As you and I are aware, the SEC or the Securities and Exchange Commission of Sri Lanka is charged with the task of regulating the capital markets of the country. You may then wonder how the SEC is caught up in an issue where a company is avoiding taxes. As the regulator of capital markets, [...]

Business Times

“Does the SEC grant licences to the wealthy to avoid paying taxes?!

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As you and I are aware, the SEC or the Securities and Exchange Commission of Sri Lanka is charged with the task of regulating the capital markets of the country. You may then wonder how the SEC is caught up in an issue where a company is avoiding taxes.

As the regulator of capital markets, the SEC licenses and regulates unit trusts. A unit trust is a pool of funds that is managed by a professional fund manager and the investors in this unit trust or the unit holders contribute each to a small portion of the fund. These investors stand to benefit from the expertise of a professional fund manager, who invests the pool of funds in various capital market instruments such as shares, corporate and treasury bonds. Thus, unit trusts help unsophisticated investors to enter and benefit from the capital markets and in a country like Sri Lanka, unit trusts play a vital role to increase the liquidity in capital markets. For this reason the government incentivised unit trusts and their investor by making the income of unit trusts tax free.

However, taking undue advantage of this tax concession, one company has set up unit trusts for the sole purpose of earning a tax free income. This company owns 99 per cent or more of the units of these unit trusts and the other investors account only for less than 1 per cent. Thus, clearly these unit trusts have been established as a scheme for this one company to avoid paying taxes and nothing to do with the above mentioned purpose as a collective investment scheme to promote capital markets!
However, with the change in government policy over the taxation of unit trusts; specifically the taxation of unit trust income in the hands of corporate investors, the above company has redeemed all of its units. This, according to the audited financial reports of the unit trusts for the year 2017/18, has resulted in the unit trusts facing serious going concern issues.

This situation begs answers to two pertinent questions; the first being, what would be the plight of the remaining unit holders (who, although, represent 1 per cent of the unit trust are many in numbers and have invested keeping faith in the system of unit trusts)?

The second, how did this company obtain a licence from the SEC and misuse unit trusts in the above manner as a tax avoidance scheme? Can you or I obtain a unit trust licence and perpetrate such a scheme!

It is quite unfortunate that when the poorest sections of the community pay far more than their fair share of taxes (to the extent of paying withholding tax on the interest income on minor’s savings accounts), the wealthiest are able to avoid paying any taxes in such elaborate schemes! I sincerely hope that this attracts the attention of the relevant authorities and that these elaborate schemers are brought to task by recovering whatever dues to the government coffers.

N. Perera
Colombo

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