Discussions on fiscal transparency were held in Colombo during May 13–22, 2002. The staff team, comprising R. Gillingham, D. Rehm, and A. Annett met with officials from the ministries of finance, education and defense; the Central Bank of Sri Lanka, the Board of Investment; the Inland Revenue and Customs Departments; People’s Bank; the Finance Commission; the Employees’ Provident Fund; the Public Service Commission; the Public Enterprise Reform Commission; the Chamber of Commerce; the Committees on Public Accounts and Public Enterprises; the Department of Census and Statistics; the Cooperative Wholesale Enterprise; the Mahaweli Authority; the Ceylon Petroleum Corporation; the Ceylon Electricity Board; and the Auditor General.
For example, a government department administers the railways, while the Central Transport Board, which operates the bus system, is a commercial public corporation. Both receive subsidies in the recurrent budget.
Most noncommercial public corporations, or public institutions, function in such areas as agriculture and irrigation; transport and communications; energy and water supply; education; health; and community services. Some of the largest institutions, in terms of budgetary transfers, are the universities, the Mahaweli Authority, which undertakes rural development activities; the Road Development Authority; and the Samurdhi Authority, which oversees the provision of subsidies to households and provides rural banking services.
The three largest commercial public corporations—the Ceylon Petroleum Corporation (CPC), the Ceylon Electricity Board (CEB), and the Cooperative Wholesale Establishment (CWE)—incurred significant losses in recent years, owing largely to quasi-fiscal activities. CPC and CEB were forced to operate under administered prices for petroleum products and electricity, respectively. CWE lost money on the importation of grain, giving to it a monopoly grain miller, and selling it on the domestic market at subsidized prices.
Article 122 of the constitution specifies that there should be no more than 1 month between the submission of the Appropriations Bill to parliament and its second reading (which is the presentation of the Budget Speech).
If the budget is delayed, parliament may conduct a “vote on account,” which authorizes expenditure to continue at the levels in the preceding budget for three months.
These transfers, as well as transfers within programs, are governed by the virement procedure detailed in the financial regulations.
These excesses occur when expenditure on certain exceeds the amount appropriated, without treasury approval to reprogram. Treasury circulars forbidding the use of unauthorized excesses are often used as a cash control mechanism.
The code would be mandatory for public corporations, but voluntary for the private sector. The Finance Act currently focuses solely on financial compliance.
In the past, when commodity prices were higher, similar funds derived their own revenue from the export of rubber and coconuts. The activity of pure extra-budgetary funds represents less than 1 percent of general government operations.
The EPF is a mandatory, government-controlled, defined-contribution, retirement-saving scheme for the bulk of the nongovernment sector. It is managed by the Monetary Board of the CBSL and financed by contributions of 12 percent of salaries for employers and 8 percent for employees. It invests 98 percent of its financial assets in government securities, including 72 percent in nonmarketable rupee securities. The ETF is financed by a 3 percent employer contribution for nongovernment sector employees and self-employed workers.
The main tax laws are the Inland Revenue Act, 2000; the Customs Ordinance; and the GST Act 1998. There is no separate tax administration law.
For example, the NSL, which was abolished in the 2002 budget, applied the same rate to domestic goods and services and imports. However, the calculation of the NSL on imports required a 25 percent markup on import value. A second example is the additional 10 percent surcharge on goods subject to the top tariff rate, earmarked for the Export Development Board.
The scale of the operation can be appreciated from the fact that the BOI firms account for 80 percent of exports from, and 65 percent of imports into, Sri Lanka.
In the appellate procedures, the onus of proof falls on the taxpayer. Cases that end up in court often take years to be decided. Under the Customs Ordinance, but not the Inland Revenue Act, the taxpayer has the right to appeal to the Minister of Finance after exhausting the internal appeals process, before taking the case to court.
The budget documents comprise the Budget Speech, the three-volume Budget Estimates, and the annual Appropriations Act. The Budget Speech is published on the ministry of finance website: www.eureka.lk/fpea.
Provincial councils publish monthly budgetary data for revenue and expenditure, with a two-month lag, although the information is not provided in the standard budget classification.
Although they are not published, the Finance Act (1971) specifies that all accounts of public corporations must be submitted to the Auditor General and reviewed by parliament.
There was a particular problem in 2001. In 2000, the authorized provisions were not fully spent because, although the goods were in transit, they did not arrive by the end of the year. In line with the financial regulations, the treasury approved the transfer of these funds into a deposit account, to be used in 2001. This (continued) amount, Rs 12 billion, was not included in any of the budget documents in 2001, or in any of the tables presenting the overall budget deficit.
The committee informed IMF staff that that the safeguards in the system are working. No letter of credit can be issued without treasury authorization, and a full schedule of deferred payments on past purchases has been incorporated into the budget. Moreover, no approval for any deferred payment purchases had been granted in 2002 to date.
For example, in the 2002 budget, transfers to universities were removed from “other recurrent” and placed in “subsidies and transfers.”
Quantification of tax expenditures is complicated by the fact that many of those who receive tax preferences, especially under the BOI provisions, do not file tax returns.
The existing legal framework comprises Constitution of the Socialist Republic of Sri Lanka (1978), the annual Appropriations Act, the Finance Act (1971), and the Financial Regulations (1992).
The fiscal year runs from January 1—December 31.
However, no analytical table is included in the budget presentation that clearly shows the derivation of the overall balance from the budget estimates.
While subnational governments are relatively small at this stage, the legal framework for more devolution of responsibilities has been put into place, and the issue of consolidation will become more important.
The projections are published in supporting document entitled Highlights of the Budget,
Loans to small and medium enterprises, typically from the World Bank or the ADB, are excluded from the on-lending part of the capital budget in the economic classification of the budget, even though the government is responsible for servicing them.
Improvements include detailed guidelines for the evaluation of tenders, selection of consultants and selection of tenderers, and for identifying exceptions and deviations from the tender procedure. New guidelines and procedures have also evolved for private sector financed infrastructure projects.
New procedures will be fully implemented once the new commissioners for the Public Service Commission are nominated.
The relevant websites for semi-annual and annual GFS and budget reports are www.centralbanklanka.org and www.eureka.lk/fpea. Monthly information is also available but has not been updated since mid 2001.
At times, delays in obtaining complete information on expenditures has delayed these submissions to 12 months or more after the end of the fiscal year.
Monthly differences between expenditures recorded by the State Accounts Department, and that implied by the monetary accounts are generally posted to “other recurrent spending” until additional information is available from ministries.
The Auditor General is appointed for an indefinite term, conditional on “good behavior.” The power of the executive branch to remove the Auditor General is largely limited to cases of illness and disability, as stated in Article 153 of the Constitution.
It should be noted that this initiative will require improved capacity within the ministry of finance to both formulate and implement the budget within a multi-year, macroeconomic framework.
A survey of local governments has been planned to determine the extent of own revenue and expenditure at this level of government.
To promote this goal, an audit act is currently being formulated with the assistance of the World Bank.