Losing the cost of living war

The government 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.

The government 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.

Compounding 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.

New Customs valuation system

By N. 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.

Systems of valuation
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.

Though many 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'.

BDV system
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.

WTO Valuation
The WTO Valuation Agreement lays down six different methods for determining the Customs value. They are:

1. Transaction 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.

2. Transaction 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

3. Transaction 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.

4. Deductive method
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.

5. Computed method
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.

6. Fallback 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 Customs Ordinance.

New system?
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.

The second 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.

Hence, under 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 taxes.

New Companies Act - in brief

By Rajika Chelvaratnam
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 Cabinet approval.

Recommendations 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.

"Based 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 future
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.

"Though 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.

"The Canadian 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.

The Ultra Vires Doctrine
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.

Setting up companies
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.

Solvency maintenance
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.

Minority buyout right
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.

Major transactions
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.

"Presently, 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.

Therefore by 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.

Directors' duties
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.

"So being 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.

Derivative action
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.

The rights 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.

Disputes Board
This 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.

Single shareholder
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.


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