During the last few weeks, the people of Sri Lanka, were witnessing, very high level comments, made by the so-called elite, on the Budget 2015, presented to the Parliament on 24.10.2014, by the Minister of Finance, approximately one month before the usual date of budget presentation. The purpose of this article is to critically examine [...]

The Sunday Times Sri Lanka

Magic or miracle revenues from a shattered budget

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During the last few weeks, the people of Sri Lanka, were witnessing, very high level comments, made by the so-called elite, on the Budget 2015, presented to the Parliament on 24.10.2014, by the Minister of Finance, approximately one month before the usual date of budget presentation.
The purpose of this article is to critically examine some of the revenue and expenditure proposals, stated in the Budget-2015, for a better understanding by all concerned.

The need to strengthen Government revenue efforts according to the Minister of Finance arises out of “increasingly high commitments of the Government to provide a wide range of public services, welfare programmes and public investment”. It is not difficult to understand why these urgent “high commitments” are only in 2015, which were not included in mid-term revenue and expenditure proposals submitted previously.
Budget-2015 Magic

File picture of President Mahinda Rajapaksa presenting the budget.

Re-Structuring of import taxes – The Minister has found an easy way to raise revenue by just re-structuring some of the major indirect taxes. It is really magic. By re-structuring import taxes in relation to motor vehicle imports he raised Rs. 5000 million additional revenue. Hereafter there will be no Customs Duties, PAL, Surcharges, Cesses, NBT or VAT on the importation of motor vehicles. All these taxes and levies will be included in the Special Excise Duty which was also charged on the importation of motor vehicles. In this respect his magical powers should be commended because he can collect additional revenue of Rs. 5000 million, even though Customs Duties on motor vehicles have been reduced. He should have provided the details of revenue forgone as a result of such duty reduction for the people to understand the real increases in other taxes associated with importation of motor vehicles. As it’s very difficult to understand how he can produce an additional Rs. 5000 million from this combination alone!

However, the Minister has not indicated the treatment of the local motor vehicle assembling activity which enjoys fantastic fiscal benefits, all this time!

Re-structuring of import taxes on liquor and manufacturing taxes on liquor, in Sri Lanka will produce another Rs. 8000 million of additional revenue in-spite of strict implementation of “Mathata Thitha” programme. However, the formula of re-structuring in case of liquor is different from motor vehicles. The only change is that the VAT and NBT will not be charged on the importation and local manufacture of liquor.

Re-structuring of import taxes on cigarettes and manufacturing taxes on cigarettes, in Sri Lanka will increase the projected revenue by another Rs. 6000 million inspite of the proposed 80 per cent of “picture warnings” covering the space of cigarette packets, which may discourage the “smokers” to a great extent. In this case also re-structuring means only to remove the VAT and NBT liability on cigarettes. The special Excise Duty will be collected on these activities.

As a result of this so-called re-structuring magic, the Minister proposes to collect additional revenue of Rs. 19000 million.

However, this may depend on the volume of motor vehicle imports (which may not increase unless there is a considerable reduction in actual prices of motor vehicles) and the import and local manufacture of liquor and cigarettes. On the social front the Government wants to discourage the consumption of liquor and cigarettes. If that is the case how can the Government expect increased consumption at the same time. That reveals the truth! The Government is not really interested in its “Mathata Thitha” campaign.

Even if the Government can raise this amount of additional revenue there are two side-effects which may have to be considered by the Government.

1. Revenue Sharing with the Provincial Councils

Under this revenue sharing arrangement, 1/3 of total NBT collection should go to the respective Provincial Councils. There is no doubt that the above re-structured items were generating a considerable amount of NBT revenue up to now and after re-structuring such NBT revenue wil become zero. As a result, there will be a considerable reduction in revenue to Provincial Councils under the existing revenue-sharing arrangement. This may provide an opportunity to re-consider the existing revenue sharing system by the Provincial Councils and to revert back to their previous turnover tax collections.

2. The CGIR’s (tax department) revenue collections

The CGIR will lose a considerable amount of the VAT and NBT revenue, hitherto accrued to the CGIR on the importation of motor vehicles, importation and manufacture of liquor and cigarettes.

Cascading effect – The Government is gradually terminating the VAT from important sectors of the economy which will help to increase the cascading effect, in order to increase the revenue. Earlier, the Government removed the VAT from telecom services and thereby increased the cascading effect on the intermediate users of telecom services. Now it’s motor vehicles, liquor and cigarettes. The entire tax paid on these items now will not be claimable as input credit by the intermediate users (non-final consumers) of such items, which will create an inflationary effect/price effect, due to non-availability of input credit which was available earlier on VAT paid.

Taxation of Casinos – The Minister has proposed to increase the Gaming Levy from the current 5 per cent to 10 per cent and to charge an Entrance Fee of US$ 100 from those who enter a casino premises. From both these he expects to collect additional revenue of Rs. 2500 million. This again is a very shaky proposal. According to the declared policy of the Government there will be no new licences to operate casinos in Sri Lanka, but there are five licences already issued (we may call them “grandfather” licences) but the identity of such licence holders are not available even with the Deputy Minister of Finance ( I am not going to discuss the issue of new guidelines required to renew such licences here). According to the latest available “Performance Report of the CGIR” for 2012, the total collection from both Betting Levy and Gaming Levy, in 2012 was only Rs. 289 million. This includes the Levy paid by existing casinos. Even with the $100 Entrance Fee (which may not be easy to enforce in a country like Sri Lanka) how could the Minister get Rs. 2500 million in 2015, unless he can perform another magic?

Finance facility for payment of tax arrears – Out of the total amount of Rs. 65,500 million of additional revenue estimated by the Minister, Rs. 40,000 million or nearly 61 per cent he proposes to obtain from the enforced collection of tax arrears, following a novel method of re-financing. There are two questions arising from this proposal:

a. Adequacy of existing “tax in default” to collect such a massiveamount of revenue

Again, to quote from the “CGIR’s performance Report” for 2012 (This is the latest available), although the gross tax in default with penalty as at 31.12.2012 was around Rs. 192.5 billion, collectible tax and penalty was only Rs. 15.8 billion!

In such a situation how can the Minister of Finance collect Rs. 40 billion out of Rs. 15.8 billion or little more than that available as at 31.12.2014 ? This is the worst estimate included in the “Budget-2015″ which will shatter the entire budget!

b. Implementing the proposal

Even to collect this 15 or 20 billion rupees within a matter of 12 months, in 2015, by providing loan facilities to the respective defaulters, may become an impossible task, although the Minister in his speech has appealed to the judiciary as well in this regard, which may not be ethical.
Now, these taxes in default recoverable under two statutes are both administered by the CGIR.

i. Default Taxes (Special Provisions) Act, No. 16 of 2010.

Under this Act a “defaulter” (as determined by the Supreme Court.) has been defined to mean any person who has exhausted Appellate Procedure available to him against any estimated assessment made by an Assessor of Inland Revenue.

Further, only any taxes administered by the CGIR which were charged and levied on or before 31.12.2009, can be recovered under the above Act.
In these circumstances, if the relevant person who has not paid such taxes arbitrarily imposed on him by an Assessor and still persuing his appeal against such assessment, can the CGIR consider him as a “defaulter” under the new Budget Proposal disregarding the Supreme Court Ruling?

ii. Inland Revenue Act,
No. 10 of 2006 -

Accordingly, any taxes administered by the CGIR, which were charged and levied 01.01.2010 onwards have to be collected under the provisions of the above Act. The detailed statistics are not available with regard to the amount of taxes in default which were charged and levied on or after 01.01.2010. In any case such amount cannot be so big as in the case of taxes charged prior to 01.01.2010.

If the CGIR is going to recover such “taxes in dispute” as mentioned earlier which are not taxes in default, in order to satisfy the Minister’s unrealistic revenue estimates, such actions may be considered as “departmental aggression” as indicated in the following speech made by Prof. G.L. Peiris, in 1992, in delivering the S. Ambalavaner memorial lecture organised by the International Fiscal Association – Sri Lanka Branch:
“The bulwark of the protection which the citizen enjoys, derives from the assurance that whatever action is resorted to by the tax authorities must at all times be taken within the confines of the law. The underlying legal concept here is that of jurisdiction or vires. The tax authorities are invested with powers which are conferred upon them by legislation. In all that they do to raise revenue for the state they are under a compelling obligation scrupulously to ensure that they do not transgress the limits of the powers which they lawfully possess. It is in this sense that there is pervasive truth and validity in the assertion by a celebrated English judge, Farewell L.J. in “Dyson V. Attorney General;’ that, “the Courts are the only defense of the liberty of the subject against departmental aggression.”

VAT on “Super Markets”

When this proposal was made in the “Budget-2013″ the supporters hailed it as a “ground breaking proposal” whether it has broken any ground or not, the minister has miserably failed to achieve the expected revenue target of Rs. 5250 million in 2013. Then, he amended this proposal in the “Budget-2014″, by reducing the registration threshold from Rs. 500 million for a period of three months to Rs. 250 million. Further, he made a highly illegal proposal to exempt supplies made by such persons to be considered as deemed liable supplies breaking all norms of justice and fair-play in taxation. In 2014, he expected to collect a massive Rs. 15000 million from this super market VAT and still the final results are not available.

In this Budget (2015) the Minister has just written only two lines in amending this ground breaking proposal for the second time. “It is proposed to fix the tax free threshold applicable for VAT and NBT on super market scale retail business (apparently he has dropped the wholesale) at Rs. 100 million per quarter.”

It seems that the Minister has given up any hopes to collect additional revenue from this ground breaking proposal in 2015! That shows his doubts about even attaining 2014 estimated revenue on this proposal.

State Enterprises

In his “Budget-2015″ speech the Minister has stated that “out of the 54 State Owned Business Enterprises, 47 have been turned around to be profitable entities.” We expect that such profits have been calculated according to the recognised accounting standards. However, the Minister has failed to give a list of such institutions and the amounts of profits made, for the information of the citizens of Sri Lanka. Further, he has failed to give the details of dividends to the Government, during 2014 and estimated dividends in 2015 and subsidies to loss making institution.

However, the situation in 2013, as given in the Report of the Central Bank of Sri Lanka, was as follows – Profits/dividends from state corporations – Rs. 35,169 million Current transfers to public corporations and institutions – Rs. 45,241 million Capital transfers to public corporations and institutions- Rs. 170,697 million

If the situation has not improved in 2014, the Minister’s stand to justify the existence of these “monsters” cannot be justified.
Expenditure Proposals -

Additional expenditure for 2015 has been estimated in the Budget as follows
Current expenditure – Rs. 103,710 million Capital expenditure — Rs. 78,150 million

Out of additional current expenditure nearly 93 per cent has been allocated for the following – Public Servants salaries and allowances – Rs. 50,000 million Correction of Pension anomalies – Rs. 35,000 million 50,000 new teachers- Rs. 4,000 million Other youth employment – Rs. 7,000 million

Without taking any meaningful steps during the last 10 years in respect of the above issues why is the Minister all of a sudden deciding to spend such a massive amount in 2015 alone, which may not be feasible according to the real fiscal situation?

Two simple questions may be raised with regard to the above expenditure -
1. Are they consistent with the previous Budgets and if not why these ad-hoc measures?
2. Even the above estimates may not be sufficient.

For example, 50,000 new teachers are to be paid Rs. 9500 per month.

Accordingly, it will need Rs. 5700 million and not Rs, 4,000 million as estimated! (The quality of the teachers who can deliver required standards in English, Mathematics etc, for Rs. 9500 per month, will have to be discussed separately).

Under the Youth Employment Programme, an allowance of Rs. 8000 per month is to be paid for six months during the training period for 50,000 youth. This will require Rs. 2400 million. In order to give them the minimum salary of Rs. 25,000 for the balance six months during their employment will require another Rs. 7500 million. The total required is Rs. 9900 million but the estimated allocation is only Rs. 7000 million.
There is no difference in this Budget speech and political speeches made by them. It is full of political mudslinging. The real contents are far from the truth!

(The writer is a Senior Tax and Investment Consultant)

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