Discontinuing efficient rules
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Utterly frustrating,” exclaimed an exporter. “The government keeps changing the goalposts all the time making it difficult to run a business,” he added.He was alluding to a Cabinet decision last week to discontinue the Simplified Value Added Tax (SVAT) scheme with effect from January 2024.
As I reflected on these developments, the phone rang. It was my jolly-mood economist friend, Sammiya (short for Samson) on the line.
“I say, I was reading about how companies are finding it difficult to operate when the government keeps changing the rules, one such instance being changing the tax system,” he said.
“Yes, this impacts on the ease of doing business process. By the way, were you aware that the World Bank’s Ease of Doing Business Index has been discontinued,” I asked.
“No……..oh really,” he replied.
The Ease of Doing Business Index – which stirred some controversy that it was overrated – saw Sri Lanka being placed in 99th position in 2020 from 88 in 2014 with a ‘medium classification compared to ‘very easy’ and ‘easy’ classification for those at the top of the ladder.
The year 2020 was the last year it was issued. The report was discontinued by the World Bank in September 2021, following a report that the bank leadership allegedly pressured experts to manipulate the results of the 2018 and 2020 reports.
“So there is no current mechanism to measure the best countries that make it easy for businesses to operate,” he said.
“Most probably the World Bank or a private entity would develop a new index which would be useful to assess in particular the countries that welcome foreign investors,” I said.
In the Sri Lankan context, rules governing business should be attractive to invite foreign investors and even for local businesses. Rules are changed frequently, complain many foreign ambassadors, making it not only cumbersome and time consuming but also counter-productive at a time when Sri Lanka is trying desperately to woo investments to the country.
One investor in a recent conversation recalled how he had to go through dozens of procedures to register a company.
FTZ investors say the proposed termination of SVAT will impact state revenue as there will be a tendency for them to import all raw material which could see an outflow of dollars and less business for local suppliers and loss of revenue to the state. This problem is in addition to the added taxes and high utility rates.
During the COVID-19 pandemic and the economic crisis, government officials handling import rules struggled to meet the special requirements after imports were restricted. “Importers, seeking special permission, were sent from pillar to post to get their requests sanctioned,” one importer said, adding that bureaucrats sitting in judgement on new rules don’t have a clue about business.
This also led to corruption, said the importer, pointing out one instance of how chocolates, currently a banned import, are still widely available as they are apparently smuggled into the country. “Some of these restricted items are coming into the country in 40 foot containers helped by some corrupt officials,” the importer said.
In the meantime, Sri Lankan exporters have also slammed the government move to discontinue SVAT from next January.
The Tea Exporters’ Association (TEA) in a statement noted that the current SVAT system provides them with a significant level of ease of doing business and competitiveness and helps their cash flows towards export operations.
“When the government expects the export sector to perform better and achieve increased revenue targets in the coming years, the proposed termination of SVAT will negate all our efforts at enhancing export revenue. The blocking of funds even for a short period would be an added burden on tea exporters as they would be required to borrow more for cash flow requirements from banks at high cost,” the association said.
It said exporters would have to spend their valuable time on following up on cumbersome procedures which are even now causing delays due to past issues with the RAMIS electronic system at the Inland Revenue Department.
Official sources said the SVAT was introduced in April 2011 to help businesses get their VAT refunds faster.
At this moment, I was distracted by the conversation of the trio under the margosa tree. “Dollar eka den aapahu rupiyal walin wedi wenawa (The dollar seems to be gaining against the rupee),” said Kussi Amma Sera.
“Eka hondai pita ratin apita salli evana ayata (This would help in remittances by migrant workers),” noted Serapina.
“Ow, egollanta den dollar ithiri-keerim walata rupiyal wediyen ganna puluwan (Yes, they would get more rupees for their dollar savings),” added Mabel Rasthiyadu, who has several relatives working in West Asia.
The rupee which has been gaining in recent times against the dollar two weeks ago saw the reverse happening last week with some observers saying this might be due to the rising demand for dollars after the government further relaxed restrictions on imports of over 300 items.
The termination of the SVAT is apparently on the guidelines issued by the International Monetary Fund (IMF) under the US$2.9 billion facility that Sri Lanka has obtained.
The Joint Apparel Association Forum (JAAF) also expressed its concern and deep disappointment over the SVAT issue. JAAF, representing the interests of the apparel industry, said the abolition of SVAT for exporters will have detrimental effects on the sector, already reeling under the pressure of declining exports, jeopardising the cash flows of businesses and impeding the efforts to return to overall growth.
“The abolition of SVAT will create a further burden on an already stressed industry, particularly on company cash flows as funds will be tied up in even the most efficient refund systems,” JAAF stated, adding that the impulsive and non-consultative decision will have disastrous impacts on the long-term operations of a viable sector.
Reflecting the view of the TEA, it said the decision has seemingly failed to consider the fact that apparel exporters may be compelled to import raw materials rather than purchasing them from domestic manufacturers and having their cash flows restricted by the VAT refund system. This will lead to increased imports, a detrimental effect on both the companies and the overall balance of trade.
As I was winding up my column sipping my second mug of tea, my thoughts were on the hope that the authorities, particularly at a time when businesses are suffering, would abandon the termination of the SVAT move. It’s not too late!
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