Sunday Nov 24, 2024
Sunday Nov 24, 2024
Thursday, 30 April 2015 00:00 - - {{hitsCtrl.values.hits}}
Like Kanag-Isvaran very clearly articulated, whatever act that has been brought in must result in extreme implementation; it must also meet the objectives that it was meant. I think this piece of legislation was unfortunately not drafted very well. Therefore, I think it needs certain amendments and reforms. The chamber is perusing this further, but the point is that currently there are a lot of reforms taking place and I do not expect any results immediately.
Kanag-Isvaran: Well before this bill was presented there were letters going out from January 2013 after the Budget. That is where the lawyers got activated, when they are consulted. Lots of queries were made about this and we had a committee which we wanted to be challenged in the Court of Appeal because it was a statutory functionary. The importance of discussion on proposed bill is very important; however here unless the Government wants an open discussion no one is really worried about what’s a bill is going to be like. Even in the 19th Amendment the same thing is happening.
Anyway, the problem is in our Constitution. You must remember, that we have a seven-day window to challenge a bill. You have to ask somebody in Parliament whether the bill is in the Order Paper and within seven days of that you must make a presentation to the Supreme Court, which has a very limited window to look at it, which is just three weeks from the day of the presentation of the petition challenging on the inconsistence of the Constitution.
In developed countries you can challenge the constitutional enactment, but here we can’t. The basic problem here is lack of discussion. This is the most obnoxious piece of legislation I have come across after a long time, because it created so much confusion and uncertainty.
Q: From the face-off do you agree that this is a deterrent for ease of doing business in Sri Lanka, particularly for foreigners?
Mangala: Certainly yes. Because on one hand Sri Lanka is trying to attract Foreign Direct Investments (FDIs) and we invite and encourage investments. But what are they going to invest in? We have only 20 million population, which is a very small market. The investors will invest in whatever the assets, build up a company and probably will re-export. This might deter investment into Sri Lanka.
Q: Could you comment about the most contentious topic; what will happen to the title? The law is in force and what would be your suggestion?
Kanag-Isvaran: Ordinarily if a property transferred from A to B is sought to be set aside, the court will settle. And the money that this man is pay for the purchase will return and the transfer of title will be set aside; but here nothing is said about that! Once you declare something null and void, it is by an operation of law. Then after a period of time they will tell you if you behave properly, you will get your title back. That’s your 50% going up and 50% coming down; I don’t know what the drafters have been thinking of. Either they deliberately did it or it is simply absolutely idiotic!
If every one of you can ask ‘what has happened to the title?’ why has it not got into the mind of drafters? Now what happened is the title is hanging around somewhere; you can’t do anything about it. In fact a man asked me recently, ‘Sir I built a new building and the title is declared void, what will happen to the building? Normally, we will say you are entitled to recompense for what we have done or based on unjustifiable treatment, can this be claimed on this? You can’t because it’s not my personal act itself and it is operation of the law. Thus, you’re left without a remedy. How long does that take to increase or decrease your shareholding? That depends on the people. If it’s listed, it’s worse! Otherwise what do is plead to somebody to buy the damn thing; I’ll give it cheap, so that I get my land back. I mean has nobody thought about it. My answer to your question is, I don’t know. This needs immediate attention. It’s a deliberate misdemeanour part on the Legislature and the legal draft.
Q: Banks call for provisioning, so what would be the situation in this scenario?
Jayesinghe: I think in that you need to take a call on whether you have the rights to realise that value. If you don’t have the rights to realise the value, chances are with zero values. The auditors are also in serious trouble because the law itself cannot figure whether it has happened or not (laughs). In that scenario, it’s rather going to be very challenging as to how you’re going to take a call on this. Because from my point of view, being over-conservative or being over-aggressive are both are wrong. You need to get the right picture of the situation and getting that right 
balance is extremely difficult simply because you don’t have the legal clarity. How to conclude on that is a good question.
Yapa: If I may add, if it’s a case of public listed company, share transaction is not controlled by the company itself. When I was working in the Colombo Dockyard at one point around 20% stake of the company which was held by a local entity suddenly transferred to a foreign party. Suddenly you can be found way above the 50% threshold. Now, if that kind of a thing happens, how do you get it back within 12 months? Even if the law allows you to do it after 12 months, how would the company proceed further? Now that is a situation where the company makes a request to buy some of that share. Will the shareholders sell at the same price? They will speculate on this. It creates a lot of situations which cannot be foreseen. Business has to happen in a stable environment, where people can foresee their risks to at least account for them. This creates a situation where you cannot foresee and that’s a real uncertain situation. It’s not very healthy for the businesses.
Q: I think that gives a good opening to Vajira. What has been the Colombo Stock Exchange’s (CSE) observation? Have you developed a system to track which companies may be subject to the new law as and when foreign ownership exceeds? What is CSE’s overall impression?
Kulatilaka: The CSE knew very well that it was going to hurt the business community. Property development is a key sector in the economy. Like Suresh said, if you take countries which have no restrictions, they grow very fast because of property development. Singapore, Thailand, Malaysia, Taiwan and those countries developed very fast. You call it nationalistic, but how many opportunities do you lose by having such rules? Because the land is ours, what can you do with the land?
In relation to the CSE listed companies on the other hand, it is not only the property development that gets affected, but all the sectors that are linked to property development. You say it has a negative impact on foreign owning, but they cannot take the land back. It’s not like the mining industry; it’s a dangerous industry because you take the resources out of the country. Overall I think this rule has quite a lot of loopholes and is harmful although it’s called nationalistic.
What’s the message we are giving to the investors? That’s again very important. The message we give is don’t come this way. In the last five years with 33 companies we did a program to and found out that 49 times it had gone above 50%, 46 times it has come below 50%. As a Government and as the Stock Exchange we were promoting the free-float of shares to attract more investors. Property development cannot be done only by the country’s resources, we need technical knowhow and we need foreign investments to come into the country.
A lot of opportunities have been lost. Although you call it nationalistic, if you’re losing opportunities, it’s not viable. We knew that there was a lot of danger and voices were raised, but I don’t think that the voices were ever counted. If I remember right, they gave 12 months for listed companies to correct the situation because the CSE made certain representation requesting not to do it immediately. If the market comes to know that there would be a great loss of wealth.
Another important and dangerous situation for foreign investor is the prospective effect of any act or law. This is taken very seriously by the foreign investors. We provided statistics as to how it will affect the market and I remember that John Keells was a major affected party as the shares and prices were fluctuating repeatedly because property development was one of their major investment portfolios.
Q: In case of a company where a foreign shareholder exceeds 50% and the title to the land or the building is lost, would there be a valuation issue?
Perera: Definitely yes! That’s what I said, the title being void and not effective in the law, that concept cannot prevail in this act; it has to be removed. There are two issues; there is a policy issue as well as an issue with the mechanism. Policy issue is whether you should have this rule to say that when the foreign ownership goes beyond 50% there should be something done to the land in the company. If you want to accept that policy and live with it then there’s an issue as to how to take action. That’s to do with the mechanism.
The mechanism that is there in the Act is impractical, that’s what I said in substitution of banks we need to get in the concept of force sale. When the foreign shareholding goes beyond 50% a company should be given a particular timeframe, say 12 months, to sell the land. So then the asset goes out, so the debit entry goes out and there’s money coming into the company. This is how it’s done in the Singaporean Residential Property Act.
Yapa: I would say it’s fair treatment if it’s a residential property, but if it’s another company, then it is not the case. What does force selling mean? Although we say it is foreign ownership of the company per se, maybe it is a local company listed in the CSE where majority of the shares are held by a foreign company at that particular time. There’s no fixed ownership in that. But the company is a local company, governed by rules of law established here. Today if that company is called local, the moment the stake increases to 51% it becomes a foreign company. In terms of the Inland Revenue it’s a local company, but according to the Land Act it is treated as a foreign company.
There are so many complications in this Act which are not clear. That’s why I said that you cannot clearly see it from one aspect, look at it from the FDI perspective and look at it from the foreign exchange perspective and look at it from various other aspects. The national interest has to come in a holistic manner; the employment it will create, the tax revenue it will create, the development it will create, so on and so forth. The 
fundamental due concern has to take place.
Q: We have only one Government representative on our panel and she’s also newly-appointed to her post. You were in the Treasury when this policy was drafted and I remember that Dr. Jayasundera was a vocal proponent of this Land Act. Could you explain the rationale behind this Act?
Dahanayake: Policymakers thought implementing such a law would restrict the selling of land to foreigners because land is a limited resource. If they go for investments, they could go for a 99-year lease, without purchasing the land in our country. Therefore, in order to protect our limited land resource, the policymakers created this act.
Q: Despite the fact the foreigners will not take the land and still want to preserve, this was the rationale; is it?
Dahanayake: Those things are acceptable. They will invest in our lands and go for profitable areas — they will earn and go. But at the same time we have experienced especially in our free trade zones most of the investors built buildings and ran away. When the laws were changed the policymakers not only expected the revenue, but the interest and for the development of the country for the future generations. It was a futuristic enactment.
Q: Preservation of the land, as well as safeguarding the nation; Suresh, any comeback on that? If the foreign investors are serious about Sri Lanka, how are we going to respond to them?
Perera: You have to look at this Act in different ways. There are good and bad aspects of it. As she said, a small country like ours should have laws to protect the limited land that we have, and I don’t think there’s anything wrong in that. But the problem is that the prohibitions should not be blanket in nature. The issue in our Act is that it is too rigid. You need to be flexible from the national point of view as well.
When it’s in the national interest, it’s not just keeping the foreigners out — bringing foreign investments, getting them to add value is also in the national interest. You need to have flexibility in there. It’s not about lease or freehold aspect of it and I don’t think there’s anything wrong in providing freehold right to foreigners. Not the beach front, not the urban areas, but where Sri Lankans are also reluctant to go and invest.
Yapa: I agree that it has to be dependent on the geography and location; maybe that is one way of looking at it. But particularly if you look at an area like agriculture where we are looking at 30% of labour, a lot of land resources are being utilised and the contribution to the GDP is around 11%. Thus, a lot of reforms will have to take place in the future in order to improve productivity in those areas. This labour has to be released when the economy grows and we are already in short of labour. If that is to take place, again some of these Acts will surface.
Leasing is good, but some of the prominent lease taxes have to be upfront and they would compare and see why they want to invest in Sri Lanka when there are other options available. Particularly when looking at FDIs we must realise that we are not the only contender available and there are other options. That is also a serious concern that we need to look at.
Q: Suresh, you mentioned that as a reform we should encourage more long-term leases. Could you elaborate?
Perera: Now what happens is that you tax on the short-term leases as well on the long-term leases and we have to pay the tax upfront. Even when you’re calculating if you go for a 99-year lease 15% you have to pay upfront as opposed to looking at five-year lease with 15%. Thus, an investor may find it easy to go for a five-year lease and renew it thereafter. What happens now is that during this five-year period when other countries like Singapore, Malaysia, Vietnam and Thailand are developing, the investors begin to shift their investment to one of these countries. But on the other hand, if you commit the investor for 99 years, irrespective of what is happening in the region he will be in Sri Lanka.
Q: It’s very early in the implementation of this Act, but has the Inland Revenue set up a separate unit to monitor compliance and also which company has moved into this cloud area?
Dahanayake: We are having a separate unit for collecting stamp duty. We have to see almost all the documents that come into this office and officials are also facing a difficult situation as there are controversial issues here. Although we collect the taxes, the funds are being transferred to the relevant provincial councils. Most of the foreign investors have a different way of investments and different way of handling things and I’m sure the auditors do understand what I’m saying. Foreigners are making investments, especially down south, but not in the proper manner. Therefore we need to explore all the documents that are submitted by the foreigners in order to get the right tax collected.
Kalyani: Actually it depends on the transaction that has been taken place. We have no hard and fast rules in that case. We just need to see if that’s up to the current market price.
Perera: As she pointed out there is a section to say that in case of state land the valuation should be conducted by a Government valuer but if it’s a private land it should be valued by a licensed surveyor. The incurrence is that you are leasing to a foreigner to get this valuation done, either from a government or licensed valuer. That section is there to ensure that two parties will not put a lower value in the lease and try to reduce the Land Lease Tax (LLT).
Q: The company I’m attached to has been in existence for the past 10 years but the foreign stake has changed from time to time. Now foreign ownership is more than 51%. In this scenario, what is the fate of the land?
Perera: There’s no problem. This Act applies to transactions that have taken place after 1 January 2013. Let’s say there is this foreigner who owns a property in Galle Fort through a company with a 100% shareholding. But the property was acquired in 2002. This foreigner can sell his shares to another foreigner without any problem. This Act does not prevent that because the land was acquired before 1 January 2013. I loophole the Act.
Q: The company that I’m attached to has a lot of subsidiaries. One of the subsidiary companies acquired a property in the middle of 2013. Now under the indirect shareholding category our holding company is a listed company and we have a foreign ownership of over 51%. But the Act came to effect at the end of 2014. What will happen to the property that we purchased and what will happen to the title of it?
Perera: Your company wouldn’t have an issue because the transaction happened between 2013 with the certification of the Speaker and that’s specifically addressed in the Act. In the interim period there was a circular that was issued and that circular allowed it at that point; subsequently when the Act came into effect that was made illegal.
Q: My question is on mortgage of land. The Act prohibits the mortgage of land for five years through licensed commercial banks under the Banking Act but what about foreign banks? Foreign bank in the sense banks that do not come under the Banking Act, say a foreign institution. There is no restriction that I could see in the Act.
Perera: This is the issue when you get to the interpretation section; the word ‘Alienation’ is defined to cover three aspects — transfer, lease and mortgage. However, under relevant operational sections in this 25-section statute is Section 2, which prevents transfers and then sections 5 and 6 which were put together to regulate leases. Only Section 11 relates to mortgages but that also in relation to different circumstances.
Q: There’s no specific prohibition for alienation. The intention was to restrict alienation but Section 2 prevents transfers, it’s confusing.
Perera: Subject to Section 11, if you have leased or transferred land to those three prohibited categories after the certification by the Speaker then from the date of that execution of the instrument from five years you’re prevented from mortgaging, irrespective of whether you’re mortgaging into a foreign bank or into a local bank. Actually, the legal department has to check the specific prohibition there.
Q: Suresh said that foreigners buying condominium would have to pay the full purchase price upfront. Is that right or is there any installment scheme?
Perera: No, if you’re talking about foreigners buying they can only buy forth floor and above. And when they are buying they have to bring foreign currency into Sri Lanka and everything should be brought in before the execution of the deed.
Q: Could they still pay in installments and at the end of it transfer?
Perera: The law says before execution of the transfer. So before the execution of the transfer deed they have to have the full money in Sri Lanka.
Q: In a situation with the lessor and the lessee, the instrument has to be levied with 15% LLT. Whose responsibility is it to pay the 15%? Is it the owner of the property or the lessee?
Perera: The lessee. Normally it is the transferee that should pay but it is between the parties. If they agree the other can pay; it’s not against law. It’s more a procedure of recovering the duty. In the same way in the Land Alienation Act also the LLT is expected to be paid by the lessee but if the parties agree the other party may pay it.
Q: In a situation where the lessee does not pay, does the instrument become void?
Perera: If the LLT is not paid, the instrument cannot be registered at the land registrar.
Q: Section 9 of the Act says that the Commissioner General of Inland Revenue should charge a levy and collect the stamp duty charge imposed according to Section 6. According to the Inland Revenue Act, if it’s a default yes. What if Inland Revenue has not charged?
Dahanayake: If the particular registrations have been done, they have to pay the stamp duty — it’s a legal document. When they come to get the stamp duty paid then we collect the tax. There is no default tax arise.
Q: On the registration of these lease agreements, if it’s an agreement between a subsidiary and a holding company, if its 100% subsidiary, is it mandatory that you register and pay the stamp duty?
Kanag-Isvaran: Whatever the nature of the parties, the stamp duty applies to the instrument. Talking about the duty, every instrument which is executed in terms of Stamp Duty Act is a listed instrument which can be stamped. It can be a lease or transfer, it indicates what percentage of duty is payable. Independent of who is doing what, that obligation arises under the Stamp Duty Act and then Inland Revenue monitoring.
Q: These taxes in advance, for example for a 99-year period, how do you account it? Are you forced to account in the financial statement in the same year or could we capitalise it?
Jayesinghe: It will be the direct cost of your lease.
Suggestion:We are talking about ideas for reforms; in the Stamp Duty Act there is actually a provision to compound Stamp Duty but there is no similar section in the Land Alienation Bill. Therefore, can’t we suggest that as a reform for repetitive transaction to ease corruption, we compound the Land Lease Tax and make a periodic payment? It will ease collection for the Inland Revenue and it would be easy for the taxpayers.
Dahanayake: If you want to suggest certain amendments, please write to us. We will consider your suggestions.
- Pix by Daminda Harsha Perera
