7 December, 2023


Are Lacunae In Regulatory Oversight Permitting Tax Avoidance By Primary Dealers?

By Chandra Jayaratne

Chandra Jayaratne

Chandra Jayaratne

Dear Mr. President,

Are Lacunae in Regulatory Oversight Permitting Tax Avoidance By Primary Dealers?

You are well aware that as a consequence of the tax revenue to GDP ratio in Sri Lanka falling from around 20% in 1990 to around 10% in 2015 http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS?locations=LK) , the capacity of the State to fund;

1. essential infrastructure;

2. human development (especially investments in health, education and ICT sectors and in focused human capability development meeting tomorrows market needs);

3. research and promote innovation; and

4. specially targeted programmes aimed at alleviating poverty, removing inequity and lack of inclusiveness in society and aimed at bringing within the focus of development marginalized and vulnerable segments of society is severely restricted. In fact it is reported that Sri Lanka holds an adverse record amongst nation states, in that it has experienced the sharpest and longest impacting annual decline in tax revenue to GDP.perpetual-treasuries-profits-in-201516

It is commonly believed that Administrative and Regulatory Oversight Lacunae may be the primary cause of the phenomenon experienced as reported above; and it is most likely that this lacunae is the primary reason leading to a significant drop in tax revenue ( both direct and indirect), customs duty, excise duty as a percentage of GDP.

As a specific single case in point, your kind attention is drawn to the Accounts of a Primary Dealer recently published in the news papers, in compliance with the applicable regulatory framework, a copy of which is enclosed. You will note that the Primary dealer in question, having declared in its accounts for the years ending on 31st March 2015 and 31st March 2016 respectively, trading profits before revaluation of trading securities of Rs. 713 million and of Rs 5,378 million, appears to have declared a NIL tax charge in respect of both years.

The above accounts lead to the question whether the activities of a Primary Dealer (being a licensed professional intermediary, who as a part of a trading business, and not as an investor in securities, invests in such securities, mainly on behalf investors (whereas investors whose investment earnings from the securities are taxed at source) should be exempt from tax on the trading profits made as an intermediary trading in securities carried out as a business. The Primary Dealer in question may have incorrectly treated the trading gain from carrying on business as a Primary Dealer as a capital gain exempt from tax.

In the specific case in point there is also a need to validate whether the intermediary in question is liable to

1. Financial VAT

2. Deemed Dividend Tax ( for not having declared the expected minimum threshold of dividends despite having more than adequate liquidity to do so).

It is generally believed that a majority of tax opinions are likely to confirm that a Primary Dealer should be liable to income tax, financial VAT and deemed dividend tax.

In the context of the need to ensure that tax leakages, due to whatever cause does not impose barriers on the state in recovering its due share of tax revenue, without effective tax avoidance by business entities engaged financial services, it is suggested that you obtain the best independent advisory opinion on the aforesaid matters in question.

One option open to you, in obtaining early an independent professional opinion on this matter of significant importance, is to make a Presidential Executive one off request of the Tax Appeals Commission, supported by the Commissioner General of Inland Revenue and other Senior Commissioners selected as appropriate, together with selected members of the panel of advisors appointed under the Tax Appeals Commission Act, to review and make a determination ( say within a month) whether the Primary Dealer in question should be made liable to

1. Income Tax on trading profits (including gains from trading)

2. Financial VAT and

3. Deemed Dividend Tax

In respect of the years of assessment 2014/15 and 2015/16; and

1. If so, what steps should be made to recover any such taxes due from the Primary Dealer in question and other similar businesses;

2. Going forward, what amendments to the statues should be made, to bring the Primary Dealers within the tax net and liable to pay tax revenue on a fair and equitable basis;

3. What administrative and regulatory oversight measures must be exercised over the operations of Primary Dealers by the Inland Revenue Authority and the relevant Regulator (Central Bank) on an ongoing basis to ensure the primary dealers comply with the liability to duly settle their taxes on a fair and equitable manner

In making the above recommendation, it is realized that the proposed request of the Tax Appeals Commission on a one off exceptional basis by the President is outside the due terms of reference of the Tax Appeals Commission as set up in terms of the Tax Appeals Commission Act.

I sincerely trust that this appeal made in good faith as governance activist receives your urgent personal attention.

Yours Sincerely,

Chandra Jayaratne

cc. Prime Minister
Snr. Advisors to the President- Please review this submission with the President
Snr. Advisors to the Prime Minister- Please review this submission with the Prime Minister
Governor Central Bank
Commissioner General of Inland Revenue
Chairman Parliamentary Committee on Public Enterpries

Print Friendly, PDF & Email

Latest comments

  • 2


    As you are aware our tax laws are archaic and old fashioned. Too many loop holes and exemptions and has resulted in us having a tax collection of 11% of GDP. This is one of the lowest in the world.

    We all need to pay more taxes. Also we are used to getting everything free and brought up in a subsidized and grants dominated environment. However very reluctant to pay direct taxes.

    This is the same with companies and corporates as well and they are no different to individuals.

    For 21 million people we have only 148,000 personal tax files. Less than 1% of population.
    For more than 75,000 companies we have only 48,000 corporate tax files and only 21,000 NBT files and 15,000 VAT files.

    This is our nation!!!

  • 1

    None of these anomalies will take place, if there is a simplified system of taxation.

    Lets face it, we have the lowest taxation rates combined in the world today. People and companies have too many exemptions.

    If we had a flat taxation rate on profits, with NO deductions, except for brought forward losses, and tax income, capital gains, and inheritance and gifts at 15%, there will be NO need to move from one to another.

    So bring everyone into the taxation net, as most of the people who should be paying income tax are NOT, they don’t even have a tax file after all.

    I can assure this way, there will be more tax compliance, and with severe penalties of 100% of the unpaid tax as the initial penalty, on non declaration, more people will start reporting their income and become tax payers.

    So noone is treated unfairly in this scenario, and of course the annual exemption of the first Rs2M in income, capital gains, inheritance and gifts combined will make sure that all wealthy people will be subjected to taxation at some point in their lives!

    Just think about it.

    If that is done this letter is is much ado about nothing, simply meaningless, as even these profits will be taxed at 15%

Leave A Comment

Comments should not exceed 200 words. Embedding external links and writing in capital letters are discouraged. Commenting is automatically disabled after 5 days and approval may take up to 24 hours. Please read our Comments Policy for further details. Your email address will not be published.