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The Advance Company Tax borrowed from the British Should be jettisoned I have addressed on this burning topic of Fiscal Reform on several fora, written and published in print media on several occasions. Time is again appropriate to revive this subject. A major reason is that time is opportune to re-canvass the appropriate parameters of taxation with the introduction of Goods & Services Tax (G.S.T.) with its all pervasive impact as a primary revenue source with minimum price effect. On a more fundamental level is the need for fiscal reform by adopting the principle of a uniformly low standard tax rate of 15% applicable to all forms of taxes other than excise duties which belong to a special category to be discussed presently. In such a regime, import duties, income tax, even Goods & Services Tax (G.S.T.), though now rated at 12.5%, should be levied at a uniform rate of 15% which will have effect of lowering importantly fiscal induced pricing and so reducing the cost of living. The present tax on capital gains both on shares and property should be abolished because there is no warrant for taxing capital gains of holders of particular forms of property when capital gains on other forms of property remain untaxed and rightly. The iniquitous turnover tax should be abolished altogether which must follow with the introduction of Goods & Services Tax. The provision for levy of turnover tax on trade by provincial or other subordinate authorities should be eliminated and the principle of sharing taxes collected centrally with other subordinate jurisdictions should be adopted. This would avoid needless taxes at various levels with their effect of merely raising prices unnecessarily, of course, apart from levies recovered for specific service rendered by such authorities. The remnant of a tax on the financial turnover of banks should be withdrawn as its effect is merely to increase the cost of credit and reduce the quantum of profit ultimately liable to tax. It amounts, in effect, to robbing Peter to pay Paul. The benefit of immediate revenue gain and lagged revenue loss calls for better cash-management by the Government Treasury for which the Central Bank should assume the initiative in funding an emerging one-time temporary shortfall of funds by accessing the Government Treasury with required liquidity. Corporate Income Alternatively, the corporate entity could be taxed at 15% when dividends would be exempt from tax. The Advance Company Tax, unwisely borrowed from British practice, which even Britain has now decided to withdraw, should be jettisoned as there are better ways of managing the cash-flow of state entities without the artifice of an Advance Company Tax which throws the cost-burden of cash management on the affected corporate enterprises, so reducing their profit and, then, reacting in reduced tax revenue. In a low tax regime canvassed, there should be no tax exemptions of any character which tends to erode the tax base. If nascent ventures have to be assisted, it should take the form of direct subsidies which have the great merit of both transparency and accountability. Small enterprises can be protected by resort to a high threshold for levy of income tax. Politicians should be strongly discouraged from pleading for tax exemptions or tax concessions in the environment of a low-tax regime. Discrimination against luxurious use or consumption, if so needed, could be exercised by the device of a surcharge at import point or imposition of a supplementary excise duty tailored to achieve this purpose. Of course, there could also be a carefully selected supplementary list of duty exemptions at import point. In a regime of an otherwise uniform import duty of 15%, the scope for corruption in administration at the customs would be greatly reduced and the temptation to evade duty by resort to dubious devices would again be much less. In this scenario of a low-tax regime, when the incentive for even legitimate tax avoidance would be greatly abated, tax evasion must be regarding as a crime against society and an unmitigated offence against honest tax payers. Accordingly, tax evaders should suffer a penalty of three times the amount of undisclosed income, coupled with mandatory rigorous imprisonment for three years and display of offenders photograph with identification in the print and electronic media. The penalty received can then be shared with the concerned assessing officers, when it will serve as an incentive for them to exercise vigilance in discovering offending tax payers. One of the living and growing cankers of society is the burgeoning black economy which on my reckoning now constitutes around 40% of the recorded economy. A high powered official committee under the Chairmanship of J. A. R. Felix, one time Commissioner-General of Inland Revenue, with B M Weera-sooriya as Secretary, now incumbent Commissioner General of Inland Revenue, was appointed on 31 January 1988 on the initiative of the International Monetary Fund to report particularly on tax evasion. The Committee submitted a comprehensive report on 5 February 1990 entitled ''Final Report of the Committee on the Collection of Tax and Administrative measures to combat Tax Evasion'', comprising 57 pages of text and 4 appendices, but the primary material in the Report relates to 1988. The committee reckoned that the undisclosed income accounted for 44% of the identified national income at market price in 1988. However, after allowing for adjustments which I had suggested in the article on the Black Economy of Sri Lanka which was published in the Ceylon Daily News of 14 February 1997, the conclusion reached was that of a total national income in 1988 comprising also component of the undisclosed income, the black economy in 1988 would constitute, say 26%. Black Economy The initial interest rate on bearer bonds and their term are relevant. The interest rate could be fixed at 6% and being bearer is definitionally free of tax and corresponds to a rate of 7.06%, free of tax, when income tax is levied at a uniform rate of 15%. When the bonds mature for renewal at the expiry of the 10 year term, the interest rate could be reduced in line with prevailing market rates. Indeed, the bond-holder could convert the bonds into cash, if he chooses, by borrowing from a bank against pledge of bearer bonds. Of course, the amnesty kept open for 18 months would offer an opportunity for even honest tax payers to invest their taxable income in bearer bonds and thus gain a benefit. But such action can be discouraged by the Inland Revenue Department exercising a close surveillance of individual declarations of assessable income covering, the amnesty period. On expiry of the amnesty period, the only acquittance open to a tax evader is evidence of bearer bonds in his procession or on pledge with a lending institution. Launched with the support of a structured awareness program, my estimate of undisclosed income which may be attracted for investment in bearer bonds, as a one time exert, is of the order of Rs. 245 billion which, when abstracted from the national economy will also exert a profound contracting effect and it should be off-set in a measure by countervailing macro-economic management, details of which are not immediately relevant. The upshot is that Government would be able to access a one time revenue accrual of around Rs. 245 billion or marginally more than the total revenue anticipated for 1998, but, however, abated by a host of tax concessions of one kind of another, introduced after 1988 and yet extant, which requires careful computation. But that as it may, the eventual revenue accrual, undoubtedly highly significant in amount, can be applied over time to directly productive investment, particularly in the regeneration of the vast Dry Zone, including importantly the war-devastated Northern Province. The cost of financing the interest on the 10 year bearer bonds at the indicated interest rate of 6% amounts to Rs. 14.7 billion on the assumed accrual of Rs. 245 billion, but before abatement for significant tax concessions, and which expense could, however, be met more than handsomely by investing the capital funds secured under the program in purposeful economic development, without even reckoning the revenue gain from better compliance by tax payers and induced economic growth in a low-tax regime. Thereafter, the control of the black economy must rest on the competence of the Inland Revenue, positively, in ensuring maximum tax compliance in a low tax regime and, negatively, on rigorous application of penal deterrence on non-disclosure of income and consequent tax evasion. In the advocated low tax regime, any ostensible revenue loss, which may ensue thereafter could be recouped, tax amnesty apart, from much improved tax compliance and the great disincentive to tax evasion or even tax avoidance. Simultaneously, there is need for re-structuring tax administration by vesting central responsibility in a Board of Inland Revenue composed of members who, I now consider should be five, each ranking in salary with the present Director General of Inland Revenue and the Chairman with the Secretary to a Minister. The five members should assume direct responsibility for oversight of Inland Revenue, G.S.T. Customs and Excise, so integrating revenue collection with tax compliance under the guiding responsibility of the Chairman. I suggest that the retiring age of the Board should extend to 63 years in line with the Judges of the Supreme Court to ensure a continuity of these services in their important responsibility of administration of Revenue. The Board of Inland Revenue will report to the Minister of Finance through the Secretary to the Treasury. A topic which bears relevance to the black economy is the gem industry Recorded exports in 1997 were of the order of Rs. 5.5 million, a mere Baga-talle, because most of the gems are smuggled across to Bangkok, Hong Kong, Antwerp and those of exceptionally high value even to London and New York. Indeed, in the circumstances of Sri Lanka, sitting as it does on a rich treasure of valuable gems, it is idle to impose control on capital transfers as it is now, when there is a ready escape through smuggled gems in which there is an organised trade. To discourage smuggling, a different mechanism must be in place, with an adequately capitalised and expertly manned Gem Development Bank as the centre-piece, coupled with penal disincentives for evading income disclosure, as indicated earlier. The point for emphasis is that a regime of control on capital transfers in the circumstances of Sri Lanka must remain a futile exercise. Sri Lanka is at the cross-roads. There must be a transformation of the inherited trials of separatism which must be proscribed by legislation as a criminal offence, as it is in neighbouring countries, but coupled with the deterrence of confiscation of property of the offender as already prescribed for by the Sixth Amendment to the Constitution enacted in 1983. Moreover, display of separatism by any members of the national community, be they Sinhalese, Tamil, Moor or any other is no longer compatible with the compulsive needs of economic development, which must uniquely depend on the systematic and rapid expansion of the Dry-Zone, indeed, inclusive of the claimed 'traditional Tamil homelands' of historical fiction and which contain notably two-thirds of the land area of the country, though it is occupied by only one-third of its people, where the required resources, human and material including water, must necessarily emanate from the over-crowded South. Indeed, the Dry-Zone must also remain the heartland of development in the dawning millennium as it surely was in the era of the ancient Sinhalese kings. Such development however, must be undertaken inevitably as a central responsibility by resort to an administrative device which I have delineated at some length in a separate contribution elsewhere. Naturally, this program must have the support of growing state revenues on a low tax base, ensuring unfailing tax compliance, with the complement of criminal liability for tax evasion. There remains a concluding reform which is merely technical in nature but nevertheless important. There was a time when the financial year of the Government ran from 1st October of one year to 30th September of the following year, a legacy of the colonial regime and the income Tax Year from 1st April to 31st March of the following year, again a legacy of British practice derived from the historical calendar of the Exchequer which commenced from 4th April of any year. Dr. N. M. Perera, when Minister of Finance of the United Front Government of 1970-1977, reformed the accounting year of the Government to coincide with the calendar year from 1st January to 31st December. However, he left the accounting year for income tax and related taxes unchanged. Yet, time is overdue for income tax and other tax years to revert to 1st January ending with 31st December of any year when all business concerns will be expected to adopt a similar accounting year, save where under the Inland Revenue Act the Commissioner General grands special dispensation to observe a different accounting year. A great merit of such uniform accounting year is better accountability of revenue collection and also better comparability of relevant data of state concerns and business enterprises for statistical and national purposes. A condition for successful implementation of the Revolution in Tax Reform, with its low-tax regime, apart from the efficient functioning of the proposed Board of Inland Revenue is undoubtedly competency in policy formulation and implementation at Treasury level, requiring a highly perceptive knowledge of economics in its fiscal and monetary manifestations and also, importantly, with administrative capability so that there is combined at high official level competency in policy advice with administrative capability to implement recommended policy. Fortunately, the Treasury has the good fortune to have a Deputy Minister of Finance, Dr. G. L. Peiris possessed of a keen intellect and a perceptive mind able to discern the niceties of public finance, and a Political Overlord in the person of H.E. the President able to exercise the required Political Will and distinguish between policy innovation and political feasibility. N. U. Jayawardena The Federation of Chambers of Commerce and Industry of Sri Lanka (SAARC CHAMBER - Forum) is organising the 2nd SAARC Trade Fair '98 in association with the Ministry of Internal and International Commerce and Food at the Bandaranaike, Memorial International Conference Hall (BMICH) Colombo, from September 8 to 15, 1998. The main purpose of this event is to project the image of SAARC member countries through the full range of their respective economic activities, to develop economic co-operation and to promote intra regional trade, investment and tourism among the SAARC member countries. This event is based on the theme of 'Opportunity for Regional Growth' and it will be a key event under the Chairmanship of Sri Lanka. 'Glaring Black Hole' of the plantation industry The Ceylon Planters Association has, in a letter dated July 14 1998, addressed to the President alleges endemic bureaucratic net-tape prevalent in certain state institutions. This is being stated in regard to no action being taken over the letter that had been senth to the president in August last new which had been submitted for action, as informed to the association. The July letter states: The overall debt incurred by Elkaduwa Plantations Ltd., to date amounts to the gigantic figure of over Rs. 225 million and, if not arrested by prompt remedial action, would continue to accumulate to insurmountable proportions and the ensuing situation would, no doubt, be disastrous as already proved by the inability of the government to attract bidders at the open stock market. Elkaduwa Plantations Ltd., poses to be the glaring 'black hole' of the country's Planting Industry which, in the national interest, calls for immediate change in its style of management which could now be achieved since the five year lease agreement entered into by this Plantation Company is due to expire on 15th July 1998. PERC by virture of this fact, could take immediate measures to prevent the government being further embarrassed in the print media and, more so, in the public opinion. We reiterate our respectful request to Your Excellency to initiate immediate action to remedy this distasteful and catastrophic situation. We take this opportunity to bring to Your Excellency's notice the inordinate delay in finalizing matters relating to the management of the two coconut Regional Plantation Companies, viz Kurunagala Plantations Ltd., and Chillaw Plantations Ltd., which are now involved in protracted arbitration proceedings to the detriment of the coconut production in the country which, if not curbed and concluded early, would give rise to the farcical situation where importation of coconuts to the country would be inevitable and unavoidable. We would also very humbly suggest to Your Excellency that in the distribution of Mahaweli land, the prospective investors be subjected to a thorough prequalification process which would ensure their alienation to deserving individuals also with a time tested agricultural background possessing the requisite expertise and wherewithal. We also draw Your Excellency's attention to the alienation of vast extents of developed agricultural land belonging to the Sri Lanka State Plantations Corporation and the Janatha Estates Development Board now being resorted to, purportedly for proposed BOI projects, unconnected to agricultural pursuits, thereby depriving those currently employed on such lands their source of livelihood. Galaha, Great Valley, Galaboda and Mount Jean Estates, belonging to the JEDB, are some of the estates which have been proposed to be so alienated. Kumarawatte Estate, Monaragala, also belonging to the JEDB, has been given over to Vajira Builders. Of the SLSPC lands, a section of Gammaduwa State Plantation, including the Superintendent's Bungalow, is to be given over to one Mrs. Donald Perera and the rest of Gammaduwa State Plantation to Baurs Ltd. Surveying of these lands prior to handing over is currently in progress. Hare Park State Plantation is to be given over to one Mr. Punchi Banda Dissanayake whilst the Rookwood Factory has already been handed over to a Japanese concern who has Mr. R. Asirwatham as the local collaborator. The surreptitious manner in which these lands are being given out, devoid of transparency, leaves much to be desired. In this regard it would be relevant to mention that at the distribution of awards at the Workers Rally, held on 14th June 1998 at Panwila Police Grounds, Hon. Ratnasiri Wickramanayake, Minister of Public Administration, Home Affairs and Plantation Industry categorically and repeatedly stated that 'not an inch of land belonging to the SLSPC or JEDB land would be given to out siders'. What has been pronounced by the Hon. Minister, we believe, is the government's policy in this regard. Hence the ongoing alienation programme is in contravention of such policy. Moreover the irregular manner in which these national assets are being divested to private individuals and organizations without being marketed in the Stock Exchange, Your Excellency would no doubt agree is a blatant and direct contravention of the elementary principles of privatization enunciated by Your Excellency. We deem it appropriate and important to also draw Your Excellency's attention to the rapid deterioration in the sphere of research and Development in the Plantation Industry. With almost all Plantations now been privatized, the continued retention of the Research Institutes in the care of the state has created a situation where this important aspect of research and development has been denied the expertise and modern technological advances achieved by other countries. Excessive government and bureaucratic interference and control, poor remuneration and such other dissuading factors have contributed to a mass brain drain where much needed qualified scientific personnel have sougth greener pastures in foreign lands depriving us of their services. We are of the view that this situation could only be remedied by privatizing the research institutes to bring them in line with the standards obtained by other developed agricultural countries. Your Excellency would, no doubt, be aware of the role of the working planter in the furtherance of the development of and achievement of the goals set by the policy makers in the Plantation sector. Being immediately involved in the implementation of such policy it is the working planter who is aware of the problems faced by the industry and the remedies called for. In such a scenario it would only be proper to enlist the advice and counsel of the working planter in the formulation of policy relating to the plantation sector. Hence we would suggest that Your Excellency would look into the feasibility of amending legislation to accommodate a working planter in the Governing Boards of such organizations as the Research Institutes, The Sri Lanka Tea Board and the National Institute of plantation Management. We of the Ceylon Planters' Society are of the confirmed view that the malady affecting the Plantation Industry today is the absence of a carefully and appropriately formulated National Policy on Plantation Industry. Hence we would very respectfully suggest to Your Excellency that Your Excellency move Your Excellency's officials to formulate and implement such a policy which would satisfy the needs and aspirations of the country and its people respectively.
The Central Bank's Spot Rates for transactions with Commercial Banks announced on the morning of August 04, 1998 were as follows:
The approximate middle exchange rates of following currencies calculated on the basis of cross rates quoted by Gulf International Bank, Bahrain as it appeared in Reuters Financial Information System on August 04, 1998 were as follows:
Average rates at which the following currencies were quoted by Commercial Banks in Colombo for Telegraphic Transfers at mid-day on August 04, 1998 were as follows:
Average Weighted Prime Lending
Rate (AWRP) and Lowest Prime Rate (LPR) Average Weighted Deposit Rate
of Commercial Banks (AWDR)
* After deducting exit fees applicable for the first year. |
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