Public interest and taxes

Reports that the Sri Lankan public lost out on Rs. 16 billion in tax revenue because of one change to the Special Commodity Levy on sugar has rightly garnered much angst, but this situation is not an exception, rather a rule on how preferential situations are created for different companies, or indeed entire segments of the economy by using taxes. 

In 2020, the Finance Ministry reduced the Special Commodity Levy on sugar from Rs. 50 per kilo to 25 cents per kilo, allowing bulk imports by one importer that resulted in a loss of Rs. 16 billion in tax revenue. Opposition politicians have pointed out the unnamed company had only 3.25% of the market share, but after bulk imports that had shot up to 59%. However, this is far from being a unique situation. 

In 2016, former Finance Minister Ravi Karunanayake was embroiled in controversy after he reportedly gave tax concessions to a beer company that was affected by floods earlier that year, even though they were insured. Later that same year, Karunanayake told Parliament the Government had lost Rs. 147 billion in revenue from 2012 to August 2015 on duty-free vehicle imports, calling for a change in the way permits are issued to public servants. 

Overall successive Governments, made up of parties on both sides of the aisle, have used and continue to use taxes to benefit some segments of the economy at the cost of consumers and public revenue. This can also be observed in the debates that recently cropped up due to the Government’s discussions with the tile industry, which has been protected for years. The one difference being that public revenue tends to benefit from higher import taxes, but they are passed through to consumers, and the public have little choice on deciding how they are affected. 

In fact, multiple sectors benefit from protectionist policies in Sri Lanka. A 2018 report released by the International Monetary Fund (IMF) showed protectionism as a key factor in the country’s weak trade competitiveness and remarked on the use of lobbying rather than strategic development or high employment as reasons for certain companies or sectors being protected. 

The study found the most protected segments of the economy benefit from both high tariffs and para-tariffs. In addition, some sub-sectors have a third layer of protection on their inputs through selected tax holidays or exemptions. Consequently, the Effective Rate of Protection (ERP) for the top 10 most protected sectors reaches between 170% and 524% as of 2015. 

The list of protected industries listed out in the report include vegetable and fruit processing, bakery products, macaroni and couscous, spirit distilling, soft drinks and mineral water as well as dairy and the aforementioned ceramic products. Their economic contribution, including job creation, is not linked to taxation, which is problematic on multiple fronts. 

Obviously, taxation is a multi-edged sword, which is why it must be done transparently and with public oversight. Unfortunately, the Finance Ministry is a black hole where such information is only conveyed to the public after decisions are made and executed. Companies’ band together for effective lobbying, which happens around the world, but what is worrying is whether there is anyone standing up for public interest regarding tax policy in Sri Lanka. 

Governments, irrespective of party leanings, need to stop making closed door tax policies and should be made to list out their social aims clearly when imposing taxes. Due to the often complicated and opaque tax system in Sri Lanka, there is potential for much public revenue to leak through the cracks. Without tighter laws and accountability mechanisms, the sugar saga is likely to be repeated.