Businesses sometimes have to pay up to five different taxes at the point of import. This results in higher costs for businesses. In order to reduce such costs for certain businesses, the government introduced import tax exemption schemes. These tax exemption schemes provide relief to businesses from certain import taxes and can be a significant cost saving to most businesses.
Our research finds that the procedure for obtaining such tax exemptions is unpredictable, inefficient and ambiguous. The procedure which is in place to benefit businesses results in undermining the objective of such scheme.
Our research focussed on the case of import tax exemption scheme for agricultural equipment. Businesses face 2 kinds of problems;
1) Opaque process – The procedure to obtain tax exemptions is neither documented nor publicly available. And verbal directives from government officials are often inconsistent and unreliable. This leaves businesses unsure of what to do and where to go, costing them their time and money.
2) Decisions subject to undue official discretion – There is no document that states the criteria for exemption approval. Also, the legislation that lists the eligible products, identifies the products by name and not by HS code. As a result of both these issues, there is undue discretion by the government officials. This results in businesses being unclear of what products are eligible and if his/her application for exemption will be approved.
The purpose of the procedure is to prevent misuse and corruption. Absence of documented procedure, exhaustive list of eligible products by HS code and eligibility criteria to obtain exemption leaves room for misuse and corruption.
Statistics on imports under the exemption scheme will help with detecting any misuse. The response received from Sri Lanka Customs to the Right to Information (RTI) application submitted requesting import statistics raises doubts as to whether they maintain these statistics. This inability to detect possible violations is a major shortcoming in a system that was put in place to constrain misuse.
Access policy note here.