Sri Lanka: The Land of Public and Private Parasites

Professor Janek Ratnatunga

A parasite is an organism that lives on or in a host organism and gets its food from, or at the expense of, its host. Clever ‘parasites’ know that they should not take so much food such that the host dies – because they know that if the host dies, they die too. A clever parasite achieves a state of mutual ‘symbiosis’ with its host.

Sri Lanka has hosted plenty of parasites in its long history. The British were the first parasites, cleverly sucking Ceylon’s resources and wealth but leaving enough scraps for the local brown-sahibs to wallow in without killing the host.

These local parasites came in all forms – politicians, public servants, professionals, landed proprietors and businessmen. Rules in the form of laws and taxes were passed by the politicians, and the public servants and professionals were given the task of ensuring that the landed proprietors, businessmen and ordinary employees followed the rules and paid their taxes.

These taxes were then used to build roads, give universal education and health, and to provide essential commodities such as food, fuel, and fertilizer.

Unfortunately, the gene pool of the clever local parasites slowly diminished in quality due to civil unrest, religious intolerance, and migration. Consequently, a genetic drift has taken place in Sri Lanka where many of the parasites that have remained in power are decidedly not clever – as they have collectively killed the host by sending it bankrupt.

Last week, the Supreme Court granted leave to proceed with fundamental rights petitions filed seeking an order to take legal action against 39 individuals seen to be responsible for financial irregularities and mismanagement of the economy. Many of the names are those that were prominent in the ‘Aragalaya’ protests – and were seen as perpetrators of Sri Lanka’s moral and economic bankruptcy. They were certainly not clever as they have sucked the country dry and virtually killed it.

But are these the only parasites responsible for Sri Lanka’s collapse?

What about the lawyers and chartered accountants who advise individuals and companies to avoid taxes?

Take for instance, the recent COPF meeting at which approval was sought by HCL, an Indian Fortune 500 company and John Keells, for 17 years of tax breaks pertaining to an investment of a miserly US$10.25 million.

I have already commented on what a fiasco it was when the Board of Investment (BOI) and the Ministry of Finance did not know the loss to the Treasury of those tax breaks. A partial answer was given later by COPF Chairman Dr. Harsha De Silva at an IRA TV interview when he said that the joint venture will make a profit of US$275 million over 10 years!

Therefore, by considering only company income tax (and ignoring all other tax breaks) I have estimated the loss to the Treasury as US$82.5 million!!

Think about it… this is a tax saving of 700% of the original investment!

In addition to the massive tax break being asked for, what was not really clear at the COPF meeting was the true nature of the project itself. I was surprised that the investment involved was a relatively small sum for a Fortune 500 company. On further investigation it appears that the project was basically to rent out space in John Keells' Cinnamon Life office complex – mainly house back-office staff needed to provide technology solutions to international clients. The revenue collected by HCL would probably be booked overseas, and the JKH joint venture would just be a cost centre.

And the US$10.25 million investment? Mainly this would be the cost of the fit out, where the fixtures and fittings needed will be imported without paying any duties and taxes.

I hope the information I have privately obtained is wrong, and that JKH and HCL will show that this project will be a revenue and profit centre bringing much needed foreign exchange to the country. Otherwise, this is not the sort of project for which Sri Lanka should be giving 17 years of tax breaks to.

In the interests of full disclosure, I have been involved in the past in negotiating BOI projects for clients where tax breaks were obtained for 5 years. However, the times were different then, and Sri Lanka was not bankrupt. We did not kill the host.

Chartered Accountants and Lawyers have been trained to provide the best advice to minimise the tax for companies. Little do we think that what we save on tax is for the benefit of the shareholders and that it indirectly takes the money away from the wider society which could have used them for their societal needs like education, health, and infrastructure.

This week Sri Lanka published a bill to legislate a planned increase in income taxes as part of its measures to increase revenue under an agreement to get funding from the International Monetary Fund. Taxes from individuals, companies, mutual funds, and trusts are all to be raised in this IMF imposed ‘haircut’. Such an imposition of taxes is a recipe for disaster, but as ‘beggars’, we have no option but to accept this. The IMF has ensured that Sri Lanka remains on life support forever.

Chartered Accountants and Lawyers will, however, be looking at this legislation gleefully, as it means more lucrative consultancies to show – those most able to pay the extra taxes – how to avoid them. Others may simply stop paying and await the next tax amnesty (Sri Lanka has had 12 tax amnesties since 1964). The cash economy will flourish, as will the ‘hawala’ cash transferring system. The only people who are going to bear the brunt of the haircut will be the salaried employees who will have taxes taken out as PAYE.

Lawyers and accountants are excellent at interpreting the letter of the law, rather than the spirit of it. However, with our country in the throes of death – as our people are spending Rs. 300 for a loaf of bread – are we professionals no better than the other parasites feeding off our host?

The author is a Sri Lankan Chartered Accountant and the CEO of the Institute of Certified Management Accountants of Australia & New Zealand.