‘Finance Bill’: Path to investment hub or money laundering hub?

By Sumudu Chamara 

Managing the Covid-19 pandemic has demanded a great deal of efficient resource management from countries’ administrations, whether in terms of monetary capital or human resources, and many nations can be seen struggling to manage their expenses and income at this juncture.

As the pandemic worsened, public health expenses increased in all countries, while national income and production decreased severely. Sri Lanka faced the same issue, albeit like most other developing countries, it has had to put in more effort to save itself from economic collapse. The last one-and-a-half years saw the nation taking a number of measures in its scramble away from the ledge, such as import restrictions, commodity price increases, employing new ways to attract tourists, and an outright ban on chemical fertilisers. 

Although the success of these measures remains questionable, the Government recently announced that it has a new plan to help build the country’s economy: On 20 July, the newly-appointed Finance Minister Basil Rajapaksa presented a Bill titled the “Finance Bill”, which many called a tax amnesty bill, to promote investments in the country. 

The Finance Bill

The Bill, in its preamble, says that it was presented as an Act to enable persons to voluntarily disclose undisclosed taxable supplies, income, and assets required to be disclosed under certain laws, in order to provide for the imposition of a tax on the taxable supplies, income and assets so disclosed; to indemnify the persons who voluntarily disclose any such taxable supply, income, or asset against liability from investigation, prosecution, and penalties under specified laws; to grant certain concessions to persons who had already disclosed taxable supplies, income, and assets under specified laws; and for matters connected therewith and incidental thereto.

The provisions of the Bill, subject to the provisions of Sub-Section (2), apply to any person who has not disclosed any amount of taxable supplies, income, or assets which was required to be disclosed under the provisions of any law specified in Schedule I, in a Value Added Tax (VAT) return for any taxable period which ended on or prior to 31 March 2020, or in a return for the income of any year of assessment which ended on or prior to 31 March 2020.

Sub-Section (2) of the Bill says that the provisions of Bill do not apply to any person in relation to whom investigations or legal proceedings, under the provisions of any law specified in Schedule II, are pending, in relation to any undisclosed taxable supplies, income, or assets, or any person who has been convicted of an offence under the provisions of any law specified in Schedule II in relation to any undisclosed taxable supplies, income, or assets. Also, it does not apply to any amount of undisclosed taxable supplies, income, or assets held by any person, in respect of which an assessment is made under the provisions of several laws.

Among these laws are the Inland Revenue Act, No. 28 of 1979 as amended, the VAT Act, No. 14 of 2002, the Betting and Gaming Levy Act, No. 40 of 1988, the Finance Act, No. 11 of 2002, the Stamp Duty Act, No. 43 of 1982, and the Stamp Duty (Special Provisions) Act, No. 12 of 2006.

However, the Bill caused severe controversy and opposition, due to the nature of investors it focuses on and the concessions they would be given. The most widespread concern raised was that those willing to invest their money under the Bill (if it becomes an Act) are required to pay only 1% tax, called a “Tax on Voluntary Disclosure”.

According to the applicable provisions, if a person intends to invest an amount equivalent to their undisclosed taxable supplies, income, or assets, which is allowed in the Bill, that person has the opportunity to purchase shares issued by a resident company, Treasury bills, or Treasury bonds issued by the Central Bank of Sri Lanka (CBSL) on behalf of the Government of Sri Lanka, any quoted debt securities issued by a resident company in Sri Lanka, or any movable or immovable property in Sri Lanka. 

Petitions against the Bill

Amidst mounting disapproval of the Bill, the Parliamentary Opposition, Samagi Jana Balawegaya (SJB) and the Janatha Vimukthi Peramuna (JVP)-led National People’s Power (NPP), among others, filed petitions against it.

Representing the SJB, MP Eran Wickramaratne, on 22 July, filed a petition before the Supreme Court. He challenged the constitutionality of the Bill, and claimed that several of its clauses were inconsistent with the Constitution. On his Facebook account, he further opined that the Bill encourages tax evasion, noting that it will not secure a net benefit to the State. He also claimed that it would be discriminatory against taxpayers and citizens who have already paid relevant taxes, and that some clauses in the Bill are arbitrary, irrational, grossly unreasonable, and contrary to the rule of law, the public trust doctrine (the principle that certain natural and cultural resources are preserved for public use, and that the Government owns and must protect and maintain these resources for the public’s use), and the sovereignty of the people.

On 21 July, JVP General Secretary Tilvin Silva alleged that the Bill had not been introduced to facilitate ordinary entrepreneurs who are helpless in the face of the economy that has collapsed due to the pandemic, but to benefit tax evaders instead.

The Morning quoted Silva as saying last week: “The businesses of those who have been unable to repay bank loans or leases, and are facing a major crisis as a result, are closing down. The Government should provide some relief to such small and medium scale entrepreneurs. However, the Government has not brought this Bill for that. This is to facilitate tax evaders who have not been exposed and have defrauded the people of their tax money. This is simply a Bill to launder black money.”

Expressing similar opinions, JVP Politburo Member and former Committee on Public Enterprises (COPE) Chairman Sunil Handunnetti, at a press briefing held last week, charged that even though there are a lot of small and mid-scale businessmen who have been affected due to the pandemic and are facing a risk of having to stop their businesses – and therefore deserve relief – the Government has brought this concession for “a group of thieves who have cheated the country and embezzled the people’s tax money”. Handunnetti opined that the Bill was aimed at helping those so-called thieves who wanted to launder black money.

“This is an attempt to give relief to the friends and corrupt members of the Government. Members of the Government claimed that as soon as Basil Rajapaksa became Finance Minister, fuel prices would be reduced and that the people would be provided relief. However, the very first Bill presented by the new Finance Minister is aimed at helping those who have black money. They can do many things, including purchase Treasury bills and properties in the country. What is actually happening is supporting fraudsters who should be exposed, to instead turn their black money into clean money. It is true that there is a crisis in the country and the Treasury is empty, but the Government presented the Bill as a pretext to support their corrupt friends,” Handunetti further claimed.

“According to the Bill, only 1% tax has to be paid to the Government, and after paying that amount, they can invest the money in the stock market, purchase properties, and deposit in bank accounts, without having to reveal their source of income. Even those who evaded paying VAT can pay just 1% tax and get away without paying the due taxes or any applicable fines. These are people who should be penalised according to the law. Once assets and incomes are revealed under this Act (once it becomes an Act), information pertaining to those assets cannot be sought even through the Right to Information mechanism. What this move encourages is thievery, illegal money making, and tax evasion, and we cannot expect the money of frauds to be utilised for rightful economic plans.” 

He alleged that in a context where the people are struggling to deal with the pandemic, the Government put forward this Bill without leaving any room for any discourse on it, in order to back corrupt people. Handunnetti also said that the people have a right to know about those that have not disclosed their assets and are trying to convert black money to clean money.

Black money and Sri Lanka 

The series of discussions that have ensued following the Bill led to concerns of black money and money laundering activities, which were also raised by some when the Colombo Port City Economic Commission Bill was publicised early this year. However, allowing the investment of undisclosed money is not a new discussion. 

Last year, the Government hinted about enacting a no-questions-asked policy for deposits of foreign currency. In response, Transparency International Sri Lanka (TISL) said that while it recognises the need for policies to bolster foreign currency reserves, it strongly believes that any new policies should be consistent with Sri Lanka’s anti-money laundering framework.

However, Sri Lanka also has international commitments when it comes to curbing money laundering activities. The said comment was made in 2020, after the Financial Action Task Force (FATF), the global policy-setter on anti-money laundering and countering the financing of terrorism (AML/CFT), delisted Sri Lanka from the FATF’s compliance document, known as the grey list, in late 2019. 

The FATF’s grey list represents a much higher risk of money laundering and terrorism financing in a country, but Sri Lanka has formally committed to working with the FATF to develop action plans that will address its AML/CFT deficiencies. According to the Central Bank of Sri Lanka’s (CBSL) Monetary and Financial Sector Policies for 2021 and Beyond, titled Road Map 2021, following the de-listing of Sri Lanka from the grey list in 2019, the European Commission also delisted Sri Lanka in May 2020 from its list of “High-Risk Third Countries” that have strategic deficiencies in their AML/CFT regimes.

“We expect to co-ordinate with stakeholders to develop individual AML/CFT policies in line with the National AML/CFT Policy. Further, the National Risk Assessment on Money Laundering and Terrorist Financing will be updated during 2021 in collaboration with all the relevant stakeholders. We also expect to take necessary action to amend relevant legislations to strengthen the legal framework in line with international standards,” the CBSL had said, with regard to action concerning anti-money laundering efforts. 

In this regard, there is a valid concern that the new Bill constitutes a complete reversal of this stance, as it creates a mechanism that can be easily abused for money laundering activity, and Sri Lanka may be at risk of being flagged once again by the FATF. This would also have the knock-on effect of being detrimental to Sri Lanka’s plans of becoming a hub for international investors, meaning that the country needs to carefully consider the long-term ramifications of this piece of legislation before it is enacted.

The Government has not officially responded to allegations that this Bill is an attempt to facilitate the process of converting black money into clean money. However, as those who spoke against the Bill stated, even though there is no argument that the country is in need of investments, plans to attract investors should not affect the rule of law in the country and turn it into a safe haven for international-level financial criminals. With the severity of our economic woes exacerbated by the Covid-19 pandemic, we simply cannot afford to make one wrong step.