Professor Janek Ratnatunga
Thank the Gods, Devas, and whatever Deity that some of the Committee on Public Finance (COPF) meeting was in Sinhala. Otherwise, it would showcase to the world the absolute lack of professionalism and basic technical knowledge of our so-called top finance officials at the BOI and the Ministry of Finance.
I have been coming to Sri Lanka for the last 25 years and running a 7-day strategic finance course annually for over 100 senior bankers, accountants, engineers, and other business professionals. I am sure that none of my students were at that meeting. If they were, they would have been able to answer an elementary question asked by the Committee chairman, Dr. Harsha de Silva, as to the loss to the Treasury of the 17 years of tax breaks asked by HCL, an Indian Fortune 500 company, partnered locally by John Keels Ltd.
The question was so elementary that I thought it was a “Dorothy Dixer Question”, where the answer is known before the question was asked.
I have resisted asking anyone in Sri Lanka for insights before I write this article as I want to only work with what I gleaned from the video of the COPF meeting that has gone viral. The video should be watched by all finance professionals as a case study of what a total shambolic preparation and presentation looks like.
According to Dr. Harsha, HCL was requesting approval for exemptions of VAT, dividend tax, PAL, CESS, income tax, customs duty, port and aviation tax etc., for 12 years, with a further 50% exemption on Income Tax for another 5 years. I think I got that right, although different periods kept being mentioned throughout the video.
At the meeting the BOI was represented by the BOI Chairman and 6 other BOI Directors. None of them were able to answer the simple question as to the tax impact to the government. The Ministry of Finance was also at a loss. The BOI Chairman was so confused he thought that it was revenue that was subject to income tax. At one stage he mentioned that he was an Engineer, and then made this wonderful statement that if the tax rate is 30% of Revenue, then the company will retain 70%!!
Wading through haze, this is what I gleaned from the video:
HCL was already a tax-exempt company under the Special Developments Projects (SDP) Act, in which Ministers have ‘total discretion” to approve an SDP project, which could, arguably lead to corruption. The SDP Act was suspended, but reinstated recently, and this project, which was approved by the Minister in 2018 (or was it 2020?) as a tax-exempt project was brought back to the table.
Why bring an already approved project back to Parliament for a further 17-year tax exemption? We then learnt that there was a ‘spanner-in-the-works’; that under the IMF Loan conditions all exporters will need to pay a 30% tax. HCL was pre-empting this and getting ahead of the game and safeguarding themselves before its imposition.
But here's the rub. Not even Dr. Harsha had knowledge of this impending IMF imposed exporter tax and had to get confirmation from the Ministry of Finance as to its possible imposition. They mumbled that it will be imposed from November (2022?). If Dr Harsha did not know, then how did HCL and John Keels know about it to take action to safeguard their interests? Something is fishy here.
There was other interesting information gleaned from the video. The HCL investment was US$10.25 million, this is a relatively small sum. The BOI had had no revenue or profit analyses, let alone any NPV projections. All they said was that it will create about 1,700 jobs per year (or was it 5,000 in the 17 years – not sure as there was a typo!), and that as IT personnel are paid Rs. 200,000 per month, and this should amount to USD 22 million in employment revenue (the numbers do not stack up, my calculation gives USD 11 million – but then all these were verbal numbers bandied at the meeting).
I was also shocked that the minimum BOI project investment is US$150,000 (this is the price of a basic apartment in Colombo). Surely, the BOI chairman got it wrong?
With regards to the cost-benefit of the tax exemption, Dr. Harsha gave additional time for the BOI team to go to a committee room, call BOI office staff, get the information, and come back to the meeting. But then the BOI Chairman said all his senior staff were at the meeting!! His solution was to phone HCL to get the figures, which were provided as a WhatsApp message!!! Talk about in-depth analysis.
The answer provided after one-and-a-half hours was that the cost to the Treasury was Rs 23 million, oops, sorry, USD 23 million. This was really embarrassing to watch. And it was the cost of the tax benefit for 10-years, not 17 years!
The BOI Chairman said that he was only in the job for 7 months and had not prepared adequately because of the weekend. What? He also blamed his staff for not adequately preparing him. Clearly, most of the senior BOI staff have been appointed not for their qualifications, and probably due to political patronage. I will be glad to put them through a basic finance course which I will deliver at no cost, as a public service.
The BOI chairman said he has a grand plan to bring US$2 Billion of investments. Plans are one thing, implementation is another. Dr Harsha reminded us how a former BOI Chairman, Dhammika Perera had a grand plan of bringing USD 5 billion, which never eventuated.
I also found via the video that the BOI chairman was also responsible for Port City investments. After his performance at the meeting, one can only shake one’s head.
Clearly this whole HCL saga will result in a stampede of companies which have already been granted tax holidays by BOI wanting extensions before the exporter tax kicks in? In the interest of transparency, the BOI should immediately release the details of companies that are applying for extended tax holidays.
On a more serious note, this is not to say that I am in agreement with an exporter tax placed on us by the IMF. I also fully support giving tax exemptions to attract foreign capital. I have mentioned in an earlier article that we have been rated by the UN as one of the most difficult countries to conduct business in due to all the red tape including multiple taxes. We definitely have to overhaul our investment and tax regime, otherwise no one will come.
HCL Technologies provides holistic software and hardware solutions with some of the best computer engineering and technology solutions available in the market. They supposedly provide the latest technology solutions as per the demand of the client, with a worldwide reach and expanse. The question is if they will bring this technology to Sri Lanka, or are they merely going to train our graduates to take-up IT positions in the Indian market?
The BOI needs to chase investments that will enhance our manufacturing capability in Sri Lanka, not investments that will eventually take our best brains and export them. I would recommend that we first need to be energy self-sufficient. We have somewhat harnessed our hydro-energy potential. Investment is now needed for advanced solar technology. It is those investments that are worth giving tax exemptions for.
The author is the CEO of the Institute of Certified Management Accountants of Australia & New Zealand.
The issue is lack of common sense and basic in the area of project evaluation and unawareness of regulatory compliances .