Coconut oil import scam leaks Rs.5 bn in tax evasion
A tax increase on imports of coconut oil by the previous regime recently created another significant controversy involving systemic fraud and economic mismanagement.
These alleged incidents of tax evasion and unfair market practices which claimed revenue losses of over Rs.5 billion quickly drew comparisons to Sri Lanka’s infamous ‘sugar tax scam’, resulting from manipulative schemes on the part of a few dominant importers.
The All Ceylon Traditional Coconut Oil Manufacturers Association alleged that several importers stocked up to 50,000 tonnes before the tax increase to manipulate market prices. Accordingly, it said the small-scale refiners along with consumers have become the ultimate sufferers of such profiteering.
Sri Lanka’s Value-Added Tax (VAT) law, which is in operation from January 1, 2024, provides for an 18 per cent VAT and a 2.5 per cent Social Security Tax on unrefined coconut oil if refined locally and sold.
However, investigations have revealed that three major companies operating under six names imported 38.8 million kg of unrefined (crude) coconut oil between January and October 2024.
Though some companies followed the regulations, some did not; they released crude coconut oil into the market without taking it through any processing to make it safe for use.
This did not only avoid taxes but also put the public in hazardous conditions, as crude coconut oil is not suitable for consumption without proper refinement.
These irregularities prompted a raid by the Inland Revenue Department (IRD). However, it is reported that one company wrote to the Ministry of Finance seeking intervention, apparently via the then office of the former President Ranil Wickremesinghe.
Although the IRD confirmed that the said taxes were payable, the correspondence indicated that the request by the company deserved “special consideration,” indicating a possible collusion between officials and importers.
The IRD has not given a clear answer on whether VAT is imposed on it. As such, this ambiguity exists.
The industry was ruined by this inaction, and approximately 40 small-scale coconut oil refineries were compelled to halt their operation, while those allegedly tax-evading companies captured the market freely.
The crisis situation in Sri Lanka was aggravated by the rise in the global price of coconut oil to US$1,880 per tonne, from $1,320 coupled with geopolitical factors like the Russia-Ukraine war. Wholesale prices of domestic coconut oil have accordingly increased to Rs.700 per kg and retail prices to Rs.1,350 per litre (in the retail market it is measured in litres).
This price increase is at a very huge foreign exchange cost. Sri Lanka imports 6,000 tonnes of coconut oil per month, siphoning US$3.5 million from the reserves. If unchecked, this could total $25 million in just six months and add to the country’s economic woes.
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