Monday, September 26, 2016

A lament of a small business trying to increase capacity/productivity/profit! - TREASURY TAKE NOTE

I run a printing business which employs nearly 100 people in Biyagama, outside of the BOI. (Board of Investment Zones for export)  It is NOT in the zone and does NOT get any privileges, tax concessions and other benefits that companies receive at the zone.

Our main inputs are imported papers, and different types of inks. Our output is books, magazines, wrapping papers, newspapers, inserts and posters. During a very short period we also as one of 30 printers, print school books for the Govt. in the three months between September and November.

The taxation rate we pay on profits is 28% and we pay approximately Rs400K per month in EPF and ETF payments. We are running at full capacity, in mostly fully depreciated machinery that is quite old, and we have business that is about 25% more than our present capacity, that we turn down for lack of capacity. As we work at capacity, we run two shifts and work 24hrs a day, except on Sundays, where double rates of overtime have to be paid.

We are faced with a labor shortage of skilled labor, willing to work as Machine minders, who can work overtime when needed, and the labor shortage in this area amounts to about 25,000 vacancies. 

On Friday, we lost one member of staff who has been with us for 18 years, because he just got accepted to a job in Korea, and he had to fly out at a moments notice today. Korea's gain is our loss, as it will take some time to train a person to his skill level, whilst he is going to Korea to do a job of a laborer UNRELATED to this field. Of course he can expect a rupee equivalent compensation of Rs150K a month, about 2.5 times what he earned here including overtime.

1                   We have lately suffered from unannounced power cuts, which cause massive disruptions, when machines suddenly stop, and have to be restarted, with the attendant wastage, and losses. We have a high powered generator to run when we need to, but consumes a heavy diesel load, and cannot automatically start upon an unexpected power outage to prevent disruption.

2                   The Govt. gazetted a monthly pay increase of Rs2,500 per member of staff, (backdated to May 1st 2015) which when you add overtime to the increased basic wages, resulted in a wage bill increase of Rs500,000 per month. Annualized cost the company Rs6M(Govt loses tax Rev 28%)

3                   As of today, we are still owed, Rs3.5M from the Educational Publications Department (EPD) of the Govt. for School Books, which we invoiced before 31st December 2015, now over 9 months old. When we cost the job, assume a three month’s funding OD cost, NOT a 9 month one!

4                   We run on high interest loans and overdrafts, and accordingly we have had to increase our overdraft, due to the delay in receiving the payment above, AND for the purchase of paper for the current years books we are currently printing, where paper cost is over 50% of the invoice value of the books.

5                   We expect an advance payment of 20% of the invoice value of the books we currently print, within the next week, in order to reduce the OD, but that does not even cover the paper, for which we have already exceeded the 30day payments terms, and had to make payment.

6                   A final tax payment for the year to 31st March 2016 is due on 30th September 2016 of Rs3.5M, when we are still owed that amount from the Govt. for invoices that are over 9months old. We DO NOT get any grace period to make the Corporation Tax payment, while we are financing the interest on the late payment of the invoices for Govt. work.

7                   More important than this is the dire need to purchase machinery that can increase our production capacity, so we can increase turnover, replace inefficient, high energy consuming machines with the latest technology, which ALSO has built in energy saving features.

8                   The capital cost of the machine is Rs130M, for which we need to borrow Rs100M from a bank. However the current effective rate of interest of 15% on loans IS TOO MUCH. It does not make economic sense, especially when in the first year, where the new machine will only be working at 50% capacity, going up in following years. If however we are paying at similar lease rates where we are leasing a vehicle for the Managing Director, 9%, as the lease was arranged a year ago, we would go for the new machine immediately.]

9                   It is therefore ironic that we are funding a NON-Productive asset, a motor car at low rates of interest, and we are UNABLE to finance a high productive asset, which will never reduce in value in Rupee terms, as not only the evaluation of the business plan by the bank prior to granting a loan is ALSO arduous, but the interest rate currently prevailing is ALSO usurious!


I have clearly and simply summarized for a lay person, the dilemma a company such as ours faces today in doing business legitimately in Sri Lanka.

We not only pay taxes to the Government for VAT which is currently 11%, NBT currently at 2% and Corporation Tax currently @ 28%, and EPF and ETF contributions currently at 23% of payroll, but have NO relief.

The Finance Ministry is in the middle of drafting their budget for the year 2017, and requesting for suggestions from the public.

What would I say, in regards our business?

1                   We would like a level playing field in that all businesses who earn profits must pay tax, or we should all be treated fairly. There are just too many businesses that are STILL under the radar, not even having a tax file, and therefore NOT paying taxes that are due.

2                   Most importantly for us, I would like the Govt. to give us a three year interest subsidy of 500 basis point, for borrowings up to a maximum of Rs100M for the purposes of purchasing machinery, to increase capacity. In a world where our competitors overseas borrow at zero rates of interest, it is hard to compete if we have to borrow funds at 15%

3        Forcing private companies to make the mandatory payment of Rs2,500 MORE a month to our staff, was a move that affected profitability, AND the ability to reinvest profits in expansion, BOTH barriers to a growing Economy. With the labor shortages, depending on supply and demand the appropriate skills will command the higher wage rates, NOT JUST those that are dime a dozen, who were forcibly upped that skewed the wage differentials further.

It is clear to the reader of this real life example,  that we have Policy makers, who have NO clue how business operates in the real world, and how their policies are killing the growth of the economy, while making political decisions, that they believe are necessary. The MOST important and URGENT task is to ALLOW COMPANIES TO BORROW FOR CAPACITY IMPROVEMENT at rates MUCH lower than for purchasing unproductive items such as Autos, for which financing schemes are dime a dozen with no questions asked. 

IN a Economy that is running at FULL EMPLOYMENT, with severe labor shortages, that the STATE has  singularly been unable to provide suitably qualified people to fill, we have NO choice but to go for the latest labor saving technology, using the latest technology in the marketplace if we are to increase capacity, compete in the global marketplace, and grow our business, even catching the export markets for our products, which the latest technology will enable us to do. 


Anonymous said...

Can you believe it! The Sri Lankan Banks and Leasing Companies have lent so much money on Autos that are of NO use to the economy, while NOT doing this on productive machinery without much more stringent tests.

Why because the govt ups the taxes on vehicles and are easily disposable and the sucker of the borrower takes the risk, so even on repossession,banks clean up!

Of course banks are only working for their self interest which is NOT the Country's. It is the fault of the Central Bank and the Govt. /Treasury in NOT putting the right policy, to dissuade from lending to dollar import cars that in addition to being unproductive leak foreign exchange like a sivve with NO return.

It shows clearly that something is wrong, when all policies dissuade investment, with high interest being the obvious culprit in a world of negative inflation.

Does the Govt.want the economy to grow? Then they had better follow your recommendation. They certainly will NOT get even 10% of the foreign investment they hope due to many factors, some outside of their control.

Anonymous said...

Just ask Ravi K to stand outside on any street in Colombo, with the Galle Road being the easiest outside Kollupitiya, and stop each car worth over 5million and ask the occupant for his tax file number. About 99% don't have one. Perhaps those in cars worth Rs30M or more are his buddies too, so that is why he is not going after them. Simple way to raise the needed Revenue to get those who should be paying, to pay, no need to increase anything for the already suffering middle classes.

Ratmale,Minneriya,Sri Lanka said...

I failed to mention that we recently had to spend Rs3.3M for a waster treatment plant for CEA certification, and we spend around Rs50K a month on the chemicals used to treat all waste prior to disposal to be in line with regulatory norms.

Anonymous said...

Interesting case study. Thank you for sharing.

1. why don't the sellers of expensive printing machines offer better financing terms, rather than financing from greedy banks, in order for potential customers to be incentivised to purchase their machines?

2. if the machines must be imported, where the financing costs could be less, can the government provide duty waivers for import of productive assets?

3. can the government provide tax write-downs for purchases of productive assets which will ultimately increase tax payments once they are productive?