Excise Dept. and IRD initiate action to recover dues
Auditor and COPA focus on losses due to tax arrears
Questions have been raised over the Government’s taxation policy, as a few errant alcohol companies have evaded payments of staggering amounts of due taxes for five years. As a result, the Excise Department has cancelled the liquor licences of one of the country's largest liquor manufacturers – W.M. Mendis.
In the Auditor General’s Summary Report on the financial statements of the Excise Department for the year ended at 31 December 2019, it is revealed that a total of Rs. 479.99 million tax arrears exceeding five years, due from five companies together with the respective late fee, had been Rs. 1,896.39 million.
The report also revealed that the cases had been filed against two companies and although it had been mentioned that files had been forwarded to the Attorney General (AG) for legal actions, no progress in that regard could be observed.
As per Excise Notification No. 902, surcharges are levied in the event of failure to pay the taxes on the prescribed date, and surcharges worth Rs. 39,514 had not been levied on nine companies which had thus failed to comply with the above and a sum of Rs. 42,643 had been lost, owing to the failure to duly calculate the surcharge pertaining to four companies, it is revealed.
The report signed by Deputy Auditor General R.R.M. Abeysinghe Banda for the Auditor General also revealed that although it is required to impose and charge a tax on every cigar, beedi, and kilogramme of pipe tobacco in accordance with Section 2 of the Tobacco Tax Act No. 8 of 1999, such a tax is not thus levied according to the sample audit conducted on cigars and beedis manufactured.
By the year 2019, there had been 18 companies registered for importing tobacco for manufacturing cigars and beedis and under said companies, approximately 500 beedi and cigar manufacturers had been registered with the department.
During the preceding four years, beedi and cigar manufacturing had been approximately four billion units.
At present, only an application fee, manufacturing and storing licence fee, and the relevant tax for the imported tobacco are charged.
The annual beedi manufacturing quantity of the 30 companies selected for the audit sample was around 31,348,500 and it observed that a massive tax revenue receivable to the Government had been annually forfeited, taking into consideration 518 registered companies.
Meanwhile, the issue of the outstanding revenue to be collected by the Excise Department has been discussed by the Committee on Public Accounts (COPA) held in Parliament in December last year.
The COPA, chaired by Prof. Tissa Vitharana, stressed that prompt action should be taken to recover the arrears.
At the committee hearings, the Commissioner General of Excise and other officials informed the committee that legal action has been taken to recover the arrears.
The Committee however noted that the Excise Department had conducted 224,737 raids during the last five years, out of which 53,848 raids were carried out in 2017, 49,278 in 2018, and 47,391 in 2019, and that legal action has been taken against the wrongdoers.
Furthermore, the Chairman drew attention to the fact that the relevant disciplinary inquiries regarding 48 officers, who were suspended due to various reasons in the Excise Department as at 31 December 2019, have not been completed properly even though one to three years have elapsed. It was also identified that some of the officers had been suspended due to non-participation in the district coordinating committees.
The Chairman of the Committee instructed that the legal proceedings be completed expeditiously and the activities of the Excise Department be maintained efficiently.
Prof. Vitharana further emphasised that necessary steps should be taken to fill the vacancies of senior and tertiary-level posts in a proper manner which directly affect the mission of the Department and that a report on the current progress of these matters should be submitted.
The Committee also paid special attention to the fact that the security sticker management process with a procurement cost of Rs. 1,597,559 by November 2020 was limited to imported foreign liquor which was only 0.28% of the total revenue of the Excise Department. The Committee stressed that it is an essential programme for the standardisation of local liquor as well.
However, when contacted by The Sunday Morning, Excise Deputy Commissioner R.M. Rathnayake said that licences of only one liquor manufacturer have not been renewed, which is W.M. Mendis and Co. Ltd., owned by a suspect in the Central Bank Treasury Bond Scam, Arjun Aloysius. The cancellation was due to the defaulting on compulsory tax payments due for several years.
He said the three manufacturing licences of W.M. Mendis, issued to Moragala and Welisara, have not been renewed since last year.
When asked about the five companies mentioned in the Auditor General's report, Rathnayake said they included the three companies owned by W.M. Mendis, along with one in Kurunegala and another in Kalutara.
"We sent a letter to W.M Mendis to come up with a repayment plan two weeks ago. They haven't responded yet. If they don’t come up with a repayment plan, we will take legal action,” he said, adding that the other two companies which have defaulted the payments were now settling the arrears under a repayment plan.
In the meantime, the Inland Revenue Department (IRD) stated that legal action has been instituted against W.M. Mendis and Co. Ltd. for defaulting on compulsory tax payments due for several years.
IRD Commissioner General H.M.W.C. Bandara told The Sunday Morning that there were several court cases filed against the company to recover the defaulted tax amounts.
It is revealed that the company has evaded the payment of approximately Rs. 6 billion in taxes and that it has defaulted Rs. 1.1 billion in excise duty up to December 2020, thereby inflicting a massive loss to the Excise Department, according to a recent investigation conducted by the IRD.
When queried about the licences of the company, Bandara stressed that though he was not specifically aware about the licences of this company; all licences have been extended till 31 January and the renewing would begin after the expiry of that period. “Due to the Covid-19 situation, we have extended the existing licences till 31 January,” he added.
Meanwhile, it is also stated that clearance from the IRD should be obtained by the respective companies when extending the liquor licences. “Without clearance, the Excise Department does not renew the licences,” Bandara added.
When contacted, a senior official attached to the Excise Department, who wished to remain anonymous, told The Sunday Morning that the Department’s objective is to somehow collect the taxes from companies and give it to the Treasury.
The Excise Department of Sri Lanka has been able to collect an income of Rs. 115 billion as excise duties and Rs. 32.8 million as tobacco taxes in the year 2019. Excise tax income reported a growth by 1% while the tobacco tax income reported a decrease by 28% compared to the previous year. Tax liability creation in terms of excise duty and tobacco tax, as recorded within 2019, was Rs. 119.18 billion.
Excise tax on alcoholic beverages is a key source of government income, accounting for around 7% of tax revenue. The excise tax did not rise directly in the last 12 months but the Value-Added Tax (VAT) and Nation Building Tax (NBT) on liquor sales were reclassified as excise tax. This did not affect retail prices but widened the excise tax difference between spirits and beer to 24% from 20% in March 2019, according to a recent report by Fitch Ratings Sri Lanka.
