A joke doing the rounds in Sri Lanka is that the only remaining part of Finance Minister Ravi Karunanayake’s 2016 budget speech is “Honourable Speaker …”Everything else has been amended, changed or suspended … at least a large part. That’s not all … consider the confusion. Gazette notifications or Treasury circulars – two processes that [...]

The Sunday Times Sri Lanka

Three cooks in a budget soup


A joke doing the rounds in Sri Lanka is that the only remaining part of Finance Minister Ravi Karunanayake’s 2016 budget speech is “Honourable Speaker …”Everything else has been amended, changed or suspended … at least a large part. That’s not all … consider the confusion. Gazette notifications or Treasury circulars – two processes that provide legal validity to tax proposals – are yet to be issued amidst some taxes being collected which technically could be challenged in a court.

In fact, the government is following a practice by the past regime where some taxes in budget announcements were collected even before the legal process was put in place. No questions were asked at the time and no challenge made. A similar situation is emerging today. The latest budget proposal to bite the dust is the Value Added Tax (VAT) and the Nation Building Tax (NBT) increase which was suspended in its operation on Wednesday through a government announcement. This is not the end of the story.

The Finance Ministry statement released to the media said that … “The amendments proposed to VAT and NBT proposed in the Budget 2016 should not be implemented until the relevant legislative enactments are passed by Parliament”. However some businesses had already been collecting this tax based on a circular issued by the Inland Revenue Department (IRD). The ministry statement – wittingly, unwittingly or maybe out of sheer ignorance -, now raises the question as to the legality of enforcing taxes through an IRD circular or newspaper notice which normally follows after a Treasury circular is issued to the IRD.

That’s a procedure that has been followed for many, many years and legally valid until now as per the latest ministry statement. Does it also call into question the legality of taxes imposed via a circular? It would appear to be so if one is to challenge the IRD when taxes-by-circular (and not gazettes approved by parliament) are imposed since such a circular would appear to be invalid based on the ministry’s “…until the relevant legislative enactments are passed by Parliament” statement.

More than 60 per cent of the 2016 budget proposals have been subjected to change or questioned which has never happened before. The defensive posture from the government is that a ‘Yahapalalaya’ regime must listen to the wishes and will of the people and these changes are in this context. Wishful thinking for the simple reason that it begs of inconsistent policies by the government, an issue that dogged the Mahinda Rajapaksa administration, and one of the main reasons why foreign investors were reluctant to invest in the country.

The collection in the past few weeks of VAT and NBT under the new rates is a sample of the current inconsistent policy regime. Going on the government’s own admission of changing the goalpost (taxes and other decisions) based on public criticism and protests, every tax or decision could then be subject to change and subsequently reversed. How can you run an administration like this? Ask former finance minister Ronnie De Mel, who ironically praised the finance minister on the 2016 Budget, and he is bound to agree that a government should not backtrack on its tax proposals to the extent that has happened this time.

Not only is its credibility at stake and exposes the inconsistencies, but it puts the entire tax revenue targets in the budget in jeopardy. Tax revenue targets are based on expenditure estimates in a budget. Now if tax revenue is not coming in, how does one find money for the expenditure items in the budget?  Another thorny issue that has arisen is the Finance Minister’s “no questions asked’ appeal to Sri Lankans and foreigners to invest their money here.

These were Karunanayake’s words in the budget on encouraging investors to bring their money to Sri Lanka: “The Government shall not take any criminal action against any persons making inward remittances of such monies held overseas through the banking channel except in instances where the proceeds are the result of terrorism, drugs, human trafficking and corruption”. Thus was clear that any black money or corrupt funds will go through the normal, rigid cross-checking by banks (sending and receiving) under strict anti-money laundering and anti-terrorism financing laws.

However several lofty public pronouncements by the minister on this issue have given a totally different interpretation and perception, so much so that even bankers are confused and have urged the government to amend exchange control laws if a ‘no questions asked’ policy is to be followed in foreign currency inflows and outflows.People are also confused over the budget proposal to entitle those above 55 years (earlier it was over 60 years) to 15 per cent interest on a deposit of Rs. 1 million.

Banks or finance companies are yet to receive a Central Bank circular to give effect to this proposal. Adding to the confusion some banks are believed to be – in the absence of a clear direction – extending these one-year deposits made under the earlier 2015 budget proposal even though that was restricted to one year. The budget has turned out to be the biggest debacle in the government’s short 12-month tenure. One of the reasons for this debacle is because there were too many ‘cooks’ involved in its preparation.

The Finance Ministry/Treasury is divided into two these days. The finance minister has his own team (newly appointed advisors) and deals with only a few officers in the budget department, which has an experienced team, while others are left ‘idling’. Separately the Prime Minister’s Policy Planning and Economic Affairs’ ministry has been involved in the budget, with conflicts often arising with Karunanayake’s team. With such bungling taking place and questions arising over the legality of the budget proposals, the government may have to present another amended budget with a shortened parliamentary debate, however under a new finance minister!

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