Revenue loss in GST

The government is likely to lose revenue by implementing the new Goods and Services Tax, a top Treasury official has said.

"GST at 12.5 per cent will not enhance revenue," Deputy Treasury Secretary P. B. Jayasundera told a seminar of the export section of the Ceylon Chamber of Commerce recently. "It will not even be revenue neutral."

Experts have recommended that GST be set at 17 per cent for the tax to be revenue neutral or for the government to get the same amount of revenue as it did under the old Turnover Tax Act.

Though in some areas taxes may go up the government would be losing revenue from areas such as telecommunications.

Soon after the tax comes into effect, wireless local loop and cellular charges bills will come down as the effective taxes are brought down from around 22 per cent of call and installation charges to 12.5 per cent. Though the govt. will lose revenue from Sri Lanka Telecom as well, its call charge hike will deny the benefit to the consumer.

Tax experts say most countries have experienced a downturn in the first year of transition. But in countries such as Sri Lanka which have high nominal growth rates also cause the natural growth rate of taxes to be high.

GST a threat to local industrialists

By Harischandra Samarasekera

After a number of deliberations in government benches and the private sector chambers for half a decade or so, Parliament has given the birth to the Goods & Service Tax Act to replace the present Turnover Tax on February 23 1998 which will be effective from April.

While it is an accepted fact that around 80 countries have so far adopted either the Goods & Services Tax (G.S.T.) or Value Added Tax (V.A.T.) to collect government revenue on consumer expenditure in the form of an indirect taxes, we must not forget the fact that the Australians and Americans rejected this concept in the belief that this tax will increase their tax liability and accordingly reduce their buying power.

However, we must be thankful to the Government of Sri Lanka for considering a very generous introductory rate of 12.5% Goods & Service Tax for wnich it faced vehement opposition from the I.M.F. (Their recommendation was 17%) we understand that the Sri Lankan Government had been denied certain financial assistance programmes as a protest by the l.M.F.

In certain sections of this legislation local industrialists have been treated discriminately vis-a-vis the direct importers, allowing the latter to get more benefits and also imposing additional financial burdens on the local industrialists. Let me explain these discriminations and additional burdens imposed upon local industrialists which have arisen as a result of the introduction of G.S.T.

(a) Today under the present system of Turnover Tax, when the local manufacturers supply or a direct exporter imports their material requirements for the purpose of export, such supply/imports are free of Turnover Tax, but under the G.S.T. when a local manufacturer supplies his materials to the direct exporter for the purpose of exports, such supplies will be liable for G.S.T., while the direct exporter or a B.O.I. company can import their requirements and defer the payment of G.S.T. for a period of 45 days, merely on submission of a corporate guarantee which has to be signed and submitted by a company director. In a situation like this, the direct exporter would like to import their material from abroad than buying from a local manufacturer, as he will be able to enjoy 45 days credit for payment of G.S.T. which the local manufacturer cannot give and hence the local manufacturer will not be competitive enough to get the orders from such direct exporters.

However, if a local industrialist agrees to extend a similar credit period for his customers, then there is a possibility of obtaining these orders, but it will be at an additional cost i.e. interest payable to the bankers or disturbing his own cashflow of the company.

If such an option is used by the local industrialists they will have to settle their G.S.T. within one month from the month of invoicing without in fact getting the money due from the customer.

This shows the discrimination arising on the implementation and changes the level playing field making it disastrous for the local industrialist vis-a-vis importers and in order to overcome this disparity it is needed to extend this same 45 days deferment of G.S.T. settlement for the local industrialists too for their supplies to the direct exporters and B.O.I. companies.

(b) Another salient feature in the G.S.T. Act is, that there are certain identified B.O.I companies whihc have been given a concession to import certain items free of G.S.T. basis, without the same concession being given for the local industrialists to supply such material on the same concessions. Sub section XXVII and XXVIII of section 76 enumerate this particular concession as follows:

(XXVII): Import by any person who has entered into an agreement

a) prior to May 16th 1996 ; or

b) prior to the appointed date in respect of a project, the total cost of which is not less than Rs. 500 million.

With the Board of Investment of Sri Lanka, under section 17 of the Board of Investment of Sri Lanka law, No. 4 of 1978, of any article which is prescribed as a project related article to be utilised in the project specified in the agreement during the project implementation period of such project as specified in such agreement or up to the date of completion of such project, which ever is earlier.

(XXVIII): Import by any person who has entered into an agreement, with the Board of Investment of Sri Lanka under Section 17 of the Board of Investment of Sri Lanka Law No. 4 of 1978, of any article which is prescribed as a project related article to be utilised in the project specified in the agreement -

(a) for a period of three years, from the appointed date, or (b) until the completion of such project, whichever is earlier.

These concessions have been granted to the B.O.I. companies to import any product related article during the project implementation stage without paying any G.S.T.

As this concession has been granted only for the purpose of import, the benefit which local industrialists enjoy in supplying materials to the B.O.I. companies without Turnover Tax today will not be available any longer and hence they will not be competitive in supplying their goods against the imports.

This disadvantage will especially affect the companies which are engaged in manufacturing of floor tiles, wall tiles, sanitary ware, air conditioners, light fittings, cables, etc.

We are at a loss to understand why the local industrialists are deprived in this manner without any logical reasons for same. Further it should be noted that this concession is an unlimited one as it does not specify a date for the expiry of this concession.

(c) When the G.S.T. is implemented with effect from 01st April 1998, no over paid Turnover Tax can be set off against GST payable and irrespective of the credit balance due to them, they will be liable to pay GST every month depending on their Turnover and any excess paid by these establishments as at 31st March 1998 will be refunded only after six months.

With the experience which we have already seen, sometimes this refund can take even 5-10 years.

The most unjust and the saddest part of this arrangement is that irrespective of the time taken for the refund, no interest or any cost of fund will be made by the government at all, while these companies will be forced to service the loans taken from their banks.

It is not correct for the government to use the funds of individuals without making any interest payments, as they are being pressed by the banks to pay the interest and instalments due in time without any soft corners for them.

(d) During the last regime, after a number of appeals made by the Chambers to the Secretary of the Treasury, accepted the fact that in order to maintain a level playing field for the local manufacturers vis-a-vis importers/traders to impose a T.T. based on the notional profits, as otherwise the local industrialists will not be competitive against the imported finished goods.

ln fact the T.T. paid on notional profits was the only non-tariff barrier imposed by the last government to protect the local industrialist from the manipulation of the importers of the finished goods.

However, with the introduction of G.S.T. this concept of notional profits has been done away with, and as a result of that the traders are encouraged to import the finished goods which will definitely affect the local industrialists.

Thus the importer can import under different names from time to time and avoid paying GST at the point of sales.

What will happen is that local industrialists will have to pay GST on cost plus profit basis, while the trader may get away by paying GST only on costs, i.e. the imported price, and as a result he will be able to supply the imported material at a price less than the local manufacturer who will have no alternative but to sacrifice his share of business to the importers.

Such a situation will force the local industrialists to close down their business or prune down their operations.

(e) If any goods which was sold prior to 31.3.98 is returned after 15 days from 31.3.98 it will not be possible for the tax payer to deduct the Turnover Tax embedded in the sale value of such returns, as it is not permitted to set off against the G.S.T.

Hence such sales returns will have to be completely ignored and T.T. paid on such sales will have to be written off as losses in the accounts.

In fact we have only a few days to switch on to the new Goods & Service Tax system and it is the duty of the Inland Revenue Authorities to clear the doubts in the minds of the taxpayers immediately, otherwise again the local manufacturer and the poor consumer will be the victims of the lapses of the bureaucrats.

The problems enumerated above are certain matters encountered by the industrialists but had not been given due consideration by the legal authorities. Thereby invariably the local industrialists will have to suffer. In fact it is imperative that certain provisions are made for the transitional arrangements to overcome problems faced by the local industrialists, when a new legislation is introduced in place of another.

Finally it is the duty of the government and the bureaucrats who advise the government authorities in this sort of changes to look into the practical aspect of implementation and disparities and discriminations which will go against only one party, which is none other than the so called 'engine of growth" or the much neglected Local Industrialists.

- The writer is Treasurer of Ceylon National Chamber of Industries

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