ECONOMYNEXT – A committee on public finance at Sri Lanka’s parliament has called for a probe on alleged huge profits made from sudden changes in trade taxes changed at midnight while the public is sleeping.

Legislators have claimed that large profits have been made through a scheme involving tax changes in combination with import licenses that stopped competitors from clearing sugar after the tax was cut.

Chairman of the Committee on Public Finance Anura Priyadarshana Yapa, had instructed the Ministry of Finance officials submit an impartial and investigative report to the Parliament on the sugar tax revision, the assembly’s media office said.

There have been calls to abolish the so-called ‘tyranny’ of the midnight gazette, which leaves room for corruption.

The sudden tax changes, which are later informed to the parliament to rubber stamp in a ‘shoot-first ask questions later’ also violates the ‘taxation by consent’ principle on which parliaments are set up, analysts have said.

Related: Sri Lanka’s fiscal tyranny by midnight gazette, retrospective taxes must end

The room for corruption or losses expands when tax changes are large.

In Sri Lanka taxes are changed at midnight without prior notice involving severe ‘regime uncertainty’ or policy instability for businesses, which can result in either large losses or profits and discourages the holding of stocks for security by ordinary businesses.

A tax cut can result in large losses for wholesalers, traders, importers or supermarkets with stocks. A tax hike can bring profits, but usually supermarkets will sell at prices already marked in packets.

However a privileged set of businessmen, through licensing scheme are allowed to operated bonded warehouses, without running tax risks, where goods are landed without taxes and are not cleared.

The taxes are usually raised to give unjust profits to ‘domestic’ producers or import substitutors in a process known as ‘tax arbitrage.’

Janatha Vimukthi Peramuna legislator Anura Kumara Dissanayake told parliament last month that a sugar import tax was first jacked up from 33 rupee a kilogram to 50 rupees on May 23, 2020 saying it was used for illegal alcohol production.

In Sri Lanka ethanol imports have been banned taxes hiked, in a regime uncertainty, to give profits to domestic producers either owned by the state or close to the establishment, critics say.

Dissanayake said at the time the administration claimed that the tax was raised to boost domestic sugar production and discourage the production of moonshine and also save ‘foreign exchange’. He said turmeric imports have been banned.

However moonshine is popular due to high taxes on ethanol and finished products which makes legal alcohol prohibitively expensive.

The high taxes have also encouraged some licensed distilleries to sell untaxed alcohol through a network of off-license retail shops (known as bars), and a promote a lucrative trade in smuggled alcohol, critics say.

Dissanayake said on October 13, the government suddenly cut taxes in sugar to 25 cents a kilogram.

“While taxes of many goods were raised, and imports of many goods were restricted, the sugar tax was removed from 50 to 25 cents,” he said. “In other words it was almost completely removed.”

He said then a statement was sent by the government that the retail price of sugar would be 85 rupees.

Related: Sri Lanka slashes onion, lentil, tinned fish, and sugar import tax to 25 cents a kilo

Dissanayake said the Consumer Affairs Authority had done a survey to find out how much sugar was with the importers cleared by paying the tax at 50 rupees.

“At the time there was 90,000 metric tonnes of sugar imported by paying tax,” he said.

“Now the government is saying to sell at 85 rupees. So there was a big confusion there. At Sathosa there was sugar at 85 rupees for one kilogram. Trade Minister Bandula Gunewardene had said that one kilo was enough for a house for one month.”

Then October 27, there was a meeting with importers, Treasury Secretary and the Chairman of Sathosa, he said. This crisis was explained.

Then a decision was made to re-impose the tax again to 40 rupees. The trade minister had told the following day out that the tax should remain at least for a month, according to the procedure. Dissanayake said.

“So it could not be changed until November 13,” Dissanayake said. “The Trade Ministry then decided to start a license scheme under the Import and Export Control Act to clear sugar from ports.”

Under the licensing scheme sugar was not allowed to be cleared from the port at 25 cents until November 22.

The government said the 40 rupee tax would be hit again from November 13.

“But the tax was not raised. After November 22, sugar was cleared at 25 cents from November 22.”

He said on October 13 Sathosa had bought 700 metric tonnes of sugar at 127.49 rupee a kilogram.

“Then it was sold at 85 rupees.”

On October 14, another 700 metric tonnes was bought at 121.50 rupees. Then it was sold at 85 rupees.

On October 20, 750 metric tonnes were bought at 92 rupees. He said it was bought from a business connected to the Shangri-La hotel building

On October 27, 600 metric tonnes was bought at 110 rupees by Sathosa.

“Now taxes were reduce and it was ordered to sell sugar at 85 rupees. To sell at 85 rupees, sugar had to bought at least 80 rupees.

“The government is saying the controlled price is 85 rupees, but Sathosa is buying at 121.50 rupees.

Dissanayake claimed that a ship carrying sugar had not arrived in the country for 30 years. But on November 02, a sugar ship can come with 26,000 metric tonnes.

Dissanayake said up to December 10, 37,000 metric tonnes had been brought at 25 cents a kilo.

He said on December 12, a sugar ship with 22,500 metric tonnes was scheduled to arrive consigned to a company called Wilmar.

Dissanayke said around 73,000 metric tonnes of sugar was due on a 25 cent tax.

Dissanayake said with the 50 rupee tax, sugar was at 135 rupee a kilogram. He said around 90,000 metric tonnes were imported at 25 cents.

“Either the government should get the tax, or the benefit should go to the people,” Dissanayake said.

“There is no sugar at 85 rupees, and no taxes for the government.”

He said about 90,000 metric tonnes had been imported or was in transit. Annually Sri Lanka imported about 650,000 metric tonnes of sugar, he said. But since the tax cut in October around 200,000 metric tonnes were either imported, or on order, he claimed.

Dissanayake said if 90,000 tonnes had been imported the revenue loss would be around 4.5 billion rupees. If 200,000 was imported the revenue loss would be 10 billion rupees.

“There is no sugar at 85 rupees,” he said. “There is revenue to the government. So certain businessmen are pocketing the money through indirect paths.”

‘Import substitution’ operators also do the same thing, analysts say. Price are kept artifically high through import duties and they pocket the tax. Economists call the process ‘tax arbitrage.’

Such countries also become export uncompetitive as not just the protected items, but goods higher up the value chain which use the protected item as inputs also become noncompetitive. (Colombo/Jan08/2020)