CUSTOMS, INLAND REVENUE, CENTRAL BANK AND YAHAPALANA  
Posted on June 2nd, 2017

KAMALIKA PIERIS

Yahapalana is revising several Acts of Parliament which are of critical importance to the economy. It is clear that these Acts were marked out for revision at the start itself, as a part of the Yahapalana regime change. The purpose is to weaken these departments.

The Ministry of Finance is drafting a new Customs Ordinance, under the direction of the Prime Minister, on the flimsy grounds that the existing Act is ‘old’. Customs officers stated that the  Customs Ordinance has worked well all these years. The law had changed periodically, over time, through amendments  and numerous court cases and was perfectly up to date. Any changes should be made every carefully.

Customs trade unions objected to the repeal of the existing Customs Ordinance. The Ministry is trying to amend the Customs Ordinance in secret, to weaken the powers of Customs officials,  they charged. All Ceylon Customs Services Union said the changes were intended to help ‘racketeers’. The existing Act had become a headache for racketeers and smugglers and those who wished to avoid paying taxes.  Fraudsters and racketeers could engage in frauds without any fear if the Act was changed.

Their protests were ignored. The new Act was drafted   by a three member committee, which included a Customs official of  80 years, who had left twenty years ago, and a lawyer who was the UNP organizer for Balapitiya and had appeared in Customs cases often against the Customs officers. This has led to the charge that the new Customs Act is drafted by lawyers who had appeared for customs racketeers and that Customs Ordinance was to be replaced with a new one to accommodate these racketeers. None of the stakeholders, such as importers, exporters, customs unions,  had been consulted.

Customs officers were not shown the new draft  and Finance Minister Ravi Karunanayake  had not given them an appointment to discuss the matter. .Customs officers had made three requests for appointments. Customs officers rarely engage in trade union work. They are well placed and well looked after, noted observers. But in this case, due to the gravity of the matter, Customs officers took trade union action.

They ‘walked out’ in protest in February 2016. Nothing happened. So in September 2016, eight Customs Unions engaged in a two day work to rule. They also staged a protest outside the Customs Headquarters. We have been asking the Minister of Finance for an appointment to discuss the new Customs Ordinance since January 2016 but he has refused to meet us. We have also asked them to give an official document on the new proposals so that we too can discuss them and have our inputs heard, but that too has been refused. We have once again asked for a meeting with Minister Karunanayake to discuss the new bill, they said in September 2016.

The Minister was eventually  compelled to provide a copy of the draft law and schedule a meeting with the Customs officers. The draft initially given to them was ‘only a cut and paste document of bits and pieces from foreign customs laws.’ The real draft must have been shown to them thereafter. We are told that Customs officers vehemently objected to the proposed Customs Act, when they saw it.  They said that it would help business tycoons while reducing the powers of Customs Officers”. Customs officers wanted the Act amended in the manner suggested by the Customs officials. But the Finance Ministry was not willing to do so. Customs officers charged that the government for acting in a dictatorial manner.

Customs officers had three other complaints. They  said the government had set up an illegal unit called ‘Revenue efficiency and investment unit’ at a cost of Rs 10 million . They wanted this removed as there were already mechanisms in place for malpractices. They also protested over the appointment  of Finance Ministry officials to oversee the functions of custom officers.  It was reported that the government had decided to recall retired customs officers as well. Thirdly, they said the government was planning to appoint a regulatory body to control four high income generating government departments, Customs, Excise, Valuation and Inland Revenue. Customs trade unions said in January 2017, that they will intensify their protest campaign against the draft bill and vowed to defeat it by exerting maximum pressure in the  near future.

The Central Bank of Sri Lanka is a semi autonomous body responsible for the conduct of monetary policy in Sri Lanka. It also has wide supervisory powers over the financial system and management of the public debt of Sri Lanka.  As soon as Yahapalana government came in, the Central Bank was taken away from the Finance Ministry and brought under the Prime Minister. There were objections  but the change was made.

In 2017, Yahapalana put forward three proposals relating to functions carried out by the Central Bank . There would be three new units. First, a Consumer Financial Protection Authority (CFPA) which would control non-bank institutions including finance companies.  Secondly, an independent Debt Office, to be set up at the Finance Ministry for transactions in government securities. This could then be extended  to other instruments including corporate debt security. Thirdly, a National Payment Platform (NPP) to be managed and controlled by ICTA  would be set up outside the Central Bank.

These proposals have come under strong criticism from various quarters including the Central Bank’s own officials  as measures intended to dilute the power of the Central Bank. Managing debt is one of the primary functions of the Central Bank. Taking away debt management from Central Bank means taking away most of its function, they said.

Assessing the solvency levels of banking and financial institutions  and overseeing national payments were also functions of the Central Bank. These two functions are preserves of the Monetary Board, assigned to it by law, to be implemented through its operational arm, the Central Bank. Prime Minister Ranil Wickremasinghe however, said the Central Bank’s task is to raise money to pay the loans, settling the debt could be done by a separate office.

The new proposals were intended to take away the powers of the Monetary Board and the Central Bank, said critics. Central Bank authorities warned that this new move would put monetary management into a chaotic situation.  the Finance Minister was trying to interfere with the responsibilities of the Monetary Board of the Central Bank charged critics.  According to the constitution, only Parliament shall have full control of Public Finance.

The government announced in its 2017 Budget that it would set up National Payment Platform (NPP) to be managed and controlled by ICTA. The National Payment Platform is intended to facilitate persons, businesses and government to make peer-to-peer payments, including fund transfers and online payments for goods and services, using computing devices, including mobile devices,” it will facilitate all government and private sector online/electronic transactions.   The government intended to use ICTA to break the monopoly of the Central Bank and hand the national payment system was over to the private sector, said critics.

Around  September 2016,  ICTA    awarded the  contract to develop the new payment platform,   to Transact Lanka ,a mobile payment and fund transfer service, without following due tender procedures. Transact Lanka was granted permission to operate the Lanka Government Payment service Web Portal to enable citizens to make cash  based payments for all government payments.

Central Bank officials  opposed  this. A Central Bank official said ‘this is dangerous stuff. No country allows a payments gateway internally to be managed by private parties. . The payment system is the responsibility of the Monetary Board of the Central Bank”, The NPP must be designed and handled by the Monetary Board of the Central Bank.”The reason is that, when we make an electronic payment we should be satisfied that the payment we make reaches the person or institution we intended to, say an account in Nigeria .

Treasury and private sector experts did not think  ICTA could deliver this project.   ICTA’s implementing and monitoring capacity to oversee the National Payment Platform (NPP) was doubtful, they said.  instead ICTA might jeopardize the National Payment Platform. In November 2016  they observed that ICTA had not yet produced any tangible results.

UPFA’s Bandula Gunawardene  filed a  Fundamental Rights violation petition regarding the ICTA managed National Payment Platform. According to  the constitution it is Parliament that has full control of over public finance, he stated. ‘To steal people’s money, they are eying to privatize this institution,” he said.

The Central Bank already has an advanced digital payment system, known as Real Time Gross Settlement System or RTGS, owned and operated by the Central Bank. This has safeguards to mitigate risks involved in payments. The necessary audit trails to prevent frauds are there. Central Bank   also has its ‘Lanka Clear’ agency for clearing cheques and operating a nationwide payment system. . ‘Lanka Clear’ is operated by banks under the supervision and part ownership of the Central Bank. It has  upgraded and modernized its service and is in the process of introducing a system of sharing the  Automated Teller Machines of  the banks.

‘Lanka Clear’s national payment system, ‘LankaPay’   is fully secured, highly confidential and trustworthy, said Bank sources. There is nothing wrong with it. The Central Bank has invested sufficiently in  its digital infrastructure   and has staff capable of performing these functions effectively and efficiently. LankaClear was the first department  in Sri Lanka to obtain the  certification of Payment Card Industry Data Security Standard (PCI-DSS), version 3.2. This certification is at the ‘zenith of international data security standards in the payment card industry.’

LankaClear is the best-placed agency for operating a national payments system, say experts. Monetary Board on behalf of the Central Bank should be asked to set up a national payment system in collaboration with Lanka Clear. ICTA can provide the necessary technical expertise to  LankaClear.

Yahapalana government also  had other proposals aimed at weakening the Central Bank. The government was  planning to set up new units under the Finance Ministry to oversee  other functions of the Central Bank, including the printing of currency notes. Several departments in the Central Bank, such as Department of exchange control, the EPF,  the Central Bank Staff training college and the public debt department,   will go to independent agencies.

An advisory group to assess the solvency levels of banking and financial institutions would be formed within the Finance Ministry. Finance Minister Ravi Karunanayake had suggested the appointment of an ‘outsider’ as Central Bank Deputy Governor. Traditionally it is a senior bank officer based on seniority and experience. Never before has the functions of the Central Bank been undermined by a Finance Minister in this manner, said critics. Nor has the role of the Central Bank been compromised as much as  now, they said. What is the purpose of a Central Bank when its departments are handed over to private companies, they asked.

Central Bank governor Coomaraswamy  said that an independent Central Bank was necessary in a country. Nimal Sanderatne observed that the independence of a Central Bank is vital for a country’s economic stability. Economies that have performed well are those who have strong, independence Central Banks.  A strong Central Bank can make a sound assessment of the economy, give sound advice and take corrective action to curb inflation. ‘It is of vital importance that all sections of the community protests against any moves to undermine the independence of the Central Bank.’

Yahapalana  made a promise at January 2015 Presidential elections, that it would present a National Audit Bill to Parliament, if elected. The National Audit Bill would help to control public sector corruption. The Bill would be   part of its 100 day programme.  However, the matter is still under discussion and  the final Bill has not yet been drafted. the government is not satisfied with the Bill.

the Finance Ministry wants amendments to the National Audit Bill. The government had initially wanted to do away with or amend about 20 out of 57 sections in the draft Bill. ‘Even at the third round of discussions, they appointed committees, and the Bill is being changed,’  said critics  in May 2017.’ There is no reason for amending the original Bill. It was drafted by a top level committee headed by the Auditor General, they said.

The original National Audit Bill has been greatly diluted, said critics. The amendments  go against the very purpose the Bill. Several key clauses of the Bill have been removed  making it ineffective. It  will not yield the desired results. The   Auditor General’s Department said  that there was no point in making further representations to the government. The subject has gone beyond their control. Everything has been messed up, I don’t think there will be a good Audit Act or Audit Service Commission, now,”  officials said.

The Bill has been repeatedly examined for ways and means of reducing the powers of the Auditor General. The Auditor General’s powers have been curtailed. He does not have  the power to appoint officers or formulate salary structures. Certain amendments bring the Auditor General under the authority of Audit Service Commission( ASC). The Auditor General can order a surcharge to recover losses incurred by bad decisions of public officials but the power to do so has been given to the Audit Service Commission.

Critics said that  the  ASC is expected to assist the Auditor General in administrative work, promotions, recruitment, and financial matters only. Auditor General should not be under the ASC. The draft National Audit Bill  also violates the Constitution. Therefore when it appears as a Gazette notification, people will probably go to Supreme Court against, saying the Bill was a violation of the Constitution.

The next target of the Yahapalana government  was the Inland Revenue, popularly known as ‘Income Tax’. When the IMF granted an USD 1.5 billion Extended Loan Facility to Sri Lanka in 2016, one of the conditions under which the grant was made was that Sri Lanka must revise its tax policy.

The IMF   said the new Act should broaden the tax base by removing excess tax incentives, modernize rules related to cross-border transactions to address base erosion and combat tax avoidance, reduce complexity through an improved principles-based drafting style and strengthen and clarify existing powers of the Inland Revenue Department to improve enforcement”.

Yahapalana was ordered to introduce a new Inland Revenue Act, otherwise IMF will withhold its   loan.  Yahapalana had no choice in the matter. Since there was no real need for a new Act, the government did not ask the Inland Revenue Department to draft a new tax law. They asked the IMF to prepare the new Act.

IMF readily did so. A team of IMF experts collected information on current revenue collection procedure and implementation of existing tax laws from the Inland Revenue Department (IRD).  Senior Inland Revenue Department officers say they were  not informed  but Commissioner-General of Inland Revenue says. The IMF team agreed with us to a certain extent on the proposals we made”.

The draft Inland Revenue Act for Sri Lanka  provided by the IMF was not an original one. It was based on what IMF had prepared for Ghana. Instead of drafting a new law to suit Sri Lanka, IMF has simply taken, word for word, the tax law of Ghana.  The proposed bill is in fact a carbon copy of Ghana’s Act  they said contemptuously. IMF has merely foisted Ghana’s tax law on us. If the objective was to modernize the law, they should have looked at Singapore or Malaysia.

The  IMF income tax included certain new  provisions. A person will be taxed on all income regardless of source and whether or not foreign income earned is brought into Sri Lanka. Chargeable income of a person for a year of assessment includes the total of the assessable income from employment, business or investment less the total amount of deduction allowed. The chargeable income shall be determined from each source separately.

In the case of business income, a gift received in respect of the business and a gain from the realization of capital assets will be taxed. In the case of investment income, a gain from the realization of an investment asset, winnings from lottery and a gift received in respect of the investment would be taxed. Interest paid to an individual is no longer exempted from tax. Interest or dividend paid to a member or a holder of an approved unit trust or mutual fund is taxed at 1 per cent where the holder is an individual otherwise is 8 per cent.

There are some good aspects in the proposed law said the Commissioner-General of Inland Revenue.  Except for this lone statement, the proposed Tax Bill has run into stiff opposition  from tax officials and experts. The move to replace the existing law,  was  a retrograde step that’s bound to create confusion and impinge on the overall revenue collection mechanism,  they said.

The new Act had been prepared without any knowledge of Sri Lankan businesses or the taxation culture which has been in operation for over 75 years, tax officials said. The new law attempts to fundamentally change the sources of income, method of calculating the taxable income, claiming deductions, assessment procedure and the administrative provisions, they charged. The proposed Act ignores the more important sections on tax law imposition and recovery and gives undue emphasis to less important sections, which have little relevance to the economy.  The proposal to separate the functions of the Department to two divisions namely, administration and tax collection will bring ‘dire consequences.’ The terminology used in the draft has no relation to the present Act either.

What was  purpose of replacing the present Inland Revenue Act, they queried. Why makde changes in a sector that generates enormous tax revenue for the government. If the government wishes to increase tax collection,  it should plug the loopholes in the law that leads to tax avoidance or evasion and make the IR department a more efficient tax collection body. The solution is not to abolish the existing Act which was in force for over a century and replace it with a new law , which, in any case, will not guarantee a higher collection of tax revenue,

There is no guarantee that the proposed Act will increase revenue, said  experts. it does not add any new  income sources to the existing revenue sources and instead of plugging the existing loopholes, the new Act  adds new  loopholes due to the brevity of the drafting  The IMF  faced time constraints in drafting the new legislation.  Instead of increasing revenue collection, the new Act would reduce it  since tax payers as well as revenue officers  will  lack an understanding of the law at least in the short to medium term.

The Inland Revenue Commissioners Association  severely criticized the proposed new Act and said its enactment would affect at least 80 percent of the new Revenue Administration and Management Information System (RAMSIS) now in  operation. RAMSIS   was programmed on the current Inland Revenue Act and any changes to the Act would make RAMSIS redundant.

RAMSIS was introduced in 2012  to  develop the automation of the Department of Inland Revenue with the ultimate objective of integrating the automated systems of the Inland Revenue Department, Sri Lanka Customs and Ministry of Planning to optimize revenue and fiscal efficiency and accountability. RAMSIS would also connect with 26 other government agencies in order to make it easier for tax payers to pay their taxes online and for the IRD to monitor and track tax payments. Services such as registration, returns, tax payments, appeals, collections, cancellation, directions, and clearances would go through the system which could collect over 95 percent of the total tax revenue The second and last phase of RAMSIS was expected to be completed by October  2017.

We are now reaping the benefits of RAMSIS, said the tax officers. We have managed to increase revenue collection of the Economic Service Charge by 16 percent, VAT by 187 percent, NBT by 157 percent and the personal and company income tax by 113 percent. To replace RAMSIS at this point would be a colossal waste of money and effort. It will cause many unforeseen consequences, inconvenience the people and confuse tax administration”. We cannot make the structural changes the IMF needs but  we could  instead make revisions to the existing Act, they added.

When drafting an Inland Revenue Act the basic structure and the principles of imposition, payment and recovery must be maintained,   said officials. But the  new IMF law departs from the very foundation and fabric of the existing Act. Further, the proposed Act is not consistent with the existing law and until the transition period ends, two regimes of law will exist side by side.  For example, taxation of finance leasing will change dramatically and until existing leasing agreements expire, two regimes will continue, creating confusion and making administration difficult. Such a  drastic change  in the Inland Revenue law will create problems said tax  experts.

Tax law  is   always difficult and  complicated, said tax experts. There are no uncomplicated tax laws, anywhere in the world,  because taxation itself is inherently complicated, and it’s not everybody who can understand it. Tax officers will  need at least four to five years to study and understand the new IMF tax law.

Any new tax law takes at least 10 years to settle down. ‘Till then people will interpret it the way they want as nobody will know the correct definition of the new law.’  The  judicial precedence, interpretations, practices and principles relating to income tax established over almost a century  will become redundant.   “The wealth of knowledge acquired over the past  decades by the Inland Revenue Department, judicial system, practitioners and tax payers will be lost overnight”.  This could result in heavy revenue loss to the government during the interim period. Who will take care of the loss of revenue during this period, critics asked.

Tax  experts say  the  existing   Inland Revenue Act No 10 of 2006, has more depth, better drafting than the new Act. And most parts of it are consistent with international best practices. Drastic changes  were not necessary  and there was no reason to ‘kick out the whole Act’. If tax reform was needed,  the existing Act could have been revised. Weak provisions can be redrafted, repugnant sections could be removed,  sections that were unclear  could be re-written    and subsequent legislation incorporated into the body of the  Act. Any unnecessary tax incentives  could be removed and the tax base increased. Positive sections in the  IMF Act, especially on transfer pricing, international tax and advance rulings could be added.

The organizations affected by the new Act  have  reacted strongly. Representatives of the Institute of Chartered Accountants of Sri Lanka, Ceylon Chamber of Commerce and industry practitioners met the Prime Minister and Finance Minister Ravi Karunanayake in April 2017. ‘We wanted certain amendments incorporated. It was with great difficulty that we managed to get something in, not everything’ , they said.

Inland Revenue Department trade unions were, in April 2017,  discussing  the action that they would take against the enactment of the new Bill. These unions were critical of the bill being moved too quickly with too little deliberation. It is therefore likely that the new income tax legislation would     paralyze tax collection countrywide, due to likely trade union action .

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