By 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.

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