How they rob billions from state coffers
By Nagananda Kodituwakku, former head of the Customs' Revenue Task Force

The government's new Inland Revenue [Special Provisions] Act came into being on February 19, 2003 with almost no resistance from the opposition parties. Under this new law all investigations, inquiries and recovery actions pending in all courts against revenue fraudsters under Customs Law, Inland Revenue Law, Exchange Control Law, Import and Export Control Law and the Excise Law would be withdrawn.

It is reported by former finance Minister Ronnie de Mel that nowhere in the world such an unprecedented amnesty is granted to the revenue fraudsters except Sri Lanka. The JVP has been the only other party which had opposed this bill and Parliamentarian Sunil Handunnetti criticizing the bill has rightly said that it would benefit only a handful of rich and influential contributors to the ruling party funds.

Surely the lawmakers are one category who enjoy duty free benefits by way of tax exemptions granted to import luxury vehicles, ostensibly for their use and other tax incentive schemes. Most of the duty permits issued to them ended up in the hands of revenue fraudsters who are the ultimate beneficiaries of the so-called tax exemptions. With this new law coming into place, some of the politicians would be relieved from any action taken against them by the Customs for their collusion in the revenue fraud.

The amnesty declared by the new law will undoubtedly have detrimental effects on the economy as well as on the law enforcement machinery. Truly speaking it is a slap on the law abiding business community who respected the revenue laws and paid the government taxes whereas it is an encouragement to the organized revenue fraudsters who defrauds government revenue in billions.

The opposition's claim that it was caught unawares is unacceptable from the people's representatives who are there to safeguard the interests of the people. According to Customs statistics, the loss of customs revenue by this bizarre amnesty is in the region of more than Rs. 27 billion. Those organized revenue fraudsters who financed the funds of both ruling party and opposition are clearly the beneficiaries.

With my vast experience of more than two decades in the Customs Administration under extremely trying circumstances, I, being an ardent advocate of the peoples' right, believe I should speak out the truth for the benefit of the right thinking people.
With the evidence I possess, I can categorically say with conviction that the whole exercise of this new law is a deception, i.e. it is a law introduced to protect the interests of fraudsters who are well supported by the political leadership.

For the benefit of those who are concerned with the corrupt practices of the political leadership and thereby denial of the government of its rightful revenue, I set out below various methods the fraudsters adopt to achieve their ends.

Duty exemption frauds
The Customs law empowers the Minister of Finance [under section 19A of the Customs Ordinance] to grant duty exemptions for certain kinds of imports where the minister considers that granting of such exemptions are required in the national interest. This is one area where the government revenue is heavily defrauded by political fraudsters under the pretext of genuine imports for lawful purposes. Cases of such revenue frauds are numerous and involvement of politicians is commonplace.

A study conducted on duty exemptions granted to hotel industry by RTF [Revenue Task Force] revealed that a large volume of the duty free permits issued to hotels and travel agencies for importation of luxury cars for tourist trade had been sold illegally and as a result the government had incurred a heavy revenue loss running into hundreds of millions of rupees. For example, the import of one such luxury vehicle incurs a revenue loss of about 5 million rupees.

Having satisfied the submissions made in this regard, I directed the officers of the RTF to seize such vehicles. I have conducted a series of such inquires and had confiscated vehicles and imposed millions of rupees as penalties against the lawbreakers. In most cases, the suspects have admitted guilt and paid the penalties though some challenged the orders in the Court of Appeal.

In one such case, it was revealed a southern tourist hotel had sold four of such permits illegally. Three had been sold to a finance company and the other to a top sportsman. At the inquiry held into this fraud the managing director of the hotel admitted guilt for illegal disposal of the four permits and was fined Rs.4,000,000 which he paid. The finance company also pleaded guilty and paid Rs 7,317,483 fine.

But the sportsman was also summoned for an inquiry. I must say that the political force and intimidations used against me in this case is enormous. There was intervention from the highest level with orders abandon the case. Two senior Customs officials repeatedly ordered me to drop the case. However, having dealt with the hotel and the finance firm, there was no way that I could set the sportsman free. I had to summon them before me and impose a penalty of Rs. 4,198,255, in spite of severe criticism from the senior officers.

The sportsman never paid the penalty or surrendered the vehicle to the Customs. Instead there were death threats. I had to leave the country under these difficult circumstances. The matter was reported in the media after my departure. After I left the country on December 19, 2001, on the orders from the highest level, the order made against the sportsman was nullified.

This appalling political action had an adverse effect on all the other cases where penalties had been imposed for similar revenue frauds. They refused to abide by the orders and challenged the forfeiture of vehicles and penalties imposed. The then government did not stop there. A written directive was issued to the Customs Department to suspend all operations against such revenue frauds, which was patently illegal.

In my opinion the new tax amnesty law is a brainchild of a politicians who advocated for such an amnesty for a long time. The new tax amnesty not only benefit those who have been found guilty of revenue frauds, but also offers a way out for political fraudsters who risked action being taken against them.

What is denied to the state by this amnesty is its rightful revenue. The much-needed funds required for the maintenance of the essential services such as health, education and transport. Who is there to be blamed? The people should blame themselves for voting for unscrupulous politicians.

False description
The intellectual property law of Sri Lanka prohibits importation of any goods with "false trade description" which are capable of misleading the buyer. But truth is that most of the established companies import goods with reputed brand names from countries like Thailand and Vietnam at cheap prices, pay a very nominal customs duty and then sell them to the public at an exorbitant price, misleading them that the goods are of Japanese origin. Similarly a refrigerator made in Vietnam is imported and sold locally as products of a local company.

Being the border control agency, the sole responsibility of enforcing the law against such deceitful traders is solely vested in the Customs administration. Having fully appraised the situation, RTF officers were deployed against such imports. After a formal inquiry, these companies were found guilty for the violation of the law. These big companies pressurized me to stop the operation of law against them. Although some admitted guilt, they used their political clout to silence me.

They compelled the then Finance Ministry Secretary P. B. Jayasunadara to summon me to the Ministry and challenge my stance against such imports. They failed to succeed at the Ministry as it was proved that they have defied the law. Having failed their strategy they then took me to the Court of Appeal and sought a court order to set aside the penalties imposed on them and implied permission to continue with such imports.

With the new tax amnesty law coming into force, all penalties and forfeitures imposed on the unscrupulous section of the business - running into billions -- would be set aside and they would be allowed to engage in their unscrupulous trade practices with no impediment whatsoever.

Understating the value
Customs charge duties as a percentage of the value of goods that are declared to customs. Hence any person, who makes a false declaration of value of the goods to customs and pays a lesser duty naturally enjoys undue advantage over others who make a correct declaration and pay the tax. The customs law prohibits such actions and provides for the confiscation of any goods that are undervalued. [Section 51 and 51 of the Customs Ordinance].

However, this is the area where the heaviest loss of revenue is incurred by the Customs. There are a large number of cases where the importers are found guilty of understating the value. In certain investigations, evidence of understatement of the value are found in the custody of the importers.

I inquired into a case some time back. There were two companies, which imported mamoties from the same source. Whereas the Brown & Co had declared higher value and had paid higher duty on their imports, it was observed that the other company had paid almost half of the duty Browns paid for the same item from the same source. The evidence placed before me clearly proved a case against the errant company and accordingly the company was fined millions of order before the Court of Appeal.

In another case against an IT firm, Customs investigators found in the possession of the company the original invoice, which declared the actual transaction price. Accordingly after a formal inquiry, the company was found guilty and imposed a penalty of more than 10 million rupees. Like most other cases, this company also challenged my order before the Court of Appeal.

In another instance, duty fraud was committed by a reputed vehicle importer. In this case it was revealed that the importer had produced a forged valuation certificate for the customs purposes. At the inquiry, the importer's agent admitted that the invoice itself furnished to the customs was a forged one. Hence vehicles valued over 12 million rupees were confiscated and the importer was imposed a heavy fine. However, once again there was intervention from the highest level with orders to release the confiscated vehicles. The case was abandoned and the penalty imposed was not paid.

In Sri Lanka, what becomes law are the designs of unscrupulous politicians. The new tax amnesty law is one such exercise. With the new tax amnesty law comes into place, all these companies and individuals would be relieved from their tax liabilities and from payment of penalties and forfeitures imposed on them. They would be allowed to make huge profits at the expense of rightful revenue to the state.

Under Customs tariff regulations that specify duties for goods, "computer software" is also listed in the schedule with a specific rate of duty. Investigations carried out by the officers of the RTF had revealed that certain well-known companies had resorted to unscrupulous methods whereas government institutions and some private organizations had declared the true value of the same software they had imported and paid customs duty. As a result, the government has incurred losses running into more than hundreds of millions of rupees.

The inquiry that I conducted into this fraud revealed that a commercial bank alone was liable for over 60 million rupees. Having established the case with evidence before me, I issued a warrant to conduct a search operation and seize all goods imported by the bank defrauding the government of millions of rupees in revenue.

The bank immediately filed action in the Court of Appeal, alleging that computer software is not liable for customs duty, and hence the customs investigations should be suspended. The court granted the order.

In spite of the court order, I summoned the bank to appear before me for an inquiry, because I was convinced that I had a very good case against the bank. But the bank once again sought and obtained a restraining order preventing the Customs from proceeding with the inquiry. As a result of this judicial process, the customs was prevented from securing for the State its rightful revenue.

With the new amnesty law coming into place, not only this bank, but also several other companies which defrauded the government of billions of rupees in revenue would also be relieved from their liabilities. This is a slap on the law-abiding section of the business community. In my opinion this tax amnesty has far reaching economic consequences and is a sheer mockery of the administration of the revenue law.

Duty rebate fraud
This is another organized revenue fraud indulged with the help of some officers in banks, airlines, the Customs and the Textile Ministry. With a view to encourage garment exports, the government offered an incentive of 32% of the exports value of the garments to exporters. To obtain the export incentive they had to furnish evidence of exports and export earnings to the Treasury, which paid the export incentive.

The fraudsters had a great plan. They imported fabric under the pretext of making garments and sold them in the open market. Some customs and Textile Ministry officials certified that they had inspected the cargo. The shipping lines and airlines issued bogus bills of ladings certifying that the goods declared in the export entries had been shipped. Some private banks certified that the remittance had been received for the alleged shipments. The fraudsters had all evidence required to claim the export incentive and they managed to rob hundreds of millions of rupees from the state coffers.

The inquiries that I conducted into this fraud revealed that hundreds of millions of Treasury funds had been defrauded by a group of organized fraudsters who had political backing.

As result of this inquiry some airline officials who issued bogus shipping documents were sacked. One such airline official is a provincial councilor. It was one of the most difficult inquiries that I ever carried out. Inquiries were completed only against very few and those who found guilty were imposed heavy penalties running into hundred million rupees. However, not a cent was paid by those who emptied the government coffers. Court actions were instituted to nullify the Customs order and the cases are pending because of the alleged inefficiency of the Attorney General's Department.

The new tax amnesty law would exonerate those who have already been prosecuted. This is just another example for the mockery of the government's fiscal policy designed to protect the interests of the fraudsters not the public interest.

It is obvious from this deplorable action by some politicians that they do not have any respect or regard for the law enforcement officials, some of whom refuse to give in to the demands of the fraudster-political mafia and who risk their livelihood and even the life itself in defending the rights of the people to lead a decent life. By enacting a law of this bizarre nature, the link between fraudsters and politicians have been proved.

Tax amnesty bill faces double challenge in SC
By Ayesha R. Rafiq
An application has been filed in the Supreme Court, asking for a determination that the Inland Revenue (Special Provisions) Bill passed by parliament granting an across-the-board amnesty to tax defaulters, is inconsistent with the Constitution and ultra vires (outside of the law).

Petitioner Nihal Amarasekera, a chartered accountant, has also filed a fundamental rights application in the Supreme Courts, citing the Prime Minister, the Finance Minister and several others as respondents and claiming that his fundamental rights have been violated by the unlawful enactment of the Inland Revenue Bill.

In his first application citing the Attorney General as a Respondent, Mr. Amaresekera has emphasised that contrary to the provisions of the Bill, the constitution clearly states that it is only the President of Sri Lanka who has the power to grant any respite or remit the whole or any part of any penalty or forfeiture due to the State. He states that the provisions of the Bill thereby manipulatively suspend the provisions of the constitution, particularly those relating to the exclusive right of the President to grant pardon.

He has pointed out that while the Bill had been presented to Parliament on January 1, this year, no copy of the Bill was made available to the public until the one week period during which any member of the public is entitled to seek the determination of the Supreme Court as to the constitutional validity of the Bill, had elapsed. He says he had no reasonable or adequate means of being aware of the contents of the Bill until it was reported in the media in mid March.

The petition states that the provisions of the Bill 'brings about the abdication of "good governance" by the Government and clearly encourages law breakers and those who perpetrate crimes, and thereby eroding all norms of "good governance", and that it seeks to concentrate "wealth in the hands of a privileged few to the common detriment" and is contrary to the State's objective of raising the moral standards of the people.

The petitioner also says that while the Preamble of the Bill seemed to provide an income tax amnesty, the amnesty, however, extends to the Customs and Excise Ordinance, Import and Export and Exchange Control laws which provide for the imposition of duties or penalties and also sentences of imprisonment. The Preamble therefore camouflages and misleads the actual effect, ambit and scope of its provisions, he says.

Mr. Amarasekera claims that if the amnesties are granted the State would be denied of a revenue of national economic proportions, and as some of the revenue will be on fines to be collected from successfully concluded prosecutions, there is no rationale to defraud the country of such legitimate revenues.

It is submitted in the petition that any persons instrumental in causing the unlawful enactment of the Bill with the knowing intention of conferring benefit on a privileged few thereby causing colossal loss to the Government, or should any of these persons seek refuge under the new law, would be committing the offence of corruption.

While the preamble of the Bill states that provisions of the Bill are being enacted "with a view to securing the future compliance of such persons with the prevalent tax laws", there is no provision in the Bill to ensure future compliance by defaulters, and in the case of criminal offences, no provision for the suspension of the fines or sentences to be reimposed should the defaulters perpetrate such fraud in the future, the petition states.

The petitioner has requested the court to determine that certain provisions of the Bill are ultra vires several Articles of the Constitution and as such could not have been legitimately enacted. Also requested is an interim order directing the Attorney General to obtain from the Directors General of Customs and Excise, Controllers of Exchange, Imports and Exports and the Commissioner General of Inland Revenue the extent of revenue losses reckoned by each of them.

The papers have been settled by K. Kanag Ishvaran P.C. and filed by Abdeen Associates.

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