the cost of living war
appears to be in danger of losing the war against the cost of living
while winning the peace battle. There is growing concern, among
the public as well as those influential sections of the business
community who are backing and promoting the peace effort, that popular
dissatisfaction with the rising cost of living could jeopardise
the gains made at the negotiating table which, it is hoped, could
pave the way for a durable peace. Whatever solution is worked out
with the help of the Norwegian and other foreign backers of the
peace process finally must be approved by the main opposition parties
and the electorate. The public would first want to be able to make
ends meet and make a decent living be fore worrying about what to
them would be abstract concepts of power sharing.
should pay more attention to reducing the cost of living or at least
to reining in inflation. The price of gas has gone up and telephone
calls are also likely to cost more this year. With the price of
oil on the rise it is only a matter of time before the prices of
other essentials, particularly transport and electricity, are pushed
up as well. If the government is unable to keep the lid on inflation
it would find it that much more difficult to get the required support
of the "south" or the majority Sinhalese electorate for
the peace effort and the ultimate solution. The solution in all
probability would devolve more power than has been contemplated
ever before, and therefore could be unpalatable to the Sinhalese
electorate and those opposition parties, namely the People's Alliance
and the Janatha Vimukthi Peramuna, which rely on such a vote base
to come to power. The pro-peace business lobby fears that the JVP,
which is strongly opposed to the present peace effort, could capitalise
on public discontent with the rising cost of living, and use it
to stir up popular opinion against a peace deal.
the problem is that Industries Minister G.L. Peiris and Economic
Reforms Minister Milinda Moragoda, are so preoccupied with the talks
with the Tamil Tigers, and in other connected issues such as resettlement
of refugees and rehabilitation, that they are unable to pay enough
attention to vital and sensitive economic issues which could turn
out to be the government's "Achilles' heel". These issues
are the rising living costs and the effort to revive the economy
and put the economic fundamentals back into some respectable shape.
Perhaps what is required is a separate ministry or minister to handle
the peace effort. We are not for a moment suggesting that the government
enlarge an already obscenely-bloated Cabinet but to reshuffle the
responsibilities of certain ministers so that the work required
to reform and revive the economy is not neglected by the focus on
the peace effort. The two ministers concerned are constantly travelling
abroad, as they rightfully should. But this inevitably results in
some neglect of their work on the economic front, neglect this country
can ill afford. As the Central Bank itself has pointed out, although
the economy is on the mend, the recovery depends on many things
being done and done right such as going ahead with unpopular reforms
and the speed of those reforms.
Customs valuation system
Siriranjan, Assistant Superintendent of Customs
It is necessary to value imported goods correctly in order
to precisely levy Customs duty and other levies. This is because
Customs duty and other levies for most of the goods are fixed on
an ad valorem basis (as a percentage of value of the goods). In
addition, precisely determining value of goods helps to provide
correct trade statistics to economic planners and other users.
There are two different systems of valuation to value goods
on their importation. One is the Brussels Definition of Value (BDV)
and the other is the World Trade Organization (WTO) Valuation Agreement.
The BDV system was introduced in 1953 and adopted by more than 100
countries; some as contracting parties to the system, while others
used this system of valuation on a de-facto basis. Sri Lanka too
adopted this system on a de-facto basis.
Customs administrations around the world adopted this system, major
players in the international trade such as the United States, Canada,
New Zealand and Australia never adopted this system. In this context,
a new system of valuation dawned in the mid-1970s as Article VII
of the General Agreement on Tariff and Trade (GATT). The agreement
on implementation of Article VII was adopted in 1979 and entered
into force on 1 January 1981. This system of valuation was known
as GATT Valuation Agreement. Later, when World Trade Organization
(WTO) succeeded the GATT, this valuation system too got a new name
- 'WTO Valuation Agreement'.
Sri Lanka is presently using the BDV system of valuation to
value imported goods. This valuation system is based on a notional
concept called 'Normal Price'. The normal price is the price which
the imported goods would fetch at the time the duty becomes payable
on a sale in the open market between a buyer and a seller independent
of each other. In short, the normal price is the price at which
anybody should be able to buy a particular item at a given time,
level and quantity. In this system, if an importer imports an item
at a special price, it would be rejected by the Customs and Customs
duty and other levies would be recovered, based on the normal price,
which is generally higher than the special price actually paid or
payable for the importation of the item.
The WTO Valuation
Agreement has been introduced in Sri Lanka from this month. The
required amendments have been effected to the Customs Ordinance
in this regard. The required steps such as publication of relevant
regulations, changes in Customs procedures and structure and training
of staff, importers, and clearing agents are being undertaken in
order to ensure smooth implementation of the new valuation system.
Introduction of this valuation system is a much-awaited move by
the business community and the World Trade Organization itself,
as there is a delay in introducing the Agreement in the country.
The WTO Valuation Agreement lays down six different methods
for determining the Customs value. They are:
value of imported goods
Under this method, the value of the imported goods would be the
price actually paid or payable for the goods on a sale for export
to Sri Lanka. The price actually paid or payable may be the result
of a reduction due to cash discount, trade discount, quantity discount,
etc. Any price reduction actually obtained by the buyer would therefore
be admissible when the Customs value is determined.
value of identical goods
Under this method, the value of imported goods would be the price
paid or payable for identical goods which is the same in all respects,
including physical characteristics, quality and reputation, country
of production, on a prior transaction. The date of export of both
these goods must be roughly the same
value of similar goods
Under this method, the value of imported goods would be the price
paid or payable for similar goods which, although not alike in all
respects, have similiar characteristics and component materials
which enable them to perform the same functions and to be commerciallyinterchangeable.
The quality of the goods, their reputation, and the existence of
a trademark are among the factors to be considered in determining
whether goods are similar or not.
This method is based on the unit price at which the imported goods
or identical or similar imported goods are sold in Sri Lanka at
the first commercial level after importation to persons not related
to the seller. Customs value is arrived at by deducting all the
costs incurred in Sri Lanka after importation of the goods such
as commission, delivery cost, Customs duties and other national
taxes paid and seller's profit from the sale price.
In this method, Customs value is the sum of the costs of producing
the imported goods in the country of exportation, an amount equal
to profit and general expenses, freight and insurance.
As this method
is based on the producer's cost price, it depends on elements available
in the country of production. Consequently, this method can only
be applied if the producer is prepared to provide data on the cost
of his production. Even if the producer agrees to furnish the information,
it will be virtually impossible for the Customs to check that information.
Therefore, application of this method may be limited in practice.
method or Reasonable Means Method
This method does not provide any specific valuation method but stipulates
that the Customs value would be determined using reasonable means
consistent with the principles of the WTO Valuation Agreement.
The first five
valuation methods given above will generally provide a basis for
determining the Customs value. However, there may be cases which
do not fully meet the requirements of those methods. For example,
the transaction is one of hiring; no identical or similar goods
are imported; the goods are not resold in the country of importation;
the manufacturer is unknown or refuses to divulge cost data. In
such cases, the imported value has to be determined under this method.
In practice the value under this method would be determined using
the principles of methods 1 to 5 subject to reasonable flexibility.
What is the
purpose of having these six different methods? Can one use any of
these methods as per his choice? No. These methods have to be used
in the given order. Sometimes it is not possible to arrive at the
Customs value by applying the first method. In this instance one
of the five alternative methods should be applied in the given sequence.
For example, if the imported goods are not purchased and received
as a gift, the first method, the transaction value of imported goods
cannot be used, as there is no transaction value for the goods imported.
In this instance it is necessary to move to the second method and
if there are no identical goods available for the imported goods,
the third method should be used and so on. However, there is an
exceptional clause in the Agreement giving the option for the importer
to request that method 5 be applied before method 4. Nevertheless,
this exception will not be applied in our country as Sri Lanka opted
not to incorporate this provision into the amendment made to the
The first reason for the implementation of a WTO Valuation
Agreement in Sri Lanka is to fulfill the contractual obligation,
as Sri Lanka is a member country of the World Trade Organization
(WTO). Actually the contractual obligation was to introduce the
agreement in year 2000, but the implementation has been delayed
due to various reasons such as delay in incorporating the provisions
of the Agreement into the national legislation.
reason is the deficiencies of the BDV system of valuation, which
is often criticized as being incompatible with business practices.
This is because, the normal price used in the BDV method is a notional
concept and sometimes differs from the actual price paid or payable
on importation of goods. For example, if an importer imports an
item on a special price, it will be rejected and he has to pay Customs
duty and other levies based on the normal price of the item. This
poses an uncertainty in the trade.
The other reason
is that the time of valuation for the BDV is the time when the Customs
duty becomes payable - i.e. the time in which the declaration is
made to the Customs on arrival of goods to Sri Lanka.
There is a
gap between the time when Customs duty becomes payable and the time
when the actual sale for the importation of the goods takes place.
Naturally there is a possibility of a change in price during this
time gap and the importer may be asked to pay Customs Duty and other
levies based on the price prevailing at the time of declaration.
In this situation too, the importer faces the uncertainty of paying
Customs duty and other levies based on a price different from the
price actually paid or payable for the importation of the goods.
this system the importers are not in a position to estimate the
correct amount of import duties and plan the business accordingly.
The WTO Valuation Agreement closely corresponds to actual commercial
realities and makes the Customs administration fully integrated
to the economic life of the country and the world. Nevertheless,
there is a possibility of unscrupulous traders misusing the provisions
incorporated to ensure the commercial realities and pay lower state
Act - in brief
The existing Companies Act of Sri Lanka that has been
the subject of reform since 1994 is to be replaced by a new Act,
which will be finalised in around two months and is presently awaiting
for reforming the present Act were made by David Goddard, a practitioner
from New Zealand who came to Sri Lanka on a World Bank funded project
to modernise the law. The aim was to bring Sri Lankan company laws
on par with the changes taking place in the world scenario.
A lot of contributions
have been made by the corporate sector, the Ceylon Chamber of Commerce,
Institute of Chartered Accountants and other institutions to the
new Act, which is in keeping with global developments.
on this the case law will improve. Unfortunately the case law in
this country does not contribute to the development of the law,"
said Dr. Harsha Cabraal, corporate lawyer and member of the Advisory
Commission of company law.
The new Act will be slightly larger in content than the present
one and some of its provisions have changed drastically. The present
Act No. 17 of 1982 is based on the British model of 1949, and therefore
is around 52 years old.
a lot of changes were made to the English Act in 1985, 1989 and
1996 none of these were incorporated into our Act which is totally
archaic," said Dr. Cabraal. The new Act moves away from certain
English principles and is modelled on the New Zealand Act, which
in turn is based on the Canadian model.
model has been a guideline for most of the cases now ... and has
been the yardstick for company law reform in many jurisdictions,"
said Dr. Cabraal. The major change in the new Act is that it will
be a lot more flexible than the present rigid system providing much
more freedom for companies to be incorporated and to expand.
Each company is bound by the objects stated in the memorandum
and therefore it is not possible for a company to be involved in
any activity other than the objects stated in the memorandum as
it would be considered to beyond the powers of the company.
The new Act
will do away with the ultra vires (beyond one's power) doctrine.
Under the new Act, each company ought to have a memorandum and Articles
of Association. The new Act has done away with the necessity for
the memorandum, which sets out what the company's objects are. This
gives the company a lot more flexibility in its business. According
to Dr. Cabraal if a company is involved in the business of importing
cars and that is not going well then it cannot resort to hiring
cars because it's bound by the memorandum. This rigidity is done
away with in the new Act, where it is a comparatively simple matter
of amending the articles of the company, which offers the business
a lot of flexibility.
Under the present Act the incorporation of a company is a long
and difficult process that involves engaging the services of a lawyer
in order to get the memorandum and articles done.Then it's a process
of visiting the office of the Registrar of Companies, filling up
forms and registering the company. Now, since the registry has also
been computerized it is possible to register a company online, thus
saving time and money.
This is a very important feature in the new Act. At any given
time the company should be able to fulfil certain requirements with
regard to its solvency. Therefore if a solvency test is maintained
at all times it would not be possible for a company to go bankrupt
without the knowledge of the persons concerned.
With the solvency
test a whole lot of restrictions have been introduced as to how
to maintain the solvency test and what sort of guidelines ought
to be followed in carrying out the test.
This is an exit option given to minority shareholders. If a
minority shareholder wants to sell his shares and get out of the
company he is given the right to do so. Earlier this process used
to happen in courts, thus making it a long drawn out procedure.
Now the minority shareholder can make an offer to the company to
purchase his shares. The valuation formula of the shares is also
given in the new Act. This exit option does not put pressure on
the company either, because the new Act sets out at what point the
company should go to courts, said Dr. Cabraal.
The new Act lists out major transactions. These major transactions
can't be carried out without the permission of the shareholders.
Therefore as far as these major transactions are concerned it is
not possible for the company or its management to do anything without
aspecial resolution or proper approval of the shareholders.
the Directors can do anything and get away and the shareholders
get to know about the transaction long after the event ... they
can siphon off funds, they can strip assets," said Dr. Cabraal.
listing out what constitutes major transactions and ensuring the
consent of shareholders for anything to do with these transactions
the activities of the management will be restricted.
The new Act specifies what the directors' duties are which
were hitherto decided on the basis of case law. Now the directors
cannot act in a manner that is reckless or grossly negligent and
they shall exercise a degree of skill and care that maybe reasonably
expected of a person of his knowledge and experience.
a director becomes a greatly responsible and heavy task... and the
role of the director is made very serious in the present context,"
said Dr. Cabraal.
This action is a common law action under the present Act, but
the new Act has made it statutory. Therefore if a minority shareholder
can prove that ther is fraud and wrong doer control, for instance
if a majority shareholder is guilty of oppression or mismanagement,
then that shareholder derives the right of the company to file action.
It is possible to step into the shoes of the company and file action
and the benefit of that action will be for the company.
of the minority shareholders' are made stronger through this provision
as the provisions in relation to oppression and mismanagement in
the present Act will also be carried on into the new Act.
is a method of Alternate Dispute Resolution where it is possible
to resolve problems involving the company through a person who is
authorized by the Act to look into the matter. It is possible for
even the courts to request that the company resorts to this mode
of dispute resolution so that the problem can be solved through
mediation internally by the board members.
The new Act will do away with people's companies, which are
very common under the present Act and include what is known as single
shareholder companies. Therefore there will be public companies,
private companies and single shareholder companies where the single
shareholder ought to be a corporate body.
When an auditor leaves a company he can make a statement on
what grounds he's leaving or whether there was pressure so that
the shareholders will be made aware of his activities.