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COLOMBO (EconomyNext) – Sri Lanka’s state-run Lanka Sathosa Limited, a retail chain close to the hearts of rulers, which undermines tax revenues of the nation by not paying value added tax, will get a 7.5 billion rupee tax payer bailout to cover mis-management and possible fraud.

"LakSathosa owes 10 billion rupees to banks and 3.0 billion rupees to suppliers," Trade Minister Rishard Bathiudeen said.

"It is a big problem to keep it going."

Following discussion with President Maithripala Sirisena, Prime Minister Ranil Wickremesinghe and Finance Minister Ravi Karunanayake, KPMG an audit firm was appointed to look into ways of re-structuring it, he said.

Karunanayake had agreed to give 7.5 billion rupee investment injection from the Treasury to keep the firm going, he said.

Bathiudeen said Lanka Sathosa the firm had a stock of rice worth 8.0 billion rupees which it could sell.

Loss Strategy

During the last regime Lanka Sathosa had bought rice for 75 rupees a kilo and sold them for 60 rupees. Nadu rice had been bought for 65 rupees and sold for 50 rupees. The exercise was estimated to have resulted in a loss of about 5.0 billion rupees.

According to draft accounts published by the finance ministry data Lanka Sathosa had revenues of 30.4 billion rupees in 2014 and also profits of 364 million rupees.

But Bathiudeen said the accounts of the company had not been internally or externally audited since 2012 and he had asked the Auditor General to audit Lanka Sathosa.

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KPMG had discovered the end of period stocks were not properly taken.

LakSathosa also had one billion rupees of good which was not in a saleable condition.

"But the money had already been paid to the suppliers," Bathiudeen said.

Discussions were ongoing with suppliers and one had already agreed to take back 50 million rupees worth of goods, he said.

Bathiudeen said the previous management had spent 600 million rupees to computerise 80 retail shops and 20 store rooms, in what appeared to be an irregular deal.

"But when we inquired from other companies, we got several offer to computerise 305 stories for about 300 million rupees," Bathiudeen said.

"There are many such events."

Though the state chain is getting 7.5 billion rupees taxpayer money to cover its misdeeds, it is not paying even one cent in value added taxes.

Tax Subsidy

Asked by reporters how much the potential tax loss to the government was due to the existence of Lak Sathosa, officials said they were not able to say as the firm was not required to pay VAT.

"LakSathosa does not pay VAT," Bathiudeen said.

The high tax revenues seen in other countries in Asia are partly due to sales and income taxes from retail chains, which serve as effective collection mechanism as economies modernise.

However Lak Sathosa is a source of tax leakage with the elected ruling class using their powers to exempt the firm from VAT. Instead of paying income tax Lanka Sathosa is now eating tax payer money.

The VAT exemption also serves as a continuous subsidy from the people to cover the inefficiencies of Lanka Sathosa.

Meanwhile retail stores owned by ordinary people, have to pay not only VAT, but also ‘deemed VAT’ on items which are not liable to tax all.

Forcing shops owned by the people charge and pay value added tax, while allowing shops close to the hearts of rulers not to pay tax is a perversion of tax justice, freedom advocates say.

Similar tax privileges were enjoyed by colonial Mercantilist firms like the Dutch East India Company.

However Bathiudeen said under its new Chairman Kiran Attapattu the firm hoped to return to profits.

Analysts say without paying tax or ‘deemed VAT’ like shops owned by the people, it should not be difficult for Sathosa to earn profits.

Meanwhile Bathiudeen said there were plans to increase the Lanka Sathosa chain by 50 stores this year, which analysts say could further undermine potential tax collections in the island.

Lak Sathosa hopes compete against shops run by the private people, he said.

Losing Streak

The predecessor of LakSathosa, Co-operative Wholesale Establishment known as Sathosa, defaulted on debts and collapsed after similar mis-management.

When Karunanayake took over as Trade Minister in 2003, the firm had debt of 8.1 billion rupees which was CWE’s credit funded losses along with those of Ceylon Petroleum Corporation and Ceylon Electricity Board, were part of the triggers for the 2000/2001 balance of payments crisis.

Under Karunanayake’s watch by 2003 CWE’s debt was cut to 2.4 billion rupees, partly using a complex deep discount bond which did not result in immediate cash payments to the budget.

The retail unit was isolated from the rest of the liabilities and a private equity partner was brought in who was to pay cash.

But Karunanayake came under fire by the opposition Janatha Vimukthi Peramuna, who were on the war path over privatization, and the newly set up firm also ran into difficulties after workers at the overstaffed firm were instigated to strike over a retrenchment scheme and a planned equity raising was abandoned.

 

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