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Billions in losses to state coffers exposed

24 Jul 2021

  • Amendments proposed to Inland Revenue Dept., Excise Dept., Customs
  • Country faces annual losses due to outdated policies and irregularities: Prof. Vitharana
By Maheesha Mudugamuwa The parliamentary Committee on Public Accounts (COPA) has highlighted the importance of amending laws related to three key government revenue generating institutions: Inland Revenue Department (IRD), Excise Department, and Sri Lanka Customs. The decision was taken in order to solve issues arising in the collection of taxes. In its first report of the First Session of the Ninth Parliament submitted last week, COPA had observed that the relevant Inland Revenue Act should be amended to solve the issues that have risen in the collection of taxes by the Department. It was also emphasised that the existing laws of the Department should be amended with a view to achieve its objectives, to implement the health guidelines, and to increase government revenue. Highlighting the status of Sri Lanka Customs, the committee had observed that the relevant Acts relating to Customs and the Department of Motor Traffic (DMT) must be amended, as there have been instances where the existing laws have posed obstacles in regularising these procedures. While submitting the report to Parliament, COPA Chairman Prof. Tissa Vitharana stated that the country faces annual losses due to outdated policies and other irregularities at government institutions. He said that a number of companies with good auditing and accounting systems have not paid their taxes to the IRD for five to six years, adding that a large amount of taxes has been lost due to it and because companies can appeal three times regarding taxes that are due. While six months have been given for appeals, it is recommended that the number of opportunities for appeal should be reduced to just one, he added. Customs’ tax irregularities Elaborating on tax irregularities, COPA had noted that the Government had lost a large amount of tax income due to the tax irregularities occurring in the importation of vehicles by Customs and the registration of these vehicles with the DMT. Several instances were highlighted with regard to the registration of vehicles that are imported to Sri Lanka for special purposes, including charging a less duty as dual-purpose vehicles in the DMT, the instance when Toyota Hilux Smart Cabs were imported, and levying of less Customs duties intended for single cabs. As such, a total loss of Rs. 3 billion had been incurred, Rs. 1 million for each of the 3,000 vehicles. Also, as per the committee, the Government has lost nearly Rs. 1,300 million in tax revenue due to the importation of 44 vans as special purpose vehicles, for which less Customs duty was levied during the period from 2010 to 2019 while registering them as dual-purpose vehicles with the DMT with the intention of transporting goods and passengers. It stated that if a Toyota Land Cruiser luxury vehicle imported by fixing the public address system and charging only a duty of Rs. 1.5 million under the special purpose vehicle (87059091) had been cleared under the category of transport of passengers (87032450), a duty of approximately Rs. 56 million should have been charged. The committee observed that in order to avert the irregularities occurring, in the importation of special purpose vehicles, the vehicles cleared under the Harmonised System Code (HS Code) No. 8705 by Customs should be registered with the DMT under a special number (PZA). The actual income as a percentage of the original/revised income has continued to decline from 2015 to 2019. The National Audit Office identified this problem in 2011 and the government had already incurred a loss of more than Rs. 1,500 million in revenue. The DMT has not considered the HS Code issued by Sri Lanka Customs when registering vehicles. The committee has, however, appointed a subcommittee to resolve this issue. It was revealed before the committee that the Value-Added Tax (Amendment) Act No. 20 of 2016 had been enforced with effect from 1 November 2016 on the units of garments supplied to the local market by garment manufacturing companies registered with the Board of Investment of Sri Lanka (BOI), but the Act became effective on 18 June 2017. As such, a loss of tax totalling Rs. 166,580,230 had been incurred during that period. The C.A.O./A.O. stated that according to recommendations of the committee report submitted on 9 October 2019 in this regard, Rs. 95 million had been recovered so far and the remaining Rs. 70 million is to be recovered in the future. The committee directed the C.A.O./A.O. to act according to the report. Losses due to delay Furthermore, highlighting the irregularities of the IRD, the committee had stressed that the system adopted by the IRD to allow the appellants to appeal in three stages has caused the government losses. Therefore, it had suggested the Department explore the possibilities of amending the Inland Revenue Act in such a way that the taxpayer has to appeal within two weeks to reduce the period spent to deliver the final determination, and in order to become eligible to appeal, the taxpayer must pay a fixed amount out of the due amount and give reasons how the balance amount is wrong and should be revised. It had further recommended that the Acts should be amended in such a way that an interest should be paid during the period of appeal while the period spent for determining the appeal should be reduced to six months – the same as the procedure adopted in respect of income taxes – and that the three appellate bodies be reduced to one. The report further highlighted that in terms of Section 12 of the Default Taxes (Special Provisions) Act No. 16 of 2010, the aggregate of tax in arrears recoverable in the year 2018, as compared with the preceding year, shall not exceed 3% representing Rs. 23.7 billion. However, the said balance of the year 2018 was Rs. 130.5 billion. As such, the committee observed that the Commissioner General of Inland Revenue had not taken action in terms of the provisions of the Act and also observed that there were arrears of taxes and fines totalling Rs. 32.5 billion to be settled even by year 2018. This was despite eight years having elapsed since the establishment of a new division in terms of the Default Taxes Payment (Special Provisions) Act No. 16 of 2010. Arrears of revenue In its observations made on the Excise Department, the committee highlighted that as per a detailed report submitted by the Department regarding the lawsuits filed against two companies and the non-taking of legal action against three companies for recovering arrears of tax, which had exceeded five years, by five companies as at 31 December 2019, the lawsuits are pending in the Supreme Court (SC) against McClum Brewery Company and W.M. Mendis (Pvt.) Ltd. Wayamba Distilleries Brewery and Warehouse was informed that it must submit a payment plan to the Ministry of Finance for approval within two weeks. The relevant entity has been informed that if it does not come forward for this purpose, action will be taken in accordance with the provisions of the Excise Ordinance. Globe Blenders Company had agreed to pay Rs. 127,018,962.59 by 31 March 2021. The committee also informed the relevant party that legal action would be taken in accordance with the provisions of the Excise Ordinance if they failed to reach an agreement on payment within the stipulated time. For Wayamba Distilleries, from the date of default of payment of instalments up to 30 November 2020, approval has been granted by the Secretary to the Ministry of Finance for an initial tax amount of Rs. 22,859,182.87 and late fee of Rs. 204, 974, 675.58, as per the agreement. The relevant entity has been told to submit a plan of payment.


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