Tax evasion attempt | Cigarette op goes up in smoke?

By Maheesha Mudugamuwa

Yet another tax evasion attempt was revealed in Parliament last week, with allegations being levelled against Bank of Ceylon (BOC) over a loan granted to a famous businessman, who is alleged to have links with high-ranking officials and politicians of the present Government, to purchase additional cigarette stocks in anticipation of a price hike.

With the previous allegations of granting sugar and coconut oil tax concessions causing a loss of billions of rupees to the Treasury, the Government now faces fresh allegations of an attempt of evading tobacco taxes by one of its supporters during their election campaigns.

It is now revealed that the BOC has approved a request to grant over Rs. 3 billion to a private company owned by the said businessman. Being one of the most significant state banks, the approval granted by BOC raised concerns over the bank’s loan policies and priorities.

Furthermore, questions have also been raised as to whether the state bank could provide such loans that could indirectly cause massive losses to the Government.

Raising the issue in Parliament, National People’s Power (NPP) Leader Anura Kumara Dissanayake alleged that the controversial company named DS Gunasekara (Pvt.) Ltd. has requested a total sum of Rs. 3,150 million (Rs. 3.1 billion) from the BOC Katuwana branch as a pledge loan.

“The reason, as mentioned in the loan application in September last year, was to purchase additional stocks of cigarettes on the assumption that the prices would go up with the Budget 2021. The Budget was to be released in November, and in September, the request had been made to BOC,” Dissanayake stressed.

He questioned whether the state banks provide such pledge loans to gather stocks on the assumption that prices might increase.

According to the documents seen by The Sunday Morning, the loan is recommended by the BOC Katuwana branch Credit Officer and Manager, Area Manager of Hambantota, Assistant General Manager of the Southern Province, Assistant General Manager of Branch Credit Range II, and Deputy General Manager of Retail Banking II to grant a concessionary interest rate of AWPLR (Average Weighted Prime Lending Rate) (monthly) +1.0% p.a for the approved pledge loan facility of Rs. 3,150 million to the said company for six months.

The reason for granting the loan, as stated in the document, is to purchase additional cigarette stocks due to the possibility of a price increase in the near future and pledge over stock of cigarettes. The said loan was first approved by the Credit Officer of the Katuwana Branch on 9 September 2020.

Nevertheless, at the time when the pledge facility was approved by the Board of Directors at its meeting held on 25 September 2020, P. Rathnayake, one of the directors, had expressed his reservations with regard to the facility and had questioned whether, being a government-owned bank, this was the right sector the bank should promote, allowing a company to keep extra stocks on the assumption that the price of cigarettes would go up.

He had also expressed his concerns that there would be no value addition to the economy from the facility and had highlighted the bank’s need to focus more on the retail segment/priority economic sectors to facilitate economic activities in those sectors.

He had further explained that the facility is against the government policy of discouraging tobacco consumption.

According to Credit Committee meeting minutes, other directors have concurred with Rathnayake’s view, but considering the longstanding relationship with the bank and the recommendation made by the Credit Committee, and also on the basis that the facility would be recovered at the earliest, the Board had approved the recommendation made.

“Only one director has opposed the request,” Dissanayake stressed.

Even if the Government is increasing cigarette prices, it should be increased by way of increasing the tax. If the stocks are available at Ceylon Tobacco Company PLC (CTC), the Government could earn good revenue from the price increase. But since the stocks are now available with a private company, neither the Government nor the public will receive the benefit, the NPP Leader stressed.

In Sri Lanka, British American Tobacco (BAT) holds a monopoly share of the local tobacco market, operating via its local counterpart, British American Tobacco Holdings (Sri Lanka). The company owns 84.13% of the shares of the CTC, which is responsible for the entire manufacturing process from tobacco cultivation to cigarette production in Sri Lanka. 

CTC owns 99% of the market with the remaining 1% comprising imported cigarettes. Almost 100% of the tobacco used for cigarette manufacturing in Sri Lanka is cultivated in the country, which accounted for approximately 3,000 tonnes of tobacco in 2014.

Tobacco tax in Sri Lanka is governed by the Tobacco Tax Act. Tobacco tax was revised on two occasions in 2016, and the price of a cigarette of the most sold brand, John Player Gold Leaf, was raised from Rs. 32 to Rs. 55 (an 71.875% increase) as a result.

Meanwhile, as alleged by Voice Against Corruption Convener Wasantha Samarasinghe, the said company has obtained Rs. 2.1 billion from BOC and it has now been reduced to Rs. 750 million. The loan has been granted at an interest rate of 6.78%.

“The loan has been granted as a pledge loan by keeping the cigarette stocks as a security,” Samarasinghe said.

He also raised concerns over why the said loan was applied from the Katuwana branch.

“The owner of the company is from Anuradhapura. So why is he going to the Katuwana branch to apply for the loan?” he questioned.

While the benefit of the tax concessions is enjoyed only by several businessmen, as alleged by Opposition political parties, consumer rights activists are urging the Government to re-evaluate the tax policies as well as to direct the Consumer Affairs Authority (CAA) to take appropriate legal action against those who violate the already gazetted maximum retail price (MRP) formulas.

It is also alleged that the Government has lost roughly Rs. 10 billion in tax revenue as a result of the reduction of the sugar tax, while in the meantime, the Government has allowed a private coconut oil importer to earn an additional profit of Rs. 175 million last year.

When contacted by The Sunday Morning, Co-Cabinet Spokesman Minister Keheliya Rambukwella said there were no discussions within the Government to increase tobacco taxes.

“It is something the Ministry of Finance should decide, but there were no such discussions held during the recent cabinet meetings,” he said.

Unfortunately, attempts made by The Sunday Morning to contact Treasury Secretary S.R. Attygalle were futile.