Johny, Johny Yes Papa?

Sugar Scam: Sweet profit, Bitter Truth?

• By October 2020, the retail price of a kilo of sugar had exceeded Rs. 130 
• The import tax of Rs. 50 on a kilo of sugar was dropped to 25 cents on 13 October 2020
• During this period, one sugar importer was able to import 100,000 MT of sugar, subject to an import tax of just 25 cents

By Piyumi Fonseka and Kalani Kumarasinghe

@Piyumi_Fonseka, @KalaniWrites on Twitter

An alleged loss of Rs. 15 billion in tax revenue following the government’s decision to slash taxes imposed on Sugar in October 2020, has been the point of contention this past week. The incident now widely dubbed as the ‘Sugar scam’ came into light early January, where sources claimed that a sudden reduction in sugar taxes gave sizable profits to a select few traders.
The Sri Lankan government has come under fire as the overnight slashing of taxes -from Rs. 50 per kilogram to 25 cents last year-has resulted in one trader importing large volumes of sugar and later selling the stocks above the fixed price. 
The State-run Sathosa is reported to have purchased stocks of sugar at various prices far above the maximum retail price following this tax reduction. Sathosa was then forced to sell sugar to the consumer at the maximum retail price of Rs. 85 per kilogramme, incurring heavy losses to the already troubled State entity.

"The petitioners allege that This is undoubtedly the biggest scam in the history of Sri Lanka. The money the government has lost from this case is much higher than the infamous bond scam"

What, When and How 

By October 2020, the retail price of a kilo of sugar had exceeded Rs. 130. The import tax of Rs. 50 on a kilo of sugar was dropped to 25 cents on 13 October 2020. At the time, sugar importers had about 90,000 metric tons (MTs) of sugar, imported after paying an import tax of Rs. 50 in storage.
 After it was stated that the retail price of sugar cannot be reduced, the Government increased the income tax imposed on a kilo of sugar to Rs. 40 on 27 October. According to the Special Commodity Levy Act, the increased tax will only come into force a month later.
Thereby, the amended tax value could not come into force between 13 October and 13 November.
During this period, one sugar importer was able to import 100,000 MT of sugar, subject to an import tax of just 25 cents.

The Samagi Jana Balawegaya youth movement last month lodged a complaint with the Commission to Investigate Bribery or Corruption, demanding a full investigation into the alleged sugar fraud that cost the government over Rs. 11 billion.
Filing the complaint, Samagi Tharuna Balawegaya Chairman MP Mayantha Dissanayake stated that in addition to the bribery investigation, a Presidential Commission of Inquiry should also be appointed to probe every aspect of the alleged fraud and the persons involved in it.

"Government comes under fire as overnight slashing of sugar import tax to just 25 cents per kg - akin to insider trading-allegedly results in one trader unfairly profiteering"

“Approximately 75,000 MT of sugar has been imported to the country by a powerful businessman after the import tax on sugar was reduced to 25 cents per Kilogram. Several other consignments of sugar are still arriving. Despite the drastic reduction of taxes, sugar prices in the market did not see a significant change. The State-owned Sathosa purchased sugar at higher prices and sold it to the public at Rs. 85 per kilogram. On the surface, we can see a suspicious deal behind the sudden influx of sugar into the country after the reduction of taxes. We suspect that some wheeler-dealers affiliated with the government derived large profits from this deal,” Dissanayake said.
“The impact of the alleged sugar fraud was two-fold. On the one hand, it deprived the government of a staggering amount of tax revenue. According to our calculations, this amounts to Rs. 11 billion. On the other hand, it burdened our consumers depriving them of the relief given by the reduction of the import tax on sugar. So, both the government and the public paid a heavy price for the alleged fraud,” he stated. “We urged the Bribery Commission to probe the involvement of former Sathosa Chairman Nushad Perera’s involvement in this and his connection with Sajad Mowzoon, the owner of the company which imported sugar. When we raised the matter in Parliament, no member of the ruling party came out with a proper answer,” he added.

"By October 2020, the retail price of a kilo of sugar had exceeded Rs. 130. The import tax of Rs. 50 on a kilo of sugar was dropped to 25 cents on 13 October 2020. At the time, sugar importers had about 90,000 metric tons (MTs) of sugar, imported after paying an import tax of Rs. 50 in storage"

The Parliamentarian said the alleged sugar fraud was similar to the Treasury Bonds scam which took place under the Yahapalanaya government. “At least President Sirisena appointed a Presidential Commission to investigate the scam and the legal proceedings were initiated based on the report. We hope President Gotabaya Rajapaksa has the backbone to investigate the corruption allegation faced by his officials and supporters.”
Dissanayake said the Samagi Jana Balawegaya, as the main opposition, will continue to monitor the progress of the bribery investigation. “Our struggle will not stop here. We will continue to raise this issue in Parliament and demand answers. This staggering deal should not be brushed under the carpet. Everyone involved in this deal, irrespective of their positions or allegiance, should be brought to justice,” he added.

Meanwhile, the opposition Janatha Vimukthi Peramuna (JVP) filed a fundamental rights petition in the Supreme Court last week seeking legal action against those responsible for an alleged sugar scam. Former JVP MP Sunil Handunnetti and former JVP Provincial Councillor Sunil Watagala filed the petition seeking an order on the Attorney General to institute legal action against those whose actions allegedly resulted in a loss of Rs 15.9 billion in tax revenue. The petitioners have named Attorney General Dappula de Livera, Finance Minister Mahinda Rajapaksa, Secretary to the President P B Jayasundara, Treasury Secretary S R Attygalle as respondents.
Former MP Handunetti said the Fundamental Rights of the general public have been violated by responsible parties who have allegedly failed to prevent the sugar scam.

“This is undoubtedly the biggest scam in the history of Sri Lanka. The money the government has lost from this case is much higher than the infamous bond scam.”
When asked what the petitioners have expected from seeking court action, he said this issue has to be taken into serious consideration by the Supreme Court and those responsible for this scam has to be brought to book.
“The Government had incurred a loss of Rs. 15.9 billion, and that this led to cuts on relief that has been provided to the public during the Covid-19 pandemic.

"After it was stated that the retail price of sugar cannot be reduced, the Government increased the income tax imposed on a kilo of sugar to Rs. 40 on 27 October. According to the Special Commodity Levy Act, the increased tax will only come into force a month later"

There is no investigation yet been initiated into this scam. There is a complaint filed against this case at the Criminal Investigation Department too.
The Government is meanwhile of the view if there is any fraud taking place, the CID should conduct an investigation.
Meanwhile, the Ministry of Finance confirmed the loss in revenue to the Parliamentary Committee on Public Accounts (COPA) in a report earlier last week. Customs Department has also confirmed that this report was sent according to the statistics given by their department.

What the Government Says

 Addressing the issue during the weekly Cabinet media briefing, Co-Cabinet Spokesman Minister Keheliya Rambukwella said there was no plan to impose an excess profit tax to regain the lost revenue. “It is completely the wrong notion that tax fraud has taken place. Tax fraud is when due taxes are not paid. I cannot talk about this right now, as it will take an hour or so for me to explain this comprehensively,” the Minister said. However, as journalists pressed the Minister for more details on the matter Minister Rambukwella explained that this incident was a fact arising from the tax policy in practice.

 “Since 1948 Finance Ministers of Sri Lanka have been increasing and decreasing prices of certain goods and commodities. This is done according to a certain tax policy. For instance, if a gazette is issued at midnight today, stating that the price of a diesel litre would be increased by Rs. 5, the entire stock held by the fuel stations at that moment would profit them. There are 1460 fuel stations in this country, and it would profit them all. Similarly, if the price of a bottle of arrack is increased by Rs. 100 through a gazette, bar owners would be selling their stock at a profit of Rs. 100 per bottle. Now is that a tax fraud? Or is it something that is caused by the tax policy?” Minister Rambukwella questioned.

"Thereby, the amended tax value could not come into force between 13 October and 13 November. During this period, one sugar importer was able to import 100,000 MT of sugar, subject to an import tax of just 25 cents"

 The Minister of Mass Media said that it can be interpreted by some as tax fraud. “But that is not the case. Tax fraud is when you don’t pay income tax or when you’re hiding tax files. This is just a wrong interpretation. A word has been taken and is being used erroneously. The claim that tax fraud has taken place is a big joke,” he said. “I can recall that during the time of Lalith Athulathmudali when he was the Minister of Trade, he increased the sugar price from 72 cents to Rs. 7.50 with a single gazette published at midnight. At the time several sugar shipments came into the country. Therefore this is a fact that is caused by tax policy. This incident is a politically motivated scheme to illustrate this as a fraud in the eyes of the public. You ask these questions as a result of such a political scheme,” Minister Rambukwella told journalists.  The Minister went on to explain that the government since their assumption of office has been the intent of providing tax relief to the public. 

“A 50 per cent reduction of the telecommunications tax was granted. The tax imposed had been at 49 per cent. That reduction is a loss for the government. If we are to debate it this way, your point is correct. We anticipated this and we expected that it will be of service to the public. Sugar was priced at Rs. 145. We expected the selling price to be at Rs. 95 or Rs. 98, but sugar was sold at Rs. 110 in the market. But it wasn’t sold at Rs. 145. We have provided some relief to the consumers of this country. Therefore the word ‘fraud’ alone is a creation and we see this as an operation through this fabrication,” Minister Rambukwella opined.

Co-Cabinet Spokesman Minister Ramesh Pathirana who also spoke on the issue then explained how the reported losses had been calculated.  “Sugar volumes imported to Sri Lanka during the past four months is 300 million kilograms. When 300 million is multiplied by Rs. 50, you get the value of Rs. 15 billion. Following the tax reduction, there was no taxation for sugar at any time,” he said.

Minister Pathirana stressed that the taxes which were slashed last year was an attempt to relieve the burden on consumers, as well as a part of the government’s effort to build a strong economy. “This is the government policy not only for sugar but tinned fish, big onions and dhal. On one hand, the government decides to provide relief to the public, and on the other hand, this government as soon as it came to power, slashed VAT, CESS, PAL and PAYE taxes. 

The VAT (value-added tax) was cut down from 15 per cent to 8 per cent. So in the year 2020, relative to the year 2019, there has been a loss of Rs. 230 billion in tax revenue. That was to develop entrepreneurship, to improve economic management in the country, as well as to promote investments. This was a government policy and it is apparent that it was never a fraud,” Minister Pathirana explained.  Journalists continued to question the Ministers on the dumping of Sugar at Sathosa, at a higher price, pointing out that it indicated fraud or manipulation. 
“If we slash taxes today, tomorrow the price won’t drop. If we increase taxes, it may happen. That is the norm in trade. For example, if diesel prices are increased by Rs. 5 tonight, tomorrow a lorry travelling from Colombo to Kandy would demand Rs. 1,500 extra due to the price hike. But if the fuel prices are decreased by Rs. 5, then the fee wouldn’t be reduced. That is the situation within the trade community.  “This is what you’re attempting to explain. But the word ‘fraud’ is something you have created on some party’s political requirements,” Minister Rambukwella responded.  The Minister also noted that that the former Sathosa Chairman was not removed due to this issue. “If that was the case, then that person should have been removed completely. This was just a change in appointment,” he added.

 Meanwhile, the United National Party urged the government to impose an excess profit tax to regain the loss of revenue. By rectifying this loss with an excess profit tax, the government would be able to avoid burdening consumers as prices of sugar would not be increased. The suppliers meanwhile would not be taxed unduly. The UNP urged the government to immediately appoint an independent commission to ensure that the issues, especially pertaining to the Sathosa sugar purchase would be resolved, adding that failure to do so would illustrate the government’s close dealings with those who exploited the change of levies.