• Decision on passing increase to consumers by 15 Jan.

With a 3% increase in Value Added Tax (VAT) for coal starting from 1 January, the State-run Ceylon Electricity Board (CEB) will be paying an additional sum of around Rs. 70 million per shipment as VAT to the Government, according to statistics available with the Lanka Coal Company (LCC).

Currently, the CEB pays a total sum of Rs. 420 million per shipment as VAT, and it is expected that the 3% increase will cause the board to increase the payment to around Rs. 490 million.

As revealed to The Sunday Morning, up until now, VAT payments had not been included in the electricity bill to avoid passing the burden to consumers. 

However, LCC officials expressed uncertainty about whether the CEB would continue to bear the VAT cost or whether it would have to pass it on to consumers like any other institution/company.

The LCC anticipates 40 coal shipments for the season ending in April next year. As of now, 14 shipments have been unloaded. The VAT increase would apply to shipments arriving after 1 January, the LCC stated.

When contacted, LCC Chairman Shehan Sumanasekara told The Sunday Morning that coal shipments were arriving as scheduled for the season.

“We have already secured nine shipments for the next season as well. Therefore, during the next season, tenders will have to be called to import coal from October. We have already secured nine shipments for September. Shipments are arriving on time and there is no issue with coal supply. We will supply this season’s coal requirement to Norochcholai.”

Regarding the VAT impact, the LCC Chairman noted that the CEB handled the financial aspects of the LCC. 

“All payments are done by the CEB, and so far, we have already settled the VAT. The decision on whether to pass the VAT to consumers has to be taken by the CEB.”

Sumanasekara stressed that the VAT increase would not affect coal prices as coal would be purchased based on index prices. “VAT is something the CEB has to pay to the necessary institution,” he explained. 

The LCC Chairman emphasised that the company was observing world market trends and was prepared to go for spot tendering whenever prices dropped considerably. 

“At present, coal prices have come down to around $ 104 per tonne. Usually, by this time, prices are supposed to increase, but prices have dropped this year. In January, we expect an increase of $ 5. However, it is not the right time to decide on long-term tenders since the market is very volatile at present. But once we observe a considerable drop in prices, actions will be taken to purchase coal accordingly.”

The annual coal requirements for thermal power generation are collected from October to March of the following year, stored in the coal yard, and used for uninterrupted power generation. 

From April to September, during the off-season with rough seas in the Norochcholai area, it is not possible to unload coal, and coal-carrying ships or barges cannot reach the power plant’s jetty.

The quantity of coal carried by ships arriving at Norochcholai is approximately 65,000 MT and according to the plant’s requirements, approximately 35 shipments are expected in a year.

However, CEB Chairman Nalinda Ilangakoon told The Sunday Morning that a decision on whether to pass on the VAT increase to the public would be reached on 15 January.

NAO report

In the latest National Audit Office (NAO) audit report for 2022, it has been revealed that the CEB faces a significant VAT payable balance of Rs. 1,436.33 million as of 31 December 2022. 

Additionally, a penalty of the same amount has been reported for the assessment years 2017/2018, 2018/2019, and 2019/2020. Shockingly, this substantial penalty remained undisclosed in the financial statements, violating Sri Lanka Accounting Standards on Income Tax (LKAS 12).

Further scrutiny of the report exposes that a 10% mark-up was added to the value of imported coal at Customs, serving as a notional adjustment that had not actually been incurred. The company recorded this mark-up, amounting to Rs. 9,419.6 million, as revenue for 2022. 

Subsequently, this amount was recognised as discounts to debtors and adjusted to the cost of sales, leading to an overstatement of both cost of sales and revenue by a similar amount, as disclosed in the audit reports.

The financial statements also reveal a significant disparity in amounts payable to the Ceylon Shipping Corporation Ltd., amounting to a difference of Rs. 724.2 million, raising concerns about the transparency and accuracy of LCC’s financial reporting.

The controversy surrounding LCC’s VAT payment procedures has garnered the attention of the Committee on Public Accounts (COPA). COPA contends that the non-disclosure of accurate information during the transportation of coal to the Norochcholai thermal power plant resulted in VAT not being charged as an additional tax in the Customs investigation. 

Consequently, there was a recovery of the undercharged VAT of nearly Rs. 187 million, accompanied by a substantial penalty of Rs. 205 million.