Published in: English

Sugar Scam 2.0

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The second sugar scam in Sri Lanka is a repeat of a deeply troubling pattern of corruption first seen in 2020. In that year, the government abruptly reduced the sugar import tax from Rs. 50 to Rs. 0.25 per kilogram, without prior notice. This move allowed a few selected importers to clear massive sugar stocks at the drastically reduced tax rate, enabling them to make enormous profits by selling at regular market prices. The government, however, lost over Rs. 16 billion in tax revenue.

Despite widespread public outcry and reports by the Auditor General and Committee on Public Enterprises (COPE) highlighting the misuse of tax policy, no meaningful legal action was taken, and the importers retained their profits.

Fast forward to November 2023, the government once again manipulated the sugar tax policy, this time by suddenly increasing the Special Commodity Levy (SCL) on sugar from Rs. 0.25 to Rs. 50 per kilo overnight. Just hours before this new tax rate took effect, an importer allegedly cleared a shipment of 8,500 metric tons of sugar under the previous tax rate. This move, allegedly saved the importer approximately Rs. 422 million in taxes that would have otherwise been paid to the state. The precision timing of this clearance raised serious questions about insider information and alleged collusion between the importer and officials with access to confidential information on internal decisions. This corruption not only caused massive losses to government revenue but also undermined public trust and highlighted systemic weaknesses in governance, accountability and oversight. The failure to hold responsible persons accountable after the first scam may have contributed to encouraging repeated abuse of power, allowing for the manipulation of tax policies for private gain. Such practices distort the market, harm honest businesses, and deprive the public of resources needed for essential services.

 

What is the corruption

The clearance of 8,500 metric tons of sugar at the old lower tax rate, immediately before the increase of tax, allowing the importer to allegedly avoid approximately Rs. 422 million in taxes to the state, indicates insider access to confidential government decisions and potential collusion between officials and private parties. A similar manipulation occurred in 2020, when a tax cut allowed importers to evade over Rs. 16 billion in taxes. As a result, the government lost significant revenue that could have funded essential public services like healthcare and education. Research estimates show that the huge revenue loss to the government (LKR 59 billion by end-2022) mostly accrued as surplus to the suppliers. This corruption undermines public trust, creates unfair advantages for some businesses, and ultimately forces the public to bear the cost through reduced services and higher prices.

 

What has been done

  • Despite media coverage and public criticism, no prosecutions or formal investigations have been launched against those involved in the 2023 sugar scam.
  • Reports by the Auditor General and COPE highlighted the misuse of tax policy in 2020, but their recommendations were not implemented.
  • No legal or policy reforms have been introduced to prevent abrupt or opaque tax changes by ministers bypassing prior approval of parliament.
  • Alleged importers implicated in both scams were allowed to retain their profits, with no effort made to recover lost revenue.
  • Parliamentary oversight mechanisms have fallen short of ensuring accountability or follow-up action on the findings.
  • There is no public record of pre-decision consultations or internal communications, leaving space for continued abuse.

 

What can be done

  • Initiate independent investigations into the 2020 and 2023 incidents, including asset tracing of the beneficiaries.
  • Establish a mandatory cooling-off period before major tax changes take effect, reducing the risk of insider exploitation.
  • Amend all tax-related legislation such as the Special Commodity Levy Act which violates the principle of parliamentary control over public finances to remove the excessive use of discretion for taxation changes without approved schemes
  • Amend laws to enable the state to recover losses from individuals and companies that benefit from policy manipulation.
  • Quarterly publication of a revenue report detailing changes to revenue measures that might result in annual revenue loss of 0.1% of GDP
  • Require public notice and stakeholder consultation before implementing changes to import duties or special levies.
  • Introduce a real-time customs tracking system to monitor large-volume commodity clearances and detect unusual timing patterns.
  • Enact legal protections and incentives for whistleblowers in customs and finance sectors.
  • Strengthen COPE and COPA with mandate to enforce and ensure their findings lead to legal action.
  • Encourage civil society involvement in monitoring government fiscal decisions, especially regarding policy changes.

 

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