ECONOMYNEXT – Sri Lanka’s main opposition has called for a forensic audit of an alleged ‘sugar scam’ carried out as taxes were suddenly changed through a midnight gazette, to find out who benefited and who had information to benefit from the intervention.
“I request you to do a forensic audit,” a legislator from the opposition Samagi Jana Balwegaya and a former State Minister of Finance Eran Wickremaratne told parliament.
“Then we will be able to find who got the benefit or whether there was a benefit or not.”
Sri Lanka suddenly changes taxes through what is known as a ‘midnight gazette’ with no prior warning or debate in parliament, causing high dislocations in market pricing.
Sri Lanka’s parliament, critics say has abdicated its responsibility of ensuring ‘taxation by consent’ which is the foundation of democratic rule and gone back to a medieval ‘taxation by Royal Prerogative’ in outsourcing its responsibility to the finance ministry bureaucrats or the executive through legitimizing the midnight gazette.
The so-called sugar scam involves the import of large volumes of sugar by one firm, after an import levy on sugar was cut from 50 rupees to 25 cents and selling at high margins riding on ‘downwardly sticky’ prices as other traders who had stocks on which taxes were paid were trying to keep prices from falling too fast to reduce losses.
Who Knew What When?
Wickremaratne said it was not correct to say, as some officials spokesmen had claimed that importers benefited only when taxes were raised suddenly without warning.
“That is not correct,” Wickremaratne said. “An importer that did not have stocks would benefit when a tax is suddenly cut overnight and an importer who had stocks would benefit when the tax is suddenly raised.
“A company that had prior knowledge will benefit either way by avoiding or delaying imports before a sudden tax cut and importing more before a tax hike.
“The profits are large when the tax changes are large.
“An important question is who had prior knowledge of a tax change. Anyone who lobbied for a tax cut could also be in the know.”
“The question is who had prior knowledge of a tax change.”
Wickremaratne during a speech in parliament in November called it an organized crime (sanvidanathmaker moolya aparader).
He said that taxes were raised to 50 rupees earlier saying it was to make the country self-sufficient in sugar. The self-sufficient tax was then brought down to 25 percent.
The tax was cut amid a rise in world sugar prices, to keep cost of living down, officials have said.
Wickremeratne told parliament that according to available information, the firm that is alleged to have made the biggest gains from the tax cut had imported only 17,881 metric tonnes of sugar from January 2020 until October 13, when the tax was changed at midnight.
“This is 3.25 percent of total imports,” he told parliament. “In the same period other firms imported 325,094 tonnes. That is 96.75 percent.”
However within a short time after the tax cut it had become the biggest player in the market, he said.
Wickremeratne told parliament that there was information that at least 8,000 metric tonnes of sugar were in a bonded warehouse.
Goods bought by bondsmen can be taken off ships and taken to the warehouse without tax. The customs charge tax as and when stocks are released.
A later report to the parliamentary committee had shown that 10,147 metric tonnes were under bond.
Wickremeratne said unlike other traders a firm with a bonded warehouse was better positioned to make high profits whether the tax was cut or raised, unlike traders who had to pay tax and clear goods.
“A company that had a bonded warehouse is in a special situation because they can avoid losses from a large tax cut, by clearing only what is needed from time to time,” Wickremeratne said.
In a further complication opposition Janatha Vimukthi Peramuna that alleged that high priced sugar had been dumped on Sathosa, a state-run retail chain which has a history of procurement scandals, which then sold the sugar for 85 rupees a kilogram on which price controls had been slammed.
In addition to the taxes foregone though sugar imports, the public also had to bear the losses at Sathosa, which is periodically bailed out with public funds.
“A forensic audit will reveal if there is a pattern in this activity,” Wickremaratne said. “A forensic audit will also reveal purchases of Sathosa and who knew.”
Wickremeratne said according to Finance Ministry data Sri Lanka’s annual sugar consumption was between 550,000 to 650,000 metric tonnes.
However after October 13 when taxes were cut and February 2021, 320,000 metric tonnes of sugar were imported in 67 shipments.
Government officials have denied that there was a sugar scam and over 15 billion rupees in taxes foregone up to February was a result of a policy decision and cannot be termed a tax loss.
Similar activities had also happened in the past, it official have said.
Champika Ranawaka, another opposition legislator had alleged that sudden tax changes in vegetable oils had also brought large profits to one or more importers at the expense of the Treasury
There have been calls to give taxation powers back to the parliament and end 21st century taxation by ‘Royal Prerogative’ without prior notice by taking the discretion away from the executive.
The midnight gazette represents so-called ‘regime uncertainty’ where predictability of government action disappears and rule of law is undermined.
There are also calls to limit tax changes to small increments which will remove the room for corruption and hoarding of goods.
Sri Lanka has a highly interventionist taxation regime to give profits to various special interests ranging from farmers, coconut landowners, and businesses producing ceramic and steel, who channel taxes that would have otherwise gone to the state (tax arbitrage) to report high profits by gauging customers.