What exactly is the Special GST and Surcharge Tax?

On taxes: we now have the Special Goods and Services Tax (SGST) Bill, and the Surcharge Tax Bill. One of them died in the Supreme Court recently, but the other is very much alive. Here’s a brief 101 on what they’re all about.

@March 31, 2022

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Story & Analysis by Umesh Moramudali Edited by Aisha Nazim and Yudhanjaya Wijeratne

At the beginning of the year, the government published two new tax legislations aiming to increase tax revenues.

These tax changes are an indication of a bigger economic problem that Sri Lanka needs to address immediately — which is, the inadequate tax revenue raised by the Sri Lankan Government. Since the early 1990’s, Sri Lanka’s tax to GDP ratio declined substantially, compelling the government to borrow more and more, resulting in an ever-growing pile of debt. Add to this, Sri Lanka’s tax to GDP ratio is one of the lowest in the world, and is one of the root causes of the current economic crisis.

Speaking quite broadly, fixing the long-stranding tax issues here requires three things:

1) Increasing tax rates for income tax

2) Widening the tax net (increase the number of people who pay tax)

3) Reducing the burden of taxes imposed on lower-income earners.

Additionally, for tax reforms to be impactful, they should not be changed every so often - which is what happened in 2019, when the then-newly elected government introduced a number of amendments to the Inland Revenue Act, No 24 of 2017.

And now we have the Special Goods and Services Tax (SGST) Bill, and the Surcharge Tax Bill. One of them died in the Supreme Court recently, but the other is very much alive. Here’s a brief 101 on what they’re all about.

The Dead: The Special GST (SGST)

The SGST was proposed in the Budget 2021, and was presented by Prime Minister Mahinda Rajapaksa (who was then the Finance Minister). The tax was aimed at consolidating a few taxes imposed on several goods and services. [1]

However, this legislation was not implemented in 2021. In 2022’s Budget Speech, Finance Minister Basil Rajapaksa noted that the SGST will be implemented in January 2022. The SGST bill was, accordingly, gazetted on 07 January.

It does pretty much what the original reading promised: consolidating a few taxes imposed on liquor, cigarettes, vehicles, telecommunication services, betting, and gaming.

Currently, these categories are hit by a variety of taxes: for example, vehicles are subjected to Custom Duty, PAL, Excise Duty and VAT; while cigarettes are subject to 15% custom duty, 8% VAT, 165% Cess and an excise duty of Rs. 46,600 per 1000 cigarettes, exceeding 72mm but not exceeding 84mm in length[2]. Various government authorities collect these taxes, like so:

Tariff
Revenue collection authority
Custom Duty
Sri Lanka Customs
Excise Tax (cigarettes)
Sri Lanka Customs
Excise Tax (Vehicles)
Sri Lanka Customs
Excise Tax (Alcohol)
Excise Department
Cess
Sri Lanka Customs
VAT (Imports)
Sri Lanka Customs
VAT (Domestically produced goods)
Inland Revenue Department
PAL
Sri Lanka Customs

Sources : Author compiled based on IRD, Sri Lanka Customs and Excise Department of Sri Lanka

The intention of introducing the SGST bill was two-fold. One was to impose a single tax instead of multiple taxes, and the other was to authorise the Ministry of Finance to collect taxes, instead of it going through the Sri Lanka Customs, Excise Department, and the Inland Revenue Department.

Collecting taxes, however, is not a function of the Ministry of Finance. Whilst it may seem efficient for a single institution to oversee tax collection, it undermines the authority of Sri Lanka Customs, the Inland Revenue Department, and the Excise Department. One of the Fundamental Right petitions filed against the SGST clearly states that Secretary to the Treasury is tasked with the supervision over Departments of Government and other institutions under the charge of the Minister, and is not, in fact, empowered to carry out duties and functions that should be performed by a Government Department - such as the Inland Revenue Department, the Excise Department, and Sri Lanka Customs.

Based on this, the SGST was challenged in the Supreme Court by several groups, including officers of the Sri Lanka Customs, Excise Department and the Inland Revenue Department.

The Supreme Court determined that the number of clauses in the bill is inconsistent with the Constitution, thus the bill cannot be passed as a legislation. In other words, this legislation is now dead. It is very unlikely that it will be reintroduced.

The Living: Surcharge Tax

Budget 2022 also proposed a one-off tax aiming to increase the tax revenue in 2022. This tax was imposed on companies which had a taxable income over Rs. 2 billion during 2020/21 (in simple terms profit made during 2020 April and 2021 March).[3]

This tax is imposed with a retrospective effect, meaning that companies are compelled to pay a surcharge tax for a period that is already over. In fact, companies have already paid tax for 2020/2021 and imposition of this tax means an additional tax payment for the year 2020/2021 (thus termed as surcharge tax).

Taxes of this nature are considered detrimental to the economy as it adversely affects businesses. If there is a rise in the tax rate, businesses can plan how to respond to that, but when a tax is imposed on revenue generated in the past, that makes things very difficult for businesses.

On 22 March, Parliament announced that the Supreme Court determined that the bill is in accordance with the constitution, and can be passed with a simple majority.

Who’s going to get hit by these taxes?

If you’re a regular citizen, the surcharge tax is out of your concern.

Big companies and banks such as Heyleys, LOLC, John Keels Holdings (JKH), Commercial Bank, Sampath Bank, Hatton National Bank, Hemas Holdings and Dialog Axiata will be required to pay this surcharge tax.

The tax did cause some controversy: opposition MPs accused the government of trying to loot income from the EPF and ETF.

Our analysis showed that these claims have a legal basis due to the broad way in which the term ‘company’ was defined in the Surcharge Tax Bill. However, subsequent to the concerns raised by the opposition, the Finance Minister clarified that EPF, ETF and nine other funds are not subject to the surcharge tax.

Overall this isn’t going to help much. Sri Lanka requires comprehensive and long term tax reforms. Tax reforms are not merely an essential economic reform. It is also a very big political commitment. Thus far very few political commitments have been made to carry out tax reforms, and the commitments we witnessed so far have been very short-lived, or short-sighted.

[1] “I propose to improve the efficiency of tax collection through the introduction of an online – managed single Special Goods and Service Tax in place of the various goods and service taxes and levies, imposed under multiple laws and institutions on alcohol, cigarettes, Telecommunication, betting and gaming and vehicles, which accounts for 50 percent of the income from taxes and levies. It is expected through this reform to direct Institutions under special legislation such as the Excise Ordinance to have a more focused regulatory engagement in facilitating the government to secure its revenues otherwise lost through sale of illicit alcohol and cigarettes.”

[2] A one-time tax surcharge of 25 percent is proposed to be imposed on persons or companies with taxable income over Rupees 2,000 million for the year of assessment 2020/2021. Rupees 100 billion is expected to be earned through this tax. - Budget Speech 2022, page 69

[3] John Player Gold Leaf and Dunhill both fall into this category.

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