Benefits not passed on to consumer – Auditor General

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By Faadhila Thassim

In addition to the oligarchy gaining from the Government’s decision to reduce the Special Commodity Levy on sugar resulting in a loss of Rs 16 billion to the State, a report recently published by the Auditor General also revealed that these benefits were not passed on to consumers.

Despite the significant reduction of levy imposed on sugar, the failure to reduce the price at that rate or considerably triggered numerous dialogues among diverse parties in society, calling for investigations on the so-called ‘sugar scam.’

Reduction in the levy 

As a part of the Government’s attempt to provide a monthly concession of Rs 500 to the public by the reduction of tax on a set of commodities including sugar, dhal, big onion, and salmon, the Secretary to the President referred a letter titled ‘Provision of Relief for the Cost of Living’ dated 13 October 2020 to the Secretary to the Ministry of Finance for the implementation of the reduction of special commodity levy on several imported items with effect from 14 October 2020.

Thus, instructions were given to reduce the special commodity levy on these commodities, while the Department of Trade and Investment Policy issued Gazette No. 2197/12 in relation to the reduction of the levy imposed on one kilogramme of both white sugar and brown sugar from Rs 50 to 25 cents and this decision was implemented with effect from 14 October 2020.

Did consumers actually benefit?

According to the report issued by the Auditor General titled ‘Special Audit Report on the Study of Expected Relief provided to consumers from the Reduction of Special Commodity Levy on one Kilogramme of Sugar from Rs 50 to 25 cents’ despite this reduction, the resultant benefits had not passed to the consumers as expected by the Government. 

It was noted that the trade community including importers and traders had paved the way for themselves to have a greater economic advantage through the reduction of taxes on sugar, while suppressing the Government’s intention to provide concessions to the consumers. Further, Pyramid Wilma (Pvt.) Ltd had also increased its sugar imports by 1,222 per cent during the period from October 2020 to February 2021 alone.

According to a report submitted by the Sugar Importers’ Association to the Consumer Affairs Authority on 16 November 2020, 11 importers had 88,743 metric tons of sugar at the time of tax reduction on 14 October 2020 and this quantity can be estimated as a stock level that is sufficient for about 1-1/2 months as per the general market requirements in Sri Lanka. Thereafter, it was said there had been a physical stock of 75,336 metric tons of sugar in the possession of 11 importers as at 16 November 2020.

Impact of reduction of the levy on Lanka Sathosa 

According to the report, even following the tax reduction, Lanka Sathosa had sold sugar bought from private sector importers from time to time and it had resulted in a loss of about Rs 102 million to Lanka Sathosa during the period from 14 October 2020 (from the date of tax reduction) to 8 February 2021 (up to the date of removing the price ceiling).

It was observed by the report that even Lanka Sathosa, which is a government institution, had not taken necessary action to purchase sugar at the stock controlled price imposed by the Government and this loss was an additional charge on the Treasury.

The report also focused on the loss faced by Lanka Sathosa due to the continuous application and revocation of a controlled price on sugar. Thus, even after a controlled price was set for sugar on 10 November 2020, Lanka Sathosa had purchased 2,378,000 kg of sugar exceeding Rs 80, which is the wholesale purchase price per kilogramme, while continuing to sell 1 kg of sugar at the previous controlled price of Rs 85. 

As a result, the financial loss incurred by Lanka Sathosa for the sale of sugar at a lower controlled price was brought to the notice of the Cabinet Sub Committee on Cost of Living and recommendations were submitted to Cabinet to reimburse the net loss incurred by Lanka Sathosa from the Treasury.

Based on these recommendations, Cabinet approval was granted to compute the sugar stock contained in Lanka Sathosa as at 14 October 2020 with the assistance of an external audit firm and to settle the loss disclosed after the computation.

Further, the loss that Lanka Sathosa was able to reimburse from the Treasury was only Rs 37,159,974.

Impacts of the reduction of fines

Moreover, the Auditor General’s report further revealed that the Government was also deprived of revenue of Rs 433,120,147 from fines due to reduction of the fine imposed on import licences.

It was said the Government had the capability of earning a revenue of Rs 590,466,009 from this process comprising the licence fee of Rs 234,000,000 and the additional fee of Rs 288,746,945 for sugar imported without obtaining licences imposed with the intention of discouraging unnecessary importation and storing of sugar in addition to the fine of Rs 67,719,064 charged by Sri Lanka Customs for the failure to obtain licences. 

Controlled price 

Commenting on the imposition and revocation of a controlled price on sugar which resulted in a staggering increase in the price of sugar in the market, the Auditor General observed it had been recommended on 9 November 2020 that a controlled price should be imposed on white sugar, but there was no mention of imposing a controlled price on brown sugar.

In accordance with the recommendations given by the Consumer Affairs Council relating to the maximum selling price for white sugar, Chairman of the Consumer Affairs Authority took measures to issue Gazette Extraordinary No. 2201/8 dated 10 November 2020 stating the maximum selling price for white sugar with effect from the same day.

In the wake of publishing this Gazette, raids had been conducted by the Consumer Affairs Authority on the traders who had defied the controlled prices imposed through the Gazette notification. Thus, action was taken against 113 retailers from 10 November 2020 to 31 January 2021. 

However, the Chairman of the Consumer Affairs Authority revoked the Gazette Notification imposing a controlled price for sugar. By the last week of July 2021 after a lapse of 6 months since the decision taken to discontinue the controlled price, the market price for sugar reached Rs 130.52 and increased to Rs 133.24 by the first week of August.

Moreover, the market price for sugar had ended up in further confusion by the end of August, and the Gazette Notification No. 2243/13 was issued imposing a controlled price again with effect from 2 September 2021.

Limitations of the report 

Certain shortfalls were reported to have taken place when the National Audit Office conducted the audit, including the failure to secure information as to whether the importers had taken measures to import the stocks of sugar ordered at the time of tax reduction and whether they had imported the stocks ordered by importers of the other countries after the tax reduction, and whether the sugar stocks imported on behalf of the importers had been retained in ships until the tax reduction.

“Only the importers in the private sector are engaged in sugar imports in Sri Lanka and it was not possible to obtain details on the wholesale price of the sugar issued to the market by those importers and to examine whether any additional charge had been levied other than the invoice price,” the report said.

Recommendations 

Thus, it was recommended to focus on the possibility of recovering the tax revenue foregone by the Government from the parties who retained the benefit in comparison to the reduction of the tax on sugar without passing it on to the consumers and considering the possibility of passing that economic benefit to the people in the future or otherwise.

Further, it was recommended to take action to make relevant policy decisions on accurate information through calling for existing relevant information from related institutions, analysing logically and the interconnection between the information in reducing taxes imposed on goods to provide relief to people.

Examining the reasons for failure in preventing expedited imports of sugar exceeding the present requirement of the country by implementing the licence procedure introduced for limiting imports and failure in proper, speedy and meaningful implementation of the introduced licence procedure, the report said.

Further, the report recommended taking action to prepare and maintain an updated database by regulatory institutions at least in collaboration, so as to enable the authorities to specifically identify as and when necessary the dates, quantities, and prices relating to goods imported to Sri Lanka issued by the importers to wholesalers, and afterward in instances in which it can be practically implemented, the prices, dates and quantities in which the item is exchanged and a frequent study of market behaviour of essential goods as well.

Further, the report called on the need to draw attention to find out the possibility of direct imports of sugar by Lanka Sathosa, which is sustaining losses by purchasing sugar at a high price from wholesalers and by selling sugar at low prices to consumers and drawing attention to prevent uneconomical purchases.