Sri Lanka new border para-tariff triggered by vanishing importers, pressure group
The budget proposed that a 0.5 percent, ‘Economic Service Charge’ (ESC) be slapped on imports other than capital goods decided at the discretion of the Minister of Finance, which will bring an ‘economic benefit to the country’.
Sri Lanka’s Economic Service Charge is a tax charged on revenue, which can be deducted from corporation income tax.
A company, however, will pay ESC on revenue even if it is making a loss.
The ESC was originally justified on the claim that there were too many tax holidays especially for exporters, who were consuming government services (‘Economic Services’ such as roads) and paying no corporate income tax.
There were also some domestic companies were apparently running for years on end with little taxable profits based on existing laws.
The ESC at 0.5 percent had been imposed at a para-tariff to cover gaps in revenue administration, illegal acts, or business failures.
Finance Ministry tax consultant Thanuja Perera told reporters that some importers were bringing down goods but were then disappearing without paying taxes and the ESC at the border would combat it.
Another reason was that tax-paying competitors had complained that others were escaping taxes, she said.
Although it was a border tax, it was not really a ‘para-tariff’ because the ESC can potentially be reclaimed, officials claimed.
The ESC would operate as a tax-on-tax at the border.
"ESC based on the importation of any article or good will be the aggregate of the CIF as approved by the Director General of Customs and the amount of any Custom import Duty, CESS PAL and SCL payable in respect of such articles or goods," the budget said.
From the import to domestic revenues, the ESC would now presumably operate like a value added tax. From domestic revenues to corporate tax, it will operate like an advance collection or withholding tax.
But Sri Lanka already has a value added tax (VAT) regime as well as a Nation Building Tax, which cascades.
Originally, value-added tax was expected to replace the Turnover Tax and Defence Levy, an earlier re-incarnation of NBT, both of which were cascading.
However, for exporters, the ESC was brought down to 0.25 percent from 0.5 percent in this year’s budget.
Overall, other para-tariffs called the ‘Port and Airport Levy’ has also been brought down in keeping with trade liberalisation, although the ESC goes against the freer trade.
Sri Lanka has a complex tax system. There have been promises made to simplify Sri Lanka’s tax system so that it will be easy to operate a business in Sri Lanka, but a steep hike in state salaries in 2015 had pushed state spending.
In 2015, government spending rose to 20.9 percent of gross domestic product from 17.3 percent in 2014. By 2018, it was still at 20.2 percent of GDP, indicating a deterioration of about 3 percent of GDP.
There were no sunset clauses for the proposed para-tariff.
In 2018, Sri Lanka’s Central Bank also printed money to keep down interest rates artificially triggering monetary instability, involving a currency collapse and capital flight, which also slowed growth and lowered living standards reducing growth in tax collections. (Colombo/Mar15/2019-SB)