The Sunday Times FT - Sleeping or just unconcerned?

The National Chamber of Exporters (NCE) said last week that it is yet to receive a response from the authorities on various issues it raised on the long delays experienced by exporters on VAT (Value Added Tax).

In a statement, the chamber said long delays experienced by exporters in obtaining VAT refunds that are legitimately due to them has been a constant source of complaints at various fora such as the Investment & Enterprise Development Forum of the Export evelopment Board & the Export Cluster of the National Council for Economic Development (NCED) of the Ministry of Finance.

“Although exporters should receive VAT refunds within 30 days of the execution of exports according to regulations, this never happens in reality. Various reasons are given by state authorities for the delays. According to the Department of Inland Revenue (IRD), the main reason appears to be delays in the allocation of sufficient funds regularly by the Treasury to effect refunds,” it said.

Here is the full text of the statement on an issue that affects the entire business community:

Most exporters are already struggling to remain competitive in international markets vis a vis their counterparts in competitor countries due to the relatively high production costs arising out of factors such as the high cost of electricity, fuel, finance & other infrastructure related costs which are beyond their control. In addition to these handicaps, the adverse effect on their cash flows, arising out of delays in VAT refunds, is an additional burden, severely affecting their performance in international markets. These factors as a whole have a negative impact on the economy of Sri Lanka, particularly in relation to the ability of exporters to earn valuable foreign exchange and create employment through the expansion of business activities.

For a small country such as Sri Lanka, which is dependant on exports for economic growth, this situation should not be allowed to continue.

The recent revelation of the massive fraud that had been occurring related to VAT refunds, by siphoning off large amounts of state funds, has compounded an already existing bad situation.

In the above background the NCE, the only private sector chamber dedicated to serve exporters, took the initiative in March this year to collect information from members of the chamber who were experiencing delays in obtaining VAT refunds.

The NCE thereafter made representations by letter dated 24th April 2006 to the Chairman of the Export Cluster of the NCED of the Ministry of Finance giving details of information collected from their members, requesting urgent attention to resolve this important issue.

The NCE received a reply from the NCED by letter dated 02nd May 2006 that the representations had been forwarded to the Tax Ombudsman for necessary action & that the progress will be informed in due course.

Meanwhile the Tax Ombudsman by his letter dated 26th April 2006 wrote to the NCED that immediate steps will be taken to call for observations from the Commissioner General of the Department of Inland Revenue with a view to expediting the VAT refunds in respect of the member companies of the NCE mentioned in the representations made by the Chamber.

Thereafter the NCE received a copy of a letter dated 03rd July 2006 addressed to the Commissioner General of the IRD by the Tax Ombudsman, inviting his attention to the delay in submitting comments & observations within the stipulated time of 14 days in order to conclude inquiries.

Officials of the NCE also met the Tax Ombudsman personally in early May, to further clarify matters regarding the representations made by the Chamber, and to see a way out of the impasse.

They were assured by the Tax Ombudsman that action would be taken to resolve this issue without delay. Thereafter the Chamber was in touch with the Tax Ombudsman from time to time. However as a solution did not seem to be forthcoming, the Chamber consulted in July a retired Deputy Commissioner of the Department of Inland Revenue who was also the former Fiscal Advisor to the Ministry of Finance & who was considered an authority on VAT matters. This move was to make an assessment of the prevailing laws, rules & regulations relating to the VAT scheme, in order to make practical proposals for speedy VAT refunds, within the prevailing legal frame work.

Among the facts that came to light as a result of this exercise was that in-terms of the amended VAT Act & also the budget proposals for 2006 presented by the government, 10% of VAT collections on imports were required to be credited to a dedicated account at the Central Bank to be utilized to expedite VAT refunds to exporters.

As the chamber strongly felt that this was a practical means to overcome the contention of the IRD that sufficient funds were not made available by the Treasury on a regular basis to effect refunds, it was decided to pursue the matter with the Central Bank.

Following this decision the President of the Chamber raised the issue of this provision, with the governor and other officials of the Central Bank, during a meeting held at the Central Bank with representatives of trade chambers.

At this discussion the officials of the Central Bank had revealed that they were not aware of such a provision but would gladly implement it, if in fact there was such provision, to resolve this important issue.

Thereafter the President of the Chamber wrote to the Governor of the Central Bank by letter dated 11th August 2006 quoting the relevant section of the VAT Act No. 08 of 2006 ie. the original section 71 on page 13 of the Act, which had been already amended as follows.

(1) 25 per centum of the tax collected every month starting from the period commencing from August 2002 on or by the 15th day of the month immediately succeeding that month & each month thereafter.

(2) 10 per centum of the tax collected by the Director General of Customs on importation of goods referred to in sub-section 03 of section 02 for the period commencing from 01st January 2006, on or by the 15th day immediately succeeding that month & each month thereafter were to be utilized to effect refunds.

The Chamber also invited attention to the fact that subsequently the budget proposals of 2006 has specifically stated that 10 per centum of tax collected by the Director General Customs on imported goods should be credited to a dedicated fund in the Central Bank in order to effect refunds without delay.

Further, the Chamber in its letter which was hand delivered to the Governor of the Central Bank on 14 August 2006, supported their contention by enclosing a copy of the budget speech made by the President in his capacity as the Minister of Finance & Planning on 8 December 2005, highlighting the relevant section which states as follows:

“In order to facilitate the refund mechanism, a dedicated account will be maintained with the Central Bank to which 10 per cent of the VAT collected on imports will be regularly credited to ensure the smooth flow of funds for refunds by the department.”

The Chamber is yet to receive a reply, or even an acknowledgement, for the letter addressed to the Governor of the Central Bank. Meanwhile member exporters of the Chamber continue to voice their frustration and utter helplessness regarding their right, to receive VAT refunds that are legitimately due to them without delay.

The Chamber therefore earnestly pleads with those in authority to give their attention to this important issue and its resolution, as it is severely affecting not only their members but also other exporters, thereby adversely impacting the economy of the country which depends so much on exports.