HS code conundrum

The Committee on Public Accounts (COPA) last week heard that the Government had lost out on Rs. 6.1 billion in revenue because of complications related to clearance via HS codes, highlighting issues of how import taxes are applied in Sri Lanka. 

Import taxes are an important part of an economy. They provide tax revenue, raw materials and products that directly affect the lives of people. However, a 2018 study found that Sri Lanka’s import tax exemption schemes are too opaque, resulting in them being open to abuse and corruption, with decisions frequently subject to officials’ discretion as regulations are unavailable to the public. 

The case study done by Verité Research (VR) found that, even though businesses are required to obtain letters of approval from several agencies to be eligible for the exemptions, there is no procedure in place to obtain these approvals. Since there is neither documented nor publicly available material, businesses must rely on verbal instructions provided by the agencies and visit these organisations in person to obtain instructions. 

Research by VR found verbal directives provided by different officers in different agencies are often inconsistent, making such instructions unreliable. Research also revealed that lack of a documented procedure favours incumbent businesses with access to high level bureaucrats at a personal level that can guide them through the opaque system over new businesses that do not have the same level of access. 

This leaves room for corruption and for established businesses to have an unfair advantage over newer companies that could have less clout with officials. It also reduced competition that may result in lesser prices for consumers.

The criteria by which exemptions are approved by the relevant Government agency are neither documented nor made publicly available, the study goes onto say. Additionally, the legislation that lists the eligible products identify them by product name and not by HS code.

As a result, the determination of the applicant’s eligibility and the product for exemption is subject to undue discretion on the part of the officer in charge. This state of affairs reduces the predictability of the outcome and leaves room for misuse and corruption.

The study warns that the current approval process is also prone to abuse by tax evaders who can import products other than those eligible under these schemes in collusion with officials. Import statistics may potentially help assess the impact of the schemes on targeted beneficiaries and detect instances of such misuse. But, the absence of such data further increases the possibility of abuse.

Given Sri Lanka’s large trade deficit, tracking imports is an important task. HS codes are used by other countries to identify products, improve accuracy and transparency. Under the present system, an import exemption cannot be checked by a third party. The lack of a reliable and quick verification process makes the already complex task of policing import tax exemptions even more complicated and opaque. This makes any attempt at accountability all but impossible. 

When drafting out regulations, the Government has to also ensure accuracy and transparency. Reforms to the Customs Act and other key regulations were proposed in the 2018 Budget, but never implemented. Reassessing import tax exemptions, or at least making them more transparent, would be a step forward in improving ease of doing business and giving access to new technology an