Sri Lanka sugar scam saga: questionable tax changes not new, no revenue ‘loss’: Finance Ministry
ECONOMYNEXT- Sudden tax changes that gave large profits to a few traders was not limited to the current administration, but had taken place before, and it was not correct to say there was a ‘tax loss’ when levies are deliberately lowered to bring prices down, an official said.
Sri Lanka’s current administration is under fire after sugar taxes were cut to 25 cents from 50 rupees a kilo when one trader in particular had imported unusually large volumes of sugar and sold them far above the cleared price, arbitraging the taxes.
Some of the stock had also been dumped on state-run Lanka Sathosa above the cleared price, in the style of the bonds bought at low prices had been dumped on the Employees Provident Fund it had been alleged.
The opposition charged that a large commodity trader with close links to the current administration had made large profits by selling sugar above the cleared price, and the Treasury had ‘lost’ 15.6 billion rupees in taxes as a result.
But large tax changes had been made overnight through gazette in the past as well, Treasury Secretary S R Attygalle told reporters in Colombo.
Sugar taxes which were at 30 rupees a kilogram had been brought down to 25 cents in July 2016, he said.
While the sugar tax had been raised within two months in 2016, no such change had been done this time, he said.
What about 2016?
Within two months a tax had been raised to 15 rupees, 2016 he said.
Brown sugar is kept high in Sri Lanka to give profits to inefficient sugar producing state enterprises had also been cut.
During the two months 145,000 metric tonnes of sugar had been imported, he said.
Each month about 55,000 to 60,000 tonnes of sugar is consumed in Sri Lanka he said.
Pointing to past crimes or frauds committed by the questioning party when questions are raised about current events is known as whataboutism or whataboutery.
Whataboutism is a tactic followed by authoritarian or nationalist nations (the Soviet Union was well-known) to point to past misdeeds of the US or European colonial nations when activists question current mistreatment of citizens, human rights abuses or minority oppression.
Whataboutism however is considered an ad hominen logical fallacy since it does not disprove (or prove) that wrong doing exists in the present time but simply questions the credibility or standing of the accuser who had committed a similar wrong doing in the past.
Technically it is known as a Tu quoque (You too in Latin) ad hominem fallacy.
Midnight gazette and Democracy
Critics have pointed out that Sri Lanka’s midnight gazette makes a mockery of democratic rule since it changes taxes without the prior debate (violating the principle of taxation by consent on which parliamentary democracies are based on), in addition to giving discretion for corruption.
Analysts have said that the tyranny of the midnight gazette must end for Sri Lanka citizens to gain true freedom and it is a revival of taxation by Royal Prerogative, on in the case of Sri Lanka taxation by Finance Minister’s Prerogative or Bureaucratic prerogative.
In the UK, taxation by consent was established by the Magna Carta and was later strengthened by Edward I in the Confirmation of Charters.
Through the Confirmation of Charters the King agreed that that….for no need will we take such manner of aid, mises (taxes) or prises (assessments) from our realm henceforth except with the common assent of all the realm and the common profit of the same realm, saving the ancient aids and prises due and accustomed.”
The British Bill or Rights specifically ended taxation by Royal Prerogative (taxation by the ruler without debate) which had been revived in Sri Lanka by the midnight gazette.
Sri Lanka’s rubber stamp parliament, tamely approves all taxes imposed by midnight gazette, retrospectively critics say.
Attygalle said the traders who imported sugar in 2020 were virtually the same as in 2016.
He said in October 13, 2020 when the sugar tax was cut to 25 cents, the landed cost of sugar (Cost-Insurance-Freight) had been 72 rupees.
With the tax the cost was around 122 rupees. At the time sugar had been retailing around 135 to 140 rupees a kilogram, he said.
By December the CIF cost of a kilo of had risen to 85 rupees, he said.
“But the price of sugar fell from 135 to 114 rupees a kilo,” Attygalle said. “How did that happen? When we bring down the tax to 25 cents, it does not fall one to one in one day. It is the same in other items also.
Price however tended to be sticky downwards, partly due to the oligopolistic nature of the market.
However traders raised the prices overnight if taxes were hiked.
A reporter said the current controversy also arose because one importer was said to have imported 39 percent of the total volume during the period and the balance five had imported 45 percent.
“There is a oligopolistic situation. The same people were there in 2015 also,” Attygalle said.
“When the tax was brought down from 30 rupees to 25 cents and raised again in two months to 15 rupees these five were there. There are about 60 others who are small.
He said the accusation would be justified if taxes were raised after the imports were made. But there had been no change it was still 25 cents.
Analysts say the building up of oligopolies could also be a consequence of frequent and sudden interventionist taxes. It would kill off smaller free enterprises from the tax shock and only a few larger players would survive.
The players who had inside knowledge of tax changes or who were able to influence politicians to change taxes would make big tax arbitrage profits or avoid losses. People with bonded warehouses would also survive, while others would be hit.
Since it was known that some importers who stocks cleared before the tax cut, would run the risk of a loss, and those who clear later would make large profits, there were corruption allegations now and also relating to earlier years, reporters suggested that large onetime tax changes not be made.
Whether taxes are lowered (giving losses to those who had stocks) and whether they are raised (giving large profits to those who had stocks, disruptive economic shocks are created.
In addition to the disruptively large taxes and the ‘Royal Prerogative’ style in which they are slapped on the people, which left room for corruption and allegations reporters suggested that a limit of 5 or 10 percent be put on a tax change as policy.
“That is an ideal situation,” Attygalle said. “You cannot compare pre-independence and today. The world has changed.
The government also has a policy of protecting domestic producers. Can you do it also? So we have to manage. We are talking about agricultural products.”
“Sometimes there are times when it is 5 percent also. If there was a perfect market I will agree to your policy. But sometimes it is an oligopoly, sometimes it is a monopoly.”
“If we do a 15 percent we are not needed. It will go automatically.”
He said in America wheat was dumped wheat in the sea and in Sri Lanka it was done with taxes, because there was no culture of dumping goods in the sea.
“You cannot plant Western things here.”
In 2016 however while crystalline sugar taxes had been raised through small changes. In September 2015, white crystalline sugar tax had been raised from 25 cents to 2.0 rupees. In November it had been raised to 11 rupees a kilogram. In December it had been raised to 13 rupees.
Sri Lanka however is a European-style nation state with all the tools of violence to coerce the population, including armed standing army, jails, a police and court system of enforcing punishment on the un-armed citizens.
When the restraints placed by citizens of Western nations against the coercive power of the state enforced with the tool of violence is take away, the citizens lose and nations regress.
However even in the West interventionism worsened after World War II, many of which were copied by others.
Not a Tax loss
Meanwhile Attygalle said it was not correct to characterize the foregone taxes a ‘loss’ since lowering taxes was part of the policy and eventually prices have down.
“It is not a revenue loss per se. This is part of the tax policy. There is no such thing as a revenue loss.”
The tax on B-onions were also brought down some time ago, he said from 40 rupees to 25 cents. In that case that should also be characterized as a ‘loss’ he said.
He said he Public Finance Committee of the parliament had asked for the import data from October 13 to February and the figure of 15.9 billion rupees had been arrived at by multiplying the import volume by 49.75 rupees.
If the formula was applied till today the ‘revenue loss’ would be greater he said.
In theory it could be applied till for many years, he said. (Colombo/Mar13/2021)