ECONOMYNEXT – Sri Lanka’s Parliament’s Committee on Public Finance has raised questions about a duopoly in wheat flour created by state restrictions on trade and large profits alleged to be made through tax arbitrage.
Legislators have complained in parliament that the duty differential was a tax scam that exploited a hungry public and lost the state about 2.1 billion rupees in taxes each month at 35 rupee a kilogram of wheat flour imported.
By a gazette notice in July 2023, Sri Lanka’s rulers had ended the people’s freedom to trade in wheat flour and made it a licensed item like in the 1970s.
Duopoly
Meanwhile two flour milling companies have been given a tax advantage to import grain at lower duty and sell flour at high prices without fear of competition.
Patali Ranawaka, who was chairing a meeting of the Committee on Public Finance pointed out that a duopoly in flour trading has now been created.
The difference between the two taxes would now be ‘arbitraged’ by the two companies. While people would pay higher prices for wheat, the taxes would not go to the state, but will end up as extra profits to the milling duopoly, analysts say.
Anura Dissanayake, leader of the opposition Janatha Vimukthi Peramuna, pointed out that Prima and Serendib flour mills were importing grain paying only 3 rupees in taxes at selling flour at whatever price they wished at a time when import prices had come down.
Earlier wheat flour was allowed to be imported on a tax of 35 rupees a kilogram.
“Up to now no import licenses have been issued,” Dissanayake said on July 19. “Effectively flour imports have been banned.
Price Fall
Dissanayake alleged there had been a practice in Sri Lanka of giving trade restrictions to give profits to companies in return for election funding.
The wheat duopoly was making large profits as cost fell due to an appreciation of the rupee and falling global prices, with the help of trade controls.
“The selling price of wheat in Sri Lanka has been raised to 210 rupees a kilogram,” Dissanayake said.
“If you compare international prices, the landing cost of a kilogram of wheat flour imported from Turkey was only 110 rupees.
“Even if you paid the 35 rupee tax, and added some profit, bakery owners say flour can be sold at 160 rupees a kilogram.
Dissanayake said a tonne of wheat flour from Turkey cost 535 US dollar in January, 510 dollars in February, 490 dollars in March, 440 dollars in April, 377 dollars in May, 355 dollar in June and July.
The cost of wheat grain meanwhile had fallen from 310 dollars a tonne in January, to 307 dollars in February, 302 dollars in March, 292 dollars in March, 279 dollar in May, 245 in June and 238 dollars in July, Dissanayake said.
Tax losses
Meanwhile the rupee which was 362.42 per dollar had appreciated.
“This benefit should go to the consumer,” Dissanyake said. “But what did the government do? The government issued a gazette and halted the import of flour.
“As a result there is a duopoly by Serendib and Prima companies.
“The government is also losing 35 rupees a kilogram in taxes. There is no benefit for the consumers. So I am asking how these decisions are made. Everywhere else they are putting price controls.”
State Minister for Finance Ranjith Siyambalapitiya said in 2020, 19,379 metric tonnes of wheat flour had been imported at the cost of 1,377 million rupees in answer to questions raised by Dissanayake.
In 2021 16,175 tonnes had been imported at a cost of 1,341 million rupees.
In 2022, 236,233 metric tonnes of wheat flour had been imported at a cost of 40,311 million rupees.
From January to July 103,517 tonnes of wheat flour had been imported at a cost of 16,410 million rupees.
The milling duopoly had imported 725,267 metric tonnes of grain up to July 15, 2023.
Roughly 640,751 metric tonnes of wheat flour had been made available for domestic consumption.
Minister Siyambalapitiya claimed that the monthly requirement for wheat flour was only 60,000 metric tonnes, but 91,535 tonnes had been imported a month.
There is an excess of 31,535 wheat flour, he claimed.
He did not say whether the milling companies were unable to sell their flour at high prices.
Siyambalapitiya said due to a good rice harvest, wheat flour imports were restricted.
Protectionism or Tax Scam?
Dissanayake said if the government wanted to protect the farmer the import duty on wheat flour could have been raised.
At 60,000 metric tonnes a month, the government was losing 35 rupees in taxes per kilogram.
At a profit of 45 rupees the two milling companies were making 2.7 billion rupees in margins, he said.
At 35 rupees in taxes, the loss to the government was 2.1 billion rupees a month, at a monthly demand of 60,000 metric tonnes.
“If it benefits the farmer, we are also happy,” Dissanyake said. But that is not what is happening here. There was a sugar scam earlier. But an even bigger scam is taking place here, through the wheat scam.”
The ‘sugar scam’ involved subsidiary legislation coming through a midnight gazette issued under a commodity levy law, where tax changes are made at the minister’s prerogative in the style of Royal Prerogative without prior consultation in parliament.
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The alleged wheat tax scam involves similar decision making without prior debate in parliament through an import and export control law. (Colombo/Aug20/2023)
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