Dhananath Fernando  00:11
Hello, hello! Welcome to Advocata Institute. We are discussing about today something very important for most of the Sri Lankans. While we celebrate about tax revenue and the government revenue, and for the first five months we have recorded budget surplus after some time, but we also need to understand whether we are on the right direction and what's the progress of the tax policy. To discuss this, joining with us is today mr. N R Gajendran, senior partner and founder of Gajma and Co. mr. Gajendran, welcome to our studio. Thank you very much for thank you for inviting

Speaker 1  00:49
me. Good to be with you, mr.

Dhananath Fernando  00:51
Gajendran. First of all, now we have done so many tax reforms. You have been in this process way before even I was born. So just tell us after all those reforms, where are we now in terms of tax policy? Are we in the right direction? Is it a while the revenue numbers are picking up? What is your view on tax policy? Are we in the right side?

Speaker 1  01:16
When you talk of tax policy and tax reform, then or not? Sometimes general impression is is only question of raising revenue. That is one aspect of it, but when it comes to tax reform, you are looking at the total gamut of the whole thing of the taxes and the economy altogether. You are looking at raising revenue or optimum revenue, you are trying to see how to improve economic efficiency, stimulate investment, distribution of income to reach the vulnerable people. How to promote saving? How to promote spending capacities? Because you have to look at the growth side. There are two aspects when you talk of revenue expenditure, as you said, surpluses. That is on the fiscal side, fiscal sustainability, and the ability to service your debts comes from that side. There is no taxes, no wealth, no growth if there is GDP doesn't grow. So other side you have to look at human capital, financial capital, technological capital, institutional capital, and how you are going to enhance them. That is the wealth building. That is the investment. One factor of GDP. So, if you want to have investments, you must have savings, and you have to have spending. So, tax is a tool for both revenue and for relief, I would say because you have when you raise revenue, taxpayer is unfair or affected because he is parting away with his wealth. Then you have to find the money for him to save, spend, and invest for the other to grow, so it is the total aspect of tax reform. We are only gone hammer and tongue, hell for leather on raising revenue. At the moment, we are still not looked. I I see some of the leaders speaking now, acknowledging that we have to go into the growth phase. We have stabilised. We have to go into the growth phase, so we we are missing one side of the balance sheet, or if you are talking of a balance sheet, there may be two balance sheets. One is on the revenue side, other one is on the wealth creation, the growth side.

Dhananath Fernando  03:54
So interesting thoughts, mr. Ajay. So what you mention is that tax is also one side is the revenue side, but also this is a tool that you can boost investment and

Speaker 1  04:05
for subtly,

Dhananath Fernando  04:06
subtly, and and also the growth factor. How

Speaker 1  04:08
do you with taxes? How do you stimulate savings? How do you stimulate spending? How do you stimulate investments? It can be an incentive. It can be an impediment. Payment of tax is an impediment, right? Incentive is to direct economy to the way you want to go. I'm not talking of when say incentives, exemptions, the whole the incentives for investments. What what how can you incentivize for invest? What do you do to encourage savings? You know, we also government is also talking of you must have buffer foreign exchange for external internal shocks for policy space. With that only you invest. No, so you. So it it is tax is wrong connotation when you say only your revenue. I think it's more important on the growth side. Growth

Dhananath Fernando  05:08
side. No, very interesting. So it it brings to me my next question. Now what we have been using is tax providing tax exemptions. How do you see it? Because we have provided like long-term tax exemptions for certain investments, ports, some projects, and as we know, there was this strategic special project strategic strategic development act, and now it has been repealed. So there has been still the tax exemption Conversation. So, how do you see this? And if we were to provide, like, if there's a guideline, there have been certain suggestions that we will give tax credits or like give tax exemptions based on the number of employment. How do you? I mean, how how do you use tax in your what you said on the growth

Speaker 1  06:00
side? I use the word incentives. One of the incentives is tax exemptions. Tax exemption seems to be wrong connotation these days for various reasons. But if you see worldwide, it has come to stay. You can talk of BEPS. You can talk of global minimum tax exemptions are granted. Why go for our neighbour India for hyperscalers like Microsoft, Alphabet, Amazon? They are giving exemptions up to 2047. If you invest in databases in in India because they want to become the global leader in artificial intelligence. So they are giving that exemptions. Not only that, they are giving reduced tariff on electricity. Then also on transfer pricing, they are saying because of exemptions, people might want to book more profits in India. No, it's only 15% maximum. Beyond that, you can tax. You know, in that type of things, they have agreed. So it is. It is come to stay. Exemptions can be brought if if the benefit if the investor is going to get benefit not from the Sri Lankan community, the benefit is should come from overseas, and also could you

Dhananath Fernando  07:30
elaborate? Like, what do you mean by the benefit should come from now? For

Speaker 1  07:32
example, if you if if you say your some investor is making and investing on the local market, consumption is local,

Dhananath Fernando  07:42
right?

Speaker 1  07:43
No need of giving exemption,

Dhananath Fernando  07:44
right?

Speaker 1  07:45
Because you're coming because of the local market,

Dhananath Fernando  07:47
right? Okay, right. If

Speaker 1  07:48
you are coming here, you're you're for exports, then you can see because we are going to exit generation, employment creation, and all those things,

Dhananath Fernando  07:58
right?

Speaker 1  07:58
But even multilateral have a sort of a negative impression or a phobia on exemptions, but where we can use it as a tool is when you must give incentive, which will automatically boost the GDP.

Dhananath Fernando  08:16
It

Speaker 1  08:17
will help to grow the GDP. GDP has five components, basically, public spending, government spending, exports, imports, and investments. Now, if you give on expenditure side, on investments, for example, as you said, for R&D, Capital creation investments, say food security investments, you know, which is an important thing. You know, agro processing, agro products, training, retraining to retain incentive on expenditure. Those will, while you are giving incentives, this automatically boosting the economy GDP. Tax exemption may not because say if you give invest 100 million, and if you give exemptions for 1 billion, your your your investment is only 100, but you are given 100. But if an investor is making 100 million. If you want to give, you can give 200 million. That's okay, you know. Not tax. But where we made made mistakes in the tax holidays, we gave exemptions beyond the lifetime of the project itself.

Dhananath Fernando  09:36
Right.

Speaker 1  09:37
You know, if you see, you know, I remember once the finance minister or deputy minister, finance minister in parliament, say we are giving exemption. By that time is over, we won't be in parliament even. So you are free for so many years. So the focus has to be: how do you encourage saving incentives? You have to give to. Morrow, individuals at 36% I'm just thinking, if you save that money, and you are going to don't spend that money, or if you invest that money for the next two within the next two three years, you have a different rate for that income. Nothing lost because already you are saving. You are our savings is only 25% Our domestic investment is about 32, 33% and this should go to about 40% if you are going to raise eight 8% GDP. And there is an investment saving gap, right? So we are still not saving enough. Then we are still not investing enough. We are still not spending enough. When you overtax, what happens? We are celebrating over taxation. Is over taxation a good thing? I don't think so. I don't think so because when you overtax, you impede spending, you impede savings, and you impede investments. So you have to have the correct balance. Focus now that we are stabilised. Focus should be how. What is the incentive? What can we do to promote investment,

Dhananath Fernando  11:09
mr. Ajendran? Since you mentioned about on the tax exemptions, two key words. One is the BEPS framework and the global minimum taxes. Where does it stand? Because from what we and so is it like? Could you elaborate? I'm not sure about the technicalities. I know there's a global minimum tax. If you give a tax exemption, still another country or they have to pay tax somewhere else. But where does it fit like on the exemptions that you spoke about in India? How do how have they managed, or is there a way how it's global. I mean, business works on this one.

Speaker 1  11:44
It's a good question. These are all cross-border taxes. You know, every country is trying to capture its taxing rights, and they are trying to make sure their taxing rights is not eroded by cross-border transactions, where their tendency is to locate profits in a favourable tax jurisdiction. Whether it comes as thin capitalization, whether it is come as overseas foreign company regulations, whether it comes as transfer pricings, whether it comes as BEPS, and whether it comes as minimum global tax, countries are trying to look after their interest. Don't forget that they are not trying to look after other people's interest, the in the transfer pricing and BEPS, the theory is and practice is where is the wealth, where is it created, where these profits belong to? If you push that too much, Sri Lanka will get nothing. Will be like a tailoring shop, cost plus markup only they will give, right? They will. Other one is the global minimum tax. If you see, that's the reason. Now they. So what happened is the pillar one, pillar two, the movement changed because countries like India, China, you might have R and D. You may be the place we are. The wealth should belong to more. We we accept that, but our market is huge. That is our strength. So when you look at us, we want to tax you. Very fair. If not for us, you can't make money, no. So for that only they've brought the significant economic test purpose also that has been brought into our recent double tax treaty of India, and this the global minimum tax is for large multinationals. So 150 million. euro turnover and things like that. How many are in this country? Why are we worried about? We don't need bootleg. We don't need champion regulation for a bootleg economy. And if you are going to do, you need an army of people, resources. How much taxes you are going to collect? How much taxes we are going to forego? If you go into these taxes, Sri Lanka will lose its base a lot. That is my impression. So, if a foreigner, if a if a investor comes, they can say, "Look here, if you are going for global minimum tax, we won't give you exemption. Don't give exemption. Give investment release, no issue for global minimum tax, no issue with the multi multilateral. So we will achieve it's a win-win solution when you give incentives on expenditure based, savings based, and investment based.

Dhananath Fernando  14:56
Any other examples or like any other cases? With your long career experience, mr. Gajendran, on this how tax being used, you mentioned a few on to use it on the growth side and on the investment side. Any other mechanisms, a tax credit system, or like, is there any other? So you can just

Speaker 1  15:17
it's it's the same thing. Now, if you see, if you Google Amazon, maybe two years ago, they had a 10 billion profits, and they have a tax credit of 157 million. That is a refund of 150. How did it happen? Because the that country encourages R and D. So the tax credit is you are giving a credit. You know, it's another way of existing. If you give, it's if you say say if you spend 100, we are going to give 200. That additional 100 is another form of a tax credit, right? Okay. So that means there is a reduction in your tax, in some form or other. So without that, we give you a credit also. The credit should be given against the tax liability or something else is another question, you know.

Dhananath Fernando  16:05
Right.

Speaker 1  16:05
So here, the credit is we are giving against the tax base instead of the tax liability, you know. So those are different. It's it's the same thing spoken differently.

Dhananath Fernando  16:16
And now I would like to come since we spoke about the exporters and focusing using tax as a growth tool, there was a big conversation about this SWAT at one point, and now SWAT system has been completely, I mean, taken off. And then there's a new system that has been implemented. Just wanted to see, since you also work with a lot of exporters, what's the status of it? Because at the initial stages, even president himself provided like a guarantee. He said, "No, it will happen. If it doesn't happen, that we can go back to the same position. Now, has it been fixed or what is happening? I also didn't hear many complaints from the exporters on the SWAT, but it was also considered one of the good inventions or innovations by the tax system in Sri Lanka, this credit system. Where do you stand on this?

Speaker 1  17:04
Svet is a creative product of Sri Lanka. I don't think anyone other countries have this SVAT system because the phobia we had on refunds. You know, the it's simply impossible to get a refund, and I must tell you, no, there can be no administration without a refund system. First of all, the refund system should be in place for that to be a very efficient administrative system. There is no refund system, no administration. Full stop. There is no further discussion or debate on that. But this SWAT was a good creation because it didn't have any cash flow issues, even for the exporters. It created a problem for the suppliers. The exporters had free fall; they had no issue. All of the problems substantially in different scales or reduced scales were transferred to the the suppliers who had the refund, then they were struggling with them. But now, once you bring this is, I wouldn't know the multilateral also said there were slippages and leakages and SFT. I really don't know what the slippages and the leakages. It was not pronounced clearly. They said they have so we want to go back to globally, the refund system works. Then, at globally, the refund system works because the refund cycle is shorter, and the cost of funds is very small.

Dhananath Fernando  18:30
Right

Speaker 1  18:30
now, if you see our cost of funds, say say 12% If you the refund will after a month, after third within 30 days, you file the return. So you have lost 30 days there. You have to wait for another 45 days. So 75 days means two and a half months. Two and a half months at 12% interest is two and a half percent interest. So exporters have to factor this two and a half percent cost, which was not there before. Right. So our competitiveness

Dhananath Fernando  19:03
is now eroding.

Speaker 1  19:04
Eroding, simple, right? So if that is the case, if this is to work, just now the refund system is working. That is because of intervention of maybe one of few officers personally, right? I don't know the institution is working. It is the officers who are making it work. So now, if SFAT is abolished and refund system, I would say you must have any sort of. Can I say bluntly? It should be an. You have to give refunds immediately. You know when the you can't

Dhananath Fernando  19:38
add it. You can't have a massive space which adds results of finance. Yeah, no,

Speaker 1  19:42
it can go to 105 days also. If you bought bought some item in beginning of the month, if you can go 100, and also they say 95% have been refunded. Then the 5% what happens? Then you have medium, low low risk, medium risk, high risk. Most of the exporters don't know what is who. You have to be transparent. You have to be have an efficient, fast, effective, time-bound refund system. 45 days now. There was a friend of mine who few about few months ago he called from Perth. He said, "Kajendran, I'm elated because I got my refund in six days. Can you imagine, right? So, I and they are calling me and telling me. I feel like not collecting the refund. You know that is the feel. So you have to come to that situation. Otherwise, it will be factored in. The larger people can absorb the smaller exporters have 2% 2% is a large sum for for

Dhananath Fernando  20:42
for those period yeah 2% month is

Speaker 1  20:45
2% so two and a half months you know you had to pay that interest of two I mean it's it's recurring

Dhananath Fernando  20:51
yeah

Speaker 1  20:52
so these are to be considered and maybe SFAT is it's it's Sri Lankan creation. I think end of the day, it's good as long as supplies of the affected party. But now we have come this hope. This works.

Dhananath Fernando  21:09
Got it. Next, I also want to discuss about now with the tax administration developments. There's all there's another initiative to bring the informal sector into the tax net. For that, I think there was a there was an initiative to bring the VAT threshold down, and now it was again brought back to where it was. But on using POS machines, those things have been mandated. Where do you stand on this, or like, can you explain us what's what would be the implications or how we should see on this when it comes to the bringing the informal sector into the tax net and broadening the tax base?

Speaker 1  21:53
No, broadening the base is one. Widening the base is the other thing. Now, if you are talking of this informal sector based on VAT, 60 million was to be brought down 36 million, and suddenly it was withdrawn on the last minute. SSCL has gone down to 36 million. Because

Dhananath Fernando  22:15
SSCL is at 60 million still, no, or did it also? It is

Speaker 1  22:18
at this 36 million. No, that was passed. SSCL legislation was passed before the that one and that one before it was vote was taken. It was withdrawn. Now the question is here: the principle of capacity to pay. The smaller guys has to be allowed to grow without going into this taxes and compliance part, now if you see if you made it 36 million, what will be 100,000 a day and more will be taxed. So if a shop is selling 100,000, how much margin do they Make 10% 5% If you pay 18% they are out of business. They can't pay, and they won't pay. Then theoretically, you will say there will be input tax. How much input tax can you get on that at that level of business at that level of purchases? They are not buying from organised people in the VAT system. No, they are buying from sundry people like them. They might not have any input, and if they are selling some basic items, they there will be no input taxes on those things. So, it it they would have either they would have been silent evaders, and/or they would have run out of business. Why go for 60 million? No. Can we ask the administration with all the people who are above 60 million whether they are registered? Answer is no. First enforce that 60,000,001st before going to the 36 million.

Dhananath Fernando  24:03
Okay,

Speaker 1  24:04
we must enforce the 36 million because these SMEs are badly hit, and they are not spoken of. When COVID came, they got a moratorium, but they got they got no haircuts. Large banks got haircuts. You have spoken about it. The smaller guys, no haircuts. Then this this other law, Parati law, is also now going in a different direction. It can be even the ligation is made easier, you know. And one good thing is, IMF they are technical. They are going to give technical assistance to improve administration between the papers recently, and also to make the tax administration SME friendly. So that is being recognised now, right? So SMEs should be given a chance. To survive, tax you can collect. You'll kill these people. It doesn't make sense. Already try to collect from the people who should be paying within 60 million, which is, which is also some say it's too low. You know, so you you have to be real more practical and because without SMEs there is no economy. 52% or more than 50% is SME. So you have to nurture them; they have to bring into the make them larger before taxing them.

Dhananath Fernando  25:29
Also, mr. Kajender, now when it comes to the digital digitization process, we I broadly mention about the fos machines and all that. So where does this fit into the larger narrative? There's online. I

Speaker 1  25:46
don't think this post machine is overspoken.

Dhananath Fernando  25:48
Okay,

Speaker 1  25:50
200,000. Some told the machine cost. It was mentioned in I think of meeting also. How many SMEs can fund buy for 200,000 unless you give it to them free? And post machines are for point of sale machine. Already they are post systems. You don't need to have another system. This is only to business to consumer transaction only post is used. If it is business to business, if you are taxpayer, then the tax invoicing system has to come. Tax invoicing system can't come in the post machine. The taxinfo is form format, what has been pronounced now, which is being circulated in the gaset torture, can't come into the post machine. So

Dhananath Fernando  26:30
we have to have a separate system which connects with the region.

Speaker 1  26:33
Yeah, you have to have a system with that where the post machine, post machine. Why do you want the point of sale machine? He will again. It depends when you are going to plug it in. No, you know he might do it at that time. He might do it end of the day, and you must have accounting people, staff people, you know all that to do. First of all, he must do his business. You know, so it's we must shouldn't overregulate these requirements. Allow them to do, and then if you want to capture, as long as they are paying, registered and paying the taxes, and they are selling to unregistered people, you don't need the no, you don't know the name and address of the people. Also, you you just collect the taxes, and if they comply with the open and file the returns, it's good enough. Whether it'll bring down evasion and all. I don't know. Even if you collect, you have to you have to enter into the system first now. If you don't enter, that's not collected. That's it.

Dhananath Fernando  27:31
Got it. Got it. Next, mr. Gajendran, there was a big conversation about these digital platforms, mainly on these taxi hailing apps. There's a local operator and there's a foreign operator and there's a tax kind of a both organisations while they are in the same industry they've been taxed differently. Where can you explain like what this digital tax means and how what's your view as a chartered accountant? Like how do we see about this or is there is there something wrong that is happening

Speaker 1  28:04
here? First of all, there is no equity in taxation. One guy can get taxed, other guy may not get taxed because of the law. But the objective is to make that playing. This is again a cross-border transaction. Non-president digital operator normally what happens in the concept of VAT business has to be carried on in Sri Lanka and the consumption should be in Sri Lanka. If the business is not carried on in Sri Lanka and the consumption in not Sri Lanka, it's not there. And even on the goods, till it once it hits Sri Lanka, you impose the customs. That is worldwide. Services cross border was never taxed, and that is the reason the Trump administration. When you have services cross taxes, he gets excited, and he he is trying to impose. They get excited, and they are going to impose tax. Now, you can't impose. That is the normal. That what happens is why these digitalization taxes came. As I said, these large countries, which had the the the huge humanity altitude, was so heavy that they said, "Look here, we have to collect some tax from you. That's what they had this equalisation levy. India, they have removed it because Trump was attacking on that. I believe so, and now they have the digital taxation. It's there. Now we have to see whether this is first of all is creating a uneven playing field. I have spoken to few people; the impression is divided. Some say, so for example, pardon me, mention in the name, Pickney is cheaper than Uber. Others say Ube is cheaper than Pickney, so it's still divided. The level playing field is already there. If this tax was an issue for the locally registered people and not for the form, this thing, their price should have been always been higher. No, it is not there. So market demand is looking after that, then if you are going to try tax cross border, we have to see what is the benefit for Sri Lanka, right? As as a card, how much tax you are going to collect? How many people have they registered now? We let to wait and see till end of the year whether this is working, and how are you going to enforce this foreign institutions? You know that's the reason you have these withholding taxes. No cross-border transaction because you can't you can't our laws can't reach another country. They have the withholding tax because the payer withholds. Then if you want, you come. If you are not liable, come and collect the refund. Or there is no need of withhold in this transaction. This is not a withhold index. You are asking to there. There is a compliance issues. There is enforcement issues, and we have to wait and see whether by end of the year how it is going.

Dhananath Fernando  31:16
mr. Ajendra, next, I think I want to also ask about the the the IMF programme because there's a view that because the IMF programme because they have given revenue targets 15% of the GDP and there have been some conversation I think there's capacity building that is happening at the Inland Revenue develop Indian Revenue Department with IMF and World Bank and people are I mean, sometimes they blame IMF because because of them that I think people who are paying 36% are not very happy. They want to bring it down. Where do you where how do you see it? Whether it's a I mean IMF programme issue or how else otherwise we can increase the revenue or where do you stand on the IMF programme, and what's your view on that?

Speaker 1  32:04
Why do you want to blame IMF? If you if you if you are misbehaving near home, neighbours will come and tell you how to behave. If we have behaved properly and done our work properly, IMF won't come and tell us, and there will be no strictures. What is IMF is telling us to do? We should have done in different forms, suiting us throughout so many years. We didn't do so. Now everything is focused on this. IMF is. They don't look into this. They are only talking of revenue sustain revenue sustainability or revenue revenue consolidation consolidation debt sustainability. They don't. They they are their mandate doesn't look at growth, right? So we have to look at growth. Now the point is, tax can be should be used as a tool for growth and for revenue. We are not using it for tool as a growth. IMF would have never intervened and said don't do this. If you are doing it as a also as a tool, you should have come up with your own prescription and solution. There is no dividing line here. There is no dividing line here. You have to see. We go to nature. You have the flower and the bee. The bee, when it's extract nectar from the flower, it enjoys the process of extraction because it's getting a stomach full, and the flower is also enjoying because it's getting much lighter and it can stay longer. So that is a win-win solution. Now we will have to find a win-win solution using tax to for IMF solutions. purpose or our purpose for revenue, our purpose for debt sustainability, our purpose for having budget surplus. That's another topic, budget surplus. You know, and the other one is the growth. Now, you also mentioned at one of the forum this time growth is on taxes, you know, 20/24

Dhananath Fernando  34:27
2025 to 2026.

Speaker 1  34:29
Yeah,

Dhananath Fernando  34:30
yeah, the GDP contribution. Yeah, yeah.

Speaker 1  34:32
No, I think 24 GDP contribution was on taxes about 6% This time is about 11% 11 or almost 12% So it is the growth is on taxes. We must have growth on industries. We must growth on agriculture. Agriculture is lower than taxes now. So that is the mix that we have to get. So it is not one-way traffic. So we have to have a win-win. Solution where we you get revenue and also the growth and to tax is a more very effective tool for both. I think it's more effective for for investment stipulation, for growth, for saving stimulation, spend spending stimulation. If you over tax, you won't have growth.

Dhananath Fernando  35:23
Since we spoke about the budget surplus, where do you see it? There's after in the first five months, there's about 197 billion budget surplus. Isn't it a good thing or is it a bad thing, or how do you see

Speaker 1  35:36
it? If there is budget surplus, then some countries which have budget surplus, they pay dividends to the citizens. You should get a check. You know, if there is a surplus, you should be getting a check. I don't know whether you get a check and whether whether we'll have a surplus next year. Whether why is this surplus is a question. Can you tell me how is this surplus happening? So most

Dhananath Fernando  35:57
likely they haven't spent on the capital expenditure.

Speaker 1  36:00
1.2 or 1.4 trillion is the budgeted expenditure, and we may have spent how much? 200, 300 billion. I don't know how much it is spent. So there is about substantial amount of unspent. So there will be a natural surplus. You are compromising the welfare and the legitimate expectation of posterity when you don't invest, you are maybe short sighted. Whatever the reasons for self interest or our interest, we are trying to not spend. But if you don't invest in investment, those are productive investment for future. We are going to be affected, and we are even the future generation will have to pay for it. That's very unfair proposition. Budget surplus is not a good thing. Where you, if it is coming from non-spending or capital expenditure, then you shouldn't have budgeted that.

Dhananath Fernando  36:56
Okay. Next is mr. Ajendran. I want to quickly move on to the digital. Sorry, the the financial services tax, which is now at 20.5% where they have merged the VAT and the SSCL. How do you see? Is it is it feels like a simplification? Anything that the financial institutes needs to be like caution about, or how do you read this amendment?

Speaker 1  37:25
The bringing both together, it's a good thing for them. It was around the same base, and they had to have two compliance requirement, two laws. Now they are going into one. That's that's. I wouldn't think they will have an issue on bringing both taxes together,

Dhananath Fernando  37:41
and also now moving forward, like generally there are tax principles so that you basically adhere, which that's a starting point of the the profession, and many tax professionals and Sri Lankans know about it. The the transparency, the simplicity, neutrality, equity. So in terms of designing this system, now you brought certain concerns overall using it as a on one side as a revenue tool, but use it it can be the power of using it more on a growth tool. So in terms of this deer into the tax principles, how do you can you shed some light on how should you design it? You also gave the example of it's a common example that you you know suck the nectar out of the flower, but you are not harming the flower. Is there a way that we should think about a framework or a structure on how to do it together? Any views on that, mr. Gajendran?

Speaker 1  38:38
You you you you have to be data driven, you have to be information driven, and without making ad hoc things, you have to make considered decisions how we are going to get this mix correct. It's it's it's it's an art and a science which has to be systematically done on a regular basis. We are still making ad hoc decisions. You know, you must have think tanks, research people supporting. You have to deliberate with the stakeholders, and see where you have to this thing. And the state has to come with the answers to promote growth, if investment is a big component, and the foreign investment is not coming into this country, in spite of the strategic location, in spite of our businesses entrepreneurial to a great extent, in spite of that, we have access to technology. In spite of that, we have been in cross-border trade for a long time. What is and we are giving incentives? What is it that's stopping us? We are to find, you know. I think if there is one. In my mind, why this thing is whatever you do, it's not coming sometimes, or it's not coming at the pace. Don't you think Sri Lanka should have been the liaring for foreign investors when the Gulf countries were on fire and they were held to scale, or the investors were running? Sri Lanka should have attracted that. Port city should have been the grounding place for them. It didn't happen. It didn't happen. I think there is. We can talk of revenue deficits, budget deficits, you know, current account deficit, balance of payment deficit. The greatest deficit is trust deficit. I think if people don't trust you, they won't interact with you. So where is that we are missing? If you enter into a contract and you abrogate it unilaterally, will there be trust? If you people come, you say something. They come, offer. Suddenly you take that incentive away, or deliberately do something like in the port city. People who got the benefit itself don't invest. They don't want to invest because they are not sure if this can happen like this. If this can happen to someone else, so there has to be a lot of damage control to my mind. You have to go and recapture the people. You know, not good enough saying that there is no corruption come. You know, the feel good factor for investment has to be created. So it is it is that with that everything will Come, you know, exemptions give no exemptions incentives. If you want to be here, they will be here. There must be a reason now. And also, if you see stories of countries like Vietnam, it's a communist country. They got told of Samsung and said, "Look here, what is it you want? What we want you to be the global hub in Vietnam, and they work towards that. So we have to find ways of bringing the big fish into the one or two big of big the small ones. One or then others will come. Imagine Elon Musk comes in stations here if he's based here, don't you think the whole country will grow for various reasons? So we have to find that solution. We can. We are talking too much. We are trying to bring new laws, new proposals. All that is good. That is good in the case of governance. It is good to curb corruptions. You know those type. Now, if you see, recently we criminalise the tax laws, right?

Speaker 2  42:47
Yeah.

Speaker 1  42:47
Investors are looking at this. They're calling. They speak to us. They're asking why. What is happening? Why that? If you don't open a fire can, there is a blow coming. If you don't even there is a what is what's happening? What's the problem? So we have to explain that problem. And if you have a problem, you must deal with the problem. The problem may be in those cases maybe there are some few pay taxpayers who have large incomes. They are not filing returns. It's then you must bring laws to deal with them, not with the whole tax-paying society. So these are things that you have to do. Very difficult to say. You must do this. You must do that. You know. Basically, we have to restore trust.

Dhananath Fernando  43:30
So, interesting point. Now, this criminalising of tax. I'm not sure whether it's a tax evasion is anywhere. No, they

Speaker 1  43:39
are not. This is a mediocre offence. If you don't, it's a new chapter that has been introduced in the Income Tax Act. Very short chapter, one of the shortest chapters. Say, if you don't open a tin, now technically, about all the people they say over 18 years have to have a tin, something like that. I don't agree. First of all, the taxpayer identification number. You must be liable for tax to have a team. That's the first principle. Now that means how if all these people are not registered, can be incarcerated, right? If you don't file a return, you know, if you don't, but habitually you are evading to pay tax. Habitually you are evading to pay file returns, then you can criminalise, right? The way the law is drafted, anyone tomorrow, if they someone misses it, and they might say there is nothing wrong. The officer can take you to courts. It might not happen, but the law is there. So these these are wrong signals, unnecessary signals being given, not necessary at this point of time.

Dhananath Fernando  44:46
My final question on Port City now, Port City, as I mean, according to your framework, like using tax also as an incentive. So it has given a lot of tax exemptions on one side, but still, as you said, one. The Middle East is on fire. There's very limited attraction. Yeah, you mentioned about the trust deficit. So where the trust can be built? So while having a tax exemption on port city, why still people are not coming? Which

Speaker 1  45:15
the trust was breached? They are no. You gave an exemption for secondary businesses, you gave a window period of two years. If you come and register, like early bird registration, after that we want to change. What happened? First few people were given balance was stalled. Trust is gone. If it is an early bird registration for two years, you must give an early bird registration for the two years. You don't stop it because whoever said it, it the policy was brought in when the multilateral was in place, right? If they didn't say anything, they shouldn't say anything. Even if they say, "Okay, we'll finish this. After that, we will do something else, right? Because of that, what happened is the even the people who got some incentives are have two minds whether to go ahead with that, right? Then you remove it. Then again, you brought in the exemption. Now, you know where. inconsistent. Can you trust that again? You are removing. You promised the world that no more exemptions, no more exemptions in this country, but again brought in. So where is this thing there? So we have to have a clear thinking. We mustn't get rattled anywhere, and we have to we have to do a lot of damage control. If seriously, this con this country is is is it's a place for investment. We have we have an island. We have virtual sunlight 365 days other than the flash floods, greenery everywhere. If you from landing any 365 days green, you eat pepper and throw the seed. It grows on its own. You don't need any system to grow. You know, people are friendly, literate people, smart people. They would do very well in other countries. We can't do well in our countries, so there is we have to make use of it. It's a good opportunity. People-based government is there with huge majority. They can legislate and they can direct.

Dhananath Fernando  47:38
Good, mr. Kajendra. Any other final thoughts before we wrap up our conversation? I think we covered quite a lot from investment sides to the revenue side to the surplus, the digital tax, and also about the the financial services tax and using it as an investment tool. The I the IMF, so many areas we were managed to discuss, but anything else did I miss to question you, which our audience should know about the tax policy?

Speaker 1  48:06
I don't think you have missed anything much, and there is nothing to miss much. But a few things looking forward, as I said, restore trust, most important institution in this, as far as taxes are concerned, it is not the policy, it is not the law, it is the administration. Administration, you know, we must begin. You know, there was Supreme Court judge who said, "Taxpayer is not king, is God. If we have that in mind, you can impose tax, you can recover taxes. Taxpayer has been fairly dealt with, and if you have a problem of revenue, go to the people who are not in the net or who are even within the net? Who are evading taxes in a big way, and other one is use taxes as a tool for economic growth. Also,

Dhananath Fernando  49:11
thank you very much, mr. Gajendran. mr. Gajendran is the founder, found and senior partner of Gajma and Co. And we also invite our audience to become an Advocata insider, you get multiple analytics on exchange rate, property market, stock market, and so many other markets. So please consider joining as an Advocata insider. We it will be about 12,000 rupees a year, 1000 rupees a month, and you support a larger course that is on building a policy community in Sri Lanka, where supports the policies that will improve the living standard of Sri Lankan. So thank you very much. We'll join you with another conversation under Advocata Studio.


Transcribed by https://otter.ai