News
Cabinet decides to repeal tax that led to sugar scam
View(s):- IMF describes Special Commodity Levy as unusual; new stable and more transparent tax to replace it
By Namini Wijedasa
The Cabinet has decided to repeal a 17-year-old tax law which was at the centre of the “sugar scam” that cost the government nearly Rs. 16 billion in “foregone revenue” from 2020 to 2021.
The Special Commodity Levy (SCL) will be scrapped from January next year, Finance State Minister Ranjith Siyambalapitiya said. This tax was introduced in 2007 to replace several other tariffs applied to specified imported foods, including customs duty, VAT, and the port and airport development levy (PAL).
The rationale was that, with large-scale imported commodities like potatoes, rice and lentils, which fluctuate constantly, it was more complicated to achieve domestic price control through the adjustment of four or five different taxes. Therefore, the then finance ministry secretary, P.B. Jayasundera, devised the SCL as a composite tax which, when raised or lowered, would help the government modulate domestic prices.
For instance, when potatoes, onions, or other agricultural produce are in season locally, the SCL on those imports is hiked to discourage imports. Or when the prices of essential commodities are high in the global market, lowering of the tax would make them more affordable locally.
“The objective was to use it in a glut or a shortage,” one economist said. “There was some logic to this, and it served a purpose. That said, it is not optimal to use tax policy to regulate market prices.”
And while the SCL was applied infrequently in the beginning, it became a go-to price control tool in later years. The list of items grew from a handful like onions, sprats, lentils, and sugar to cheese, kiwis, dried mangosteens, plums, and quinces.
“It not only expanded but became a protective tool,” the economist pointed out. “It started being applied to products that were not mass consumed, and the result was opaqueness and increased difficulty of keeping track.”
The law gives total discretion to the Finance Minister to revise the tax overnight via gazette (application of the levy becomes effective). It is approved retrospectively in Parliament. This has been deemed problematic by the International Monetary Fund (IMF) which has called on the government to do away with the law, describing it as a “very unusual type of tax”.
“When it applies, no other indirect taxes (such as excise or VAT) are due,” says the IMF’s technical assistance report based on its Sri Lanka Governance Diagnostic Assessment released in September last year. “Moreover, the levy’s scope (and hence the scope of all other indirect taxes) and applicable rates can be changed overnight by the signature of the Minister of Finance.”
“Gazette notifications and approval by Parliament are only required as soon as convenient, which seems to create tension with Sri Lanka’s constitution, requiring that Parliament have full control of public finances,” the multilateral lender says. And it points to the controversial sugar scam, for which no remedy has yet been provided.
The report points out that, in October 2020, the Finance Minister reduced the SCL on several goods, including sugar, from Rs. 50 to Rs. 0.25 overnight. “Subsequently, an unusually large amount of sugar was imported by a well-connected entrepreneur,” it states. “As the consumer price of sugar remained unchanged, the levy reduction led to large windfall gains for the importer.”
As reported in the Sunday Times in 2022, Pyramid Wilmar (Pvt) Ltd., the private company accused of profiteering from the government’s massive sugar tax cut, imported 1,222 percent more sugar than usual between October 2020 and February 2021, but did not pass the advantage on to consumers.
The National Audit Office called on the government to recover its lost revenue by correctly identifying the companies that had benefited from not transferring the tax cut to the people. This has not been done.
The Finance Ministry admitted in 2021 that the government’s decision to slash the sugar tax caused “foregone revenue” of Rs 15.951 billion while not achieving the desired effect of reducing retail prices. (The NAO report placed the lost tax income even higher). The ministry also said it was only carrying out instructions from the then president’s office as conveyed by his Secretary, Mr. Jayasundera.
Foregone earnings are the difference between earnings actually achieved and earnings that could have been achieved by way of tax.
“The SCL became vulnerable to abuse,” an official source said. “The argument is that if the information that is discussed internally leaks out before the gazette is issued, there is the risk that some parties can stock up before it comes into effect and thereby make a killing.”
“Whether the SCL is increased or decreased, it is a problem,” State Minister Siyambalapitiya acknowledged. “Say we raise the sugar tax overnight by Rs. 25, someone with a stock of 1,000 metric tons will earn that much more. Say we lower it as we did previously. When the tax reduction takes time to reach the market, vendors make a killing.”
“With the SCL, the discipline required of a tax system isn’t there,” he explained. “It can be gazetted and implemented today, and it can go to Cabinet and parliament at any time.”
The tax has been a longstanding concern for importers in general. One of the government’s commitments to the IMF is to “consider replacing the Special Commodity Levy with other, more stable, taxes in the medium term”. The date for this is given as January 2025.
The government had earlier committed “to amend the tax legislation (in particular, the Special Commodity Levy) to impose further discipline on the ministerial authority to introduce tax policy changes without prior parliamentary approval by end-June 2024 and ensure that modifications that are permitted do not result in tax revenue losses”.
The global trend was to do away with multiple taxes and impose a single excuse duty on imports, Minister Siyambalapitiya said. To influence domestic prices, the government is likely to go for “seasonal excise duties” that can be adjusted when there are harvests at home.
“We will revert to more standard, basic taxes,” another government source said. “Prices will probably fluctuate to a greater extent but there could be other measures, such as quantitative restrictions being imposed. For instance, when it is potato season here, we could limit the volume that is imported.”
“Alternative measures should be used to manage market supply volatility,” he continued. “Particularly with regard to facilities for storage of produce, so that when there is excess supply during production season, it can be stored and released to the market when supply is weak. This can address the impact of a volatile supply on farmers. This is how all other countries manage domestic market price fluctuations. This needs investment, which we have delayed and used distortive measures like SCL instead.”
“There remains a risk for the poor and vulnerable,” he admitted. “This welfare objective should be addressed through direct transfers to those identified as poor. These can help them tide over the impact of higher prices in the event of seasonal fluctuations. Aswesuma has its flaws, but it has elements that will get us to a more robust outcome following a 30-year delay in reforming this mechanism.”
Meanwhile, Minister Siyambalapitiya said the sugar scam “is still being investigated”. He maintained that “even if nothing untoward had happened, and it was done in utmost good faith, it broke public trust.
“We can’t have that in a tax system,” he said. “What replaces the SCL has to be something that is more transparent.”
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