13th August, 2006  Volume 13, Issue 5

First with the news and free with its views                                     First with the news and free with its views                             First with the news and free with its views                                    


AG's damning report on Dept. of Inland Revenue highlights,

Finance Minister -  Mahinda Rajapakse, Treasury Secretary - Dr.P.B. Jayasundera and Auditor General - Sarath Mayadunne

VAT scam a colossal Rs. 288 billion

By Sonali Samarasinghe

If you thought the Rs. 3.5 billion VAT fraud was the biggest monetary scandal this century then you can think again. This nation and its public are being scammed every minute by its administrators and legislators. And they are being scammed big time.

The VAT fraud is no longerRs.3.5 billion. It is nearly 100 times that amount and that's a modest estimate on available data. As it stands the sum is already a gigantic Rs.288.9 billion.

It has now come to light that a sum of Rs. 283.4 billion ofVAT monies has been lost to the state in a matter of just two years from January 2004 to end March 2006 due to fraud. Slamming the system in a damning report, the Auditor General (AG) states the loss in revenue is due to large scale fraudulent VAT refunds made by the VAT department without proper investigation and  bureaucratic incompetence 

A hard hitting Special Projects Report by the Auditor General tabled in parliament two weeks ago proves that the Department of Inland revenue is wracked with bureaucratic incompetence, riddled by irregularities and weighted down by negligence and fraud.

Not only is the department not reconciling its books with a discrepancy of Rs. 14.3 billion between the Individual Revenue Account and the Accounts of the Republic in 2005 alone, but the department's administration is atrociously poor.

Shockingly, there were discrepancies of even the number of files on public corporations and institutions available in the Department. For instance within a space of six months between December 31, 2002 and June 30, 2003 the number of these files incredibly increased from 46 to 4,894. That is a difference of 4,848.

In fact according to the available obviously dubious data at the Department of Inland Revenue, within a space of six months the number of Employees under the Pay As You Earn Scheme dropped from 789,221 to 215,424. That is a drop of 573,797 employees. These discrepancies are shown when comparing the number of files appearing in the performance reports of the Department of Inland Revenue (DIR) as against the census reports of the DIR.


 The Auditor General also states the negligence and failure to recover VAT funds despite the issue of assessments for the recovery of these monies has exacerbated the situation contributing to a conducive environment within the DIR for such picaresque behaviour.

 Another massive fraud

 If that is not hard enough to swallow, the public has now been further defrauded of a colossal Rs.389 billion by fraud, negligence and illegal activity of government departments, ministers and the executive, a new audit report reveals. A weak system and lack of coordination between government institutions has contributed to a network of fraudulent and irregular activity that has drastically affected state revenue.

Already reeling from one of the biggest ever VAT fraud, in history, the nation's beleaguered economy cannot any more take the slings and arrows of outrageous ministerial and administrative impiety.


The Auditor General in his Special Project Report has revealed shocking details of how the government is being defrauded of billions of tax rupees due to departmental and ministerial malpractice.

If politics is the art of the possible then politicians are consummate con artists. And while the taxman may hunt down the small fry in frustration, it is in fact politicians who end up defrauding the government of revenue.

While the findings show that the annual loss of government revenue is astronomical and cannot even be computed, a series of test checks carried out by the department has shown a loss of Rs. 389 billion.

Slams government

The Auditor General, hard hitting and precise as always has blamed the fiasco squarely on the government. While citing several reasons for the loss of such a huge amount of revenue he says questionable responses made by institutions when audit queries are made and serious lapses are pointed out instead of immediately taking steps to rectify the situation.

Shirkers all

The AG also ticks off the Treasury Secretary, secretaries to relevant ministries and heads of respective departments for shirking their responsibilities. He reminds the Secretary to the Ministry of Finance that he, as the nation's chief accounting officer is responsible over all and draws attention to the weaknesses in higher management and the lack of accountability

He also cites as a major reason for the colossal losses and weak management of tax revenue, the neglect to introduce specialised systems and controls by the authorities concerned.

Why this becomes vital is that the tax structure within the taxation policy of Sri Lanka facilitates a large portion of tax revenue to flow direct to the government.

For instance out of the total tax revenue of Rs. 198.3 billion received during 2005 by the Department of Inland Revenue , 97.6 percent had been directly remitted to the government as direct and indirect taxes through the department of customs including other government institutions, individuals and other institutions.

However, the Auditor General slams the system stating the coordination and flow of information and data between major government tax collecting institutions is almost non existent.

VAT fraud - just when you thought it was a mere Rs.3.5 billion

The VAT fraud is no longer Rs.3.5 billion. As it stands the sum is already a colossal Rs.288.9 billion.

Take revenue due to the government on Value Added Tax during the period 2003 to 2005 for instance. The accounts are horrendous. The arrears of VAT as at March 31, 2006 was a humongous Rs. 288.9 billion. The arrears of tax which amounted to Rs. 5.4 billion at the end of 2003 had within the space of two years leap frogged to Rs. 288.9 billion just four months ago.

Primary reason - fraud

The primary reason for these arrears the Auditor General states is large scale fraudulent VAT refunds and the failure to collect large amounts of tax upon assessment due to reasons best known to the department.

However it is not only fraud but also sheer negligence, incompetence and lack of computer technology and software that has contributed to this terrible blight on the public weal.

The AG had detected two instances of Value Added Tax totaling a humongous Rs. 200.6 billion owing to the state coffers that had not been included when computing arrears.

They were - 

TIN Number             Assmnt.             Date                 Amount
                              Number                                       Rs. Millions
409162070            9961882            2004.10.21            182,406.2
409162517            9961883            2004.10.21            18,206.8
Total                                                                         200,613.0

 Even though these assessments had been computerised they did not come up on the computer screen due to the computer programme blocking out any data beyond a certain limit as erroneous.

In fact the above two VAT 20 Assessments had been handed over to the VAT department but on the receipt no official departmental stamp had been placed. Instead the dates September 29 and 30, 2004 had been manually written.

Fraudulent intent

You need not be a rocket scientist to figure out that it is possible to enter data in excess of the maximum capacity of the computer fraudulently with the full intention of committing a fraud even in an instance where the VAT 20 Assessments have been duly issued.

In this instance even though the two assessments related to two different institutions, both had been filled up and signed by the same person. However this same person had in fact signed and furnished another assessment relating to another institution where the official date stamp had been placed.

The Commissioner General of Inland Revenue attempts to cover up this matter. He states that the date was written manually as the date on the date stamp was unclear and that if one person is a partner of several partnerships such person can sign reports of partnerships and instances of the same person signing two VAT 20 forms is possible.

He also states in his observations that when values exceeding the upper ceiling are reported, it can be detected at the time of entering such data to the computer.

Nonetheless the Auditor General is unforgiving. He reprimands the Inland Revenue Department for not taking any steps whatsoever to rectify this situation even though 20 months had passed from the date of assessment up to the Auditor General's report on the above VAT refunds. Who will monitor the monitors?

But more importantly even though such a huge amount appears on the computer printout none of the officers in the higher management of Inland Revenue have exercised any supervision of this extraordinary case, while the state continues to be deprived of this revenue.

Books don't match

If you thought you'd heard it all hold on to your hats. There are also massive discrepancies between the accounts of the Treasury and the accounts of the DIR. Therefore the accounts of the republic do not reconcile with individual revenue accounts.

For instance in 2004 the discrepancy between the individual revenue account and the accounts of the republic was 589.5 million (Rs. 0.6 billion). This discrepancy bounded to a massive Rs. 14.3 billion in 2005.

In fact the Auditor General states the relevant authorities have taken no steps to rectify these discrepancies which very clearly appeared in the accounts of the republic presented by the Secretary,  Ministry of Finance and Planning and the Secretary, General Treasury as recently as April 19, 2006 and the individual revenue accounts for 2005 presented for audit as recently as July 3, 2006.

There were also serious differences amounting to Rs.16.2 billion between the individual revenue accounts of the Department of Inland Revenue and the Treasury computer print outs.

Customary irregularities

And if that is still not enough, enter the Customs Department. Customs as we all know is big business. And nobody understands this better than the Auditor General himself.

He now turns his eye on the 'highly questionable' existence of discrepancies between data on imports fed into the computers by the Department of Customs and the Department of Inland Revenue.

In fact the Value Added Tax on eight import entries relating to two institutions during 2002 and 2003 according to the records of the Department of Inland Revenue and the Customs Department was Rs.1.2 million.

The VAT on six import entries to an institution entered into the data base of the statistical division of the Department of Customs but not appearing in the database of the Department of Inland Revenue was Rs. 863,095

The VAT on 23 import entries of that institution for August, September and October 2002 included in the data base of the DIR but not in the data base of the Department of Customs was Rs. 2 million.

There are also discrepancies between the data of the performance report of the DIR and the data of the department of fiscal policy. While in 2003 the difference was Rs. 50.8 million by 2004 it had risen considerably to Rs. 3.45 billion.

The latest Auditor General's Special Project Report is a damning document as far as the Inland Revenue Department is concerned. It is now upto President Mahinda Rajapakse as the Minister of Finance to rein-in his ministers and his departmental heads and read them the riot act.

Rajapakse knows more than anyone else how important state revenue is at a time he is on the verge of launching the country back into  full scale war. 


Jeyaraj takes the Treasury for a ride

Jeyaraj Fernandopulle

It is now revealed that Minister of Consumer Affairs Jeyaraj Fernandopulle has illegally revised vehicle permit fees, for the import of vehicles perhaps under the misapprehension that he is monarch of all he surveys, costing the country a loss of Rs. 9.8 million.

Certainly the public is aware that Minister of Consumer Affairs Jeyaraj Fernandopulle is a cavalier politician. The Minister is also happily for him in charge of the lucrative Department of Import and Export. 

However no one seems to be more aware of Fernandopulle's cavalier attitude than the country's out going Auditor General, S.C. Mayadunne himself. 

In a hard hitting Special Report to parliament the AG states the Minister has revised and reduced permit fees in an irregular manner.

Reduced fees

Though regulations made by the Minister in terms of Section 20(3) of the Imports and Exports (Control) Act must be published in the Gazette and only effective from the date of publication or on a date specified in the regulations, the Minister for reasons best known to him has thought it fit to drastically reduce the permit fees surrepticiously without publication in the Gazette.

Thus a number of vehicle import permits had been issued by the department based on the direction of the Minister by charging permit fees less that what was charged before September 15, 2005.

The loss of tax revenue to the government due to the Minister's irregular revision of fees for 160 permits issued between September 15, 2005 and March 10, 2006 has amounted to Rs. 9.8 million.

The Controller of Imports and Exports says these revisions were made on the "written order of the Minister" which were in turn made in response to several requests made to the Minister for the revision of the above mentioned fees.

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