| Curtailing
revenue loss from smuggling and malpractices
| Ceylon
Chamber proposals for budget 2004
The Ceylon Chamber of Commerce last week announced it had
put forward proposals for the forthcoming Government budget
2004.
The taxation
sub committee of the Chamber obtained the views of business
personalities from its 35 affiliated associations, corporate
heads and audit firms before the final submission was made.
Increasing revenue, taxation and tax administration, policy
and macro economic issues were the key areas covered in the
proposal.
Curtailing
revenue loss from under invoicing and under valuation, broadening
the tax net to cover public servants, preparation of accounts
to confirm to accounting standards which will improve transparency
and also more consistent and acceptable accounts for the revenue
assessment process optimizing the tax revenue, and tax audits
to identify non- filers and non-compliers were some of the
measures put forward by the Chamber to enhance revenue for
the government.
As a
measure of attracting new foreign and local investment and
to encourage company formation, the Chamber asked the government
to implement the 'Group Taxation" in Sri Lanka.
Further,
suggestions were put forward on double taxation treaty arrangements
in order to optimize the attractiveness of Sri Lanka for investment,
trade and technology transfers.
All the
stories on this page are excerpts from the Chamber of Commerce
budget proposals |
The state and
the business community lose billions of rupees annually due to the
entry of smuggled, contraband/counterfeit goods and malpractices
at points of entry such as under-valuation and under-invoicing by
unscrupulous importers.
This questionable trade is fast growing and threatening businesses
engaged in ethical competition. Tax evasion is mainly aimed at minimising
import duty and VAT payments.
The modus operandi
by these unscrupulous traders are: Under-declaration of value and
quantity
·Smuggling
The main methods used for these operations are: ·Import under
different product names and HS Codes
·Concealed
with other imported cargo in containers
·Unaccompanied sea baggage-mainly of expatriate workers returning
from the
Middle East
·Malpractices at Unaccompanied Baggage Warehouses
·Misuse of Duty Free Allowance by arriving passengers
·Baggage carriers/organised traffickers
·Pilferage/smuggling
from ships berthed in outer harbour
To prevent losses to government revenue, it is proposed that measures
be taken to increase checking and vigilance, and enforce harsher
penalties on those found guilty of having committed offences.
Recommendations
to prevent loss of government revenue from smuggling:
For immediate action
- Establish
a database of agents valuation of common goods imported into Sri
Lanka (as practised for motor vehicles imported into Sri Lanka).
- Intensify
scanning on persons who bring in commercial quantities with maximum
fines for importers/passengers detected with smuggled goods, as
stipulated in the Customs Ordinance and other statutes.
- *Intensify
vigilance by law enforcement agencies at points of entry for more
focused enforcement of the law.
- Increase
frequency of surprise checks by Revenue Taskforce under Customs.
- Forge an
effective partnership between Customs/other law enforcement agencies
and affected industries.
- Regular dialogue
between industry and law enforcement authorities under the aegis
of the Chamber of Commerce.
- Customs to
prosecute the importers who makes false declarations.
For medium term action:
- Establishment
of a Directorate of Special Operations under the proposed Revenue
Authority, comprising Customs, Excise and Police personnel.
- Signing of
a Memorandum of Understanding, as appropriate, between the Customs
and affected industries.
- Limit variation
of declared value of imports to 10 percent of agent valuation.
Re-introducing
the Export Development Investment Support Scheme
The Export Development Investment Support Scheme was introduced
in 1984 to promote and develop the non-traditional export sector
in Sri Lanka and is considered as an effective scheme by a wide
proportion of the export community.
The scheme
was withdrawn in 1992. In view of the high costs of factor inputs
such as electricity tariffs, high cost of administration, and cost
of inflexibility in labour management, it is proposed that the EDISS
scheme be re-introduced for a limited duration of around 5 years,
to resuscitate this sector, until the above factors are rectified.
It is proposed
that the scheme be re-introduced for non-traditional exports (goods
and services) with focus on value addition. The Export Development
Investment Support Scheme to be extended to non-traditional exporters
of goods and services successful in generating a growth in their
export turnover.
Only 25 percent
of the EDISS grant is paid in cash. The balance 75 percent is in
the form of an Export Development Certificate (EDC) which can be
encashed only for investment in export oriented projects approved
by the Export Development Board.
Qualifying sectors: all merchandise exporters (only producer cum
exporters would be entitled for this scheme) other than those exporting
tea, rubber, coconut products, coffee, cloves in primary form, gems
and garments under quota. In the services sector all services excluding
tourism and foreign employment.
Qualifying
criteria: Exports earnings in USD terms in the grant year to be
at least two percent higher than the average for the three previous
years. Exporters receiving Rs 200,000 p.a. in EDISS payments to
be paid in cash and those eligible for an amount in excess of Rs
200,000 to be paid 25 percent in cash and the balance as a Export
Development certificate.
EDCs would be
valid for three years and be encashable only after investment in
export-oriented projects approved by the EDB. These should include
only investment in buildings, machinery and export promotional activities
(and not to be allowed for purchase of vehicles or to finance working
capital).
Cheques
for high value transactions
To discourage the informal sector operations and encourage the settlement
of high value transactions by the use of cheques, set aside the
debits tax now imposed and replace same with a tax, (say Rs. 10
per thousand) for cash transactions over Rs. 100 000.
This will be
an initial step towards making bank transactions compulsory for
transactions over Rs. 500,000.
Tariff
protection for farmers
 Provide
protection to the local farmers through higher tariffs to encourage
local production and investment in technology in the farming sector.
In addition, extend incentives to agricultural exporters for a limited
duration to give them time to penetrate new global markets for their
products and to enable farmers to improve their productivity.
Relief
for equity capital formation
Most of the businesses in Sri Lanka are heavily undercapitalized
and these businesses rely on bank and other borrowing. Thereby they
incur high finance costs.
Fiscal policy should be directed to encourage equity capital formation.
Possibly qualifying payment relief should be allowed as much as
possible for a person or a company investing in equity capital of
the business. This approach is an alternative to granting tax holidays.
Qualifying
payment allowances: It is proposed that the qualifying payment allowance
for expenses incurred for housing, contributions to Provident Funds,
donations to approved charities, medical (hospitalization), education
and insurance be allowed up to a maximum of 20 percent of assessable
income. This is not expected to create a significant revenue loss
but provide relief to employees on their investment in housing (a
thrust sector), savings (provident fund contributions) and health
and education costs.
Pre-exempt
tax losses under tax incentives granted under Inland Revenue Act
& BOI. At present tax losses incurred during the period prior
to the date from which the tax holiday period commences cannot be
set off against other income. We suggest that such tax losses be
allowed against other income as it falls in line with the principle
of "capacity to pay tax"
Move
towards group taxation
Progressively move towards the "Group Taxation Concept"
in recognition of the under noted benefits which would accrue to
business enterprises:
¨ Attracting
new foreign and local investments,
¨ Improving transparency and governance of group companies,
¨ Encouraging company formation,
¨ Expansion of current businesses in a more cost effective
and tax neutral manner.
Government
to appoint a committee under the purview of the Revenue Authority
to review with all stakeholders and agree the framework, scope and
regulatory provisions relating to the implementation of Group Taxation
in Sri Lanka.
The deliberations of the committee to be finalised in time for announcements
to be made in the 2005 budget recommending step by step process
of full integration of group taxation.
Accounts
to conform to standards
All directors of companies, partners and sole proprietors of business
with a turnover of over Rs. 50 million be required by law to prepare
accounts strictly in conformity with Sri Lanka Accounting Standards
and the auditors to confirm such compliance.
This will ensure improved transparency and also more consistent
and acceptable accounts for the Revenue Assessment process optimising
the tax revenue.
Declaration
of tax file numbers in big business transactions
Parties engaged in business transactions in excess of a specified
amount should be requested to disclose the respective income tax
file numbers on the face of the invoice, receipt or contract note,
to facilitate subsequent tracing and effective tax compliance.
Possible limits could be:
- Acquisition
of any capital assets with a dutiable value over Rs. 5 million
- Payments in excess of Rs. 1 million for any goods or services.
Foreign contractors
retained by government, non governmental organisations, multilateral
agencies and private sector be required to open a tax file and register
for statutory dues including super-annuation liabilities at the
time of award of contracts.
The party securing the services of foreign contractors be made liable
to ensure due settlement of taxes and other statutory dues before
release of payment.
Require compulsory
registration of any business with a turnover above Rs. 25 million
(and below a specified ceiling to be determined by government) with
the Department of Inland Revenue. The registration certificate to
be displayed prominently at the place of business quoting the income
tax file number.
At the time
of registration, the businesses will have to decide either to pay
a fixed charge of 1% of turnover as income tax or else be subject
to the normal process of assessment.
New businesses
to register within first year of commencing business. Failure to
register would be seen as a punishable offence.
This arrangement could aid the Revenue Authority to facilitate :
- Unique
pin numbers (Business Registration No. or NIC No) to be assigned
by parties to all transactions over a specified amount.
- Outsource
tax investigations to private sector taxation professionals, where
possible, and thereby establish a professional approach to co-ordinate
revenue optimisation.
In such events
it should be ensured that there would be no conflict of interest
in engaging them.
- Expansion
of coverage and minimise revenue evasion to be facilitated through
a well focussed and networked online information exchange linking
the Inland Revenue, Customs and Excise Departments, with centralised
databases of the said departments and data collections made of
high value transactions.
- An effective
and professional investigation arm to support the online transaction
and tax declaration matching facilities.
- Appointment
of an independent Revenue Ombudsman to facilitate fair and expeditious
settlement of tax payer grievances not requiring formal appeal
or legal process.
- Education
of general public of the benefits of opening a tax file and ways
in which they could manage their tax affairs and mitigate tax
liability through legitimate measures.
- Review
the present structure of fines for all major offences and increase
the general quantum payable.
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