February, 8, 2019
President’s Counsel Dr. K. Kanag-Isvaran, who is one of the country’s most respected lawyers highlighted the need for a “Tax Ombudsman” in Sri Lanka while delivering the keynote speech at the 22nd Annual Tax Oration of CA Sri Lanka on “The Tax Collector and The Rights of the Taxed.”
“The need for a “Tax Ombudsman” is now more urgent than ever before due to the changes in the income tax regime and the implementation of the Revenue Administration Management Information System (RAMIS), to prevent see tax payers running pillar to post,” he told an audience comprising of chartered accountants representing the public and private sectors.
Dr. Kanag-Isvaran recalled how the concept of “Tax Ombudsman” was introduced in the Budget of November 2004 by the then Minister of Finance and the office was established on 15th September 2005 with the appointment of a retired High Court Judge who was the first and only holder of the office. “The administrative framework and operational guidelines pertaining to the Tax Ombudsman mandated the appointment to be a period of 2 years. No successor was appointed pursuant to the completion of his tenure. Hence that office remains in abeyance,” he said.
Highlighting the benefits of tax Ombudsmen, he disclosed how in Pakistan, Federal Tax Ombudsman Ordinance of 2000 governs the institution and appointment of the Tax Ombudsman under the hand of the President. “Within 60 days of lodgment of a complaint, the Ombudsman is obliged to communicate his findings & recommendations to the Revenue Division, who in turn is required to report on remedial action taken within the time stipulated,” he said.
Dr. Kanag-Isvaran said that the South African Tax Ombudsman has been constituted by the Tax Administration Act of 2011 while the tax ombudsman office was set up in 2013. The Tax Ombudsman is appointed by the Minister of Finance and is accountable to the Minister of Finance. The key responsibilities of the South African Tax Ombudsman Office has been identified as ‘to maintain a balance between Revenue Authorities’ powers and duties, on the one hand, and taxpayer rights and obligations on the other. Achieving this balance will enhance the degree of equity and fairness in tax administration and improve taxpayers’ perception of the country’s tax system as being fair and equitable. International experience shows that taxpayers are then more inclined to fully and voluntarily comply with their tax obligations’.
The Canadian Tax Ombudsman appointed by the Governor in Council with a three year tenure. Canadian Tax Ombudsman's mandate is to assist, advise and inform about any matter relating to services provided to a tax payer by the tax office, while the Indian Tax System consists of Income Tax Ombudsman and many Indirect Tax Ombudsman.
“We should not be wanting the phenomenon of the Parisian ‘yellow vests’ with our proposed ‘carbon tax’,” Dr. Kanag-Isvaran noted.
In conclusion, he said the taxpayers know the Government may be able to tax them, but they also need to know the use of such taxes. “Accountability is mandatory. Reasons for and uses of collected taxes should be made available to the public and this in turn brings accountability. Hence one cannot deny that "Representation" is one of the most significant right of the tax payer,” he added.
CAPTIONS: K. Kanag-Isvaran delivering the keynote speech at CA Sri Lanka’s 22nd Annual Tax Oration.
Full text of the speech delivered by Dr. Kanaganayagam Kanag-Isvaran:
“Mr. Jagath Perera, President of The Institute of Chartered Accountants of Sri Lanka, Ms Shamila Jayasekara, Chairperson of the Faculty of Taxation, Honourable Council Members of the Institute, Distinguished Invitees, Ladies and Gentlemen.
I am greatly honoured to have been invited to address this august assembly of the members of the accountancy profession. I thank you for it. I was at first a little hesitant because I could not fathom what the Faculty of Taxation would require of me as to the content of the presentation. That hesitancy was soon dispelled when I was given a list of topics to speak on. I have endeavored to stick to it.
I must congratulate you on your choice of a Lawyer not only because Lawyers and Chartered Accountants are looked upon as allies as we occasion much annoyance and grief to the tax collector but also because we have a complimentary, albeit a little different, perception and approach when we set out to do what we do best in protecting those under our care from the clutches of the tax collector.
I would like to illustrate this with a folk story from a village in Ottoman Turkey
One day, the tax collector of Akşehir and surrounding towns fell into the river. Since he didn’t know how to swim, he was about to drown. The villagers gathered by the river bank to save him.
“Give me your hand, give me your hand,” they were all shouting. But the man was not extending his hand.
At that time Nasreddin Hodja happened to be passing by. He was a learned man, of high social standing. He was lawyer.
“Hodja Efendi,” said the good samaritans, “the tax collector fell into the water. He is going to drown. He is not giving his hand.”
“Let me try,” said Hodja.
“Efendi, efendi,” he yelled to the man bobbing in the water, “take my hand!”
To this, the tax collector immediately extended his hand and grabbed Hodja’s arm. The Hodja and the people around were now able to pull him off the water.
The good Samaritans were amazed! And looked at him inquiringly.
“You see,” Nasreddin Hodja clarified, “he is a tax collector, he is more practiced in taking than giving.”
We Lawyers understand this reality.
The tension between the tax collector and the taxed is as old as time in terms of recorded history. In every culture, in every part of history, from the tax collectors of ancient Israel to the Inland Revenue Agents of today the tax man has received
more than his share of contumely. That is why even the Bible speaks so negatively of the tax collector.
No one likes to pay money to the Government, especially when the Government is perceived to be oppressive. But they do nevertheless end up paying.
As the American Humorist Evan Esar would say,
“Some taxpayers close their eyes, some stop their ears, some shut their mouths, but all pay through the nose”.
But not without resistance. It is out of such a resistance that the Magna Carta, the Great Charter, was born.
You might re-call that the event took place nearly eight centuries ago, in 1215, on Mount Runnemede in England. Rebel nobles, the Barons in England, drafted the Magna Carta to curtail the power of their own tyrannical monarch–King John who taxed heavily his nobles to pay for his military defeats. King John affixed his seal on the document at Runnymede on June 15, 1215, making it Europe’s first written constitution. The Magna Carta is considered one of the first steps taken in England towards establishing parliamentary democracy.
A few hundred years later the Magna Carta would inspire the American colonists to declare independence from the British themselves.
The 39th clause of the Magna Carta declared,
“No freeman shall be taken, imprisoned, disseised, outlawed, banished, or in any way destroyed, nor will we proceed against or prosecute him, except by the lawful judgment of his peers and by the law of the land.”
The principle that no man shall be taxed except by the authority of Parliament
became established. It is this principle – a principle of the rule of law- which we as lawyers seek to establish in a court of law against the demands of the tax collector, once the chartered accountants have finished with them.
The burden of this oration will be to discuss the travails of the citizen vis-à-vis the revenue laws of the country.
Constitutional underpinning of the principle
The principle established by the Magna Carta is reflected in our Constitution too,
as a constitutional safeguard.
The Sri Lankan Constitution in Chapter XVII mandates that the raising of finances from the citizen shall only be by the authority of Parliament. This is articulated in Articles 148 and 152 of the Constitution.
Article 148 of the Constitution, reads as follows,
“Parliament shall have full control over public finance. No tax, rate or any other levy shall be imposed by any local authority or any other public authority, except by or under the authority of a law passed by Parliament or of any existing law”.
It is then well established that it is only a “law”, namely an Act of Parliament, now extant or to be passed, that can impose any “tax, rate or any other levy’. Hence no tax, rate or other levy can be imposed except by or under the authority
of a law passed by Parliament. Therefore the question whether the burden of any tax, rate or levy has been imposed by Parliament must be clearly and unambiguously spelt out in the very words of the enactment seeking to impose that burden. Otherwise it is unconstitutional and bad in Law. Whether it is so or not, is tested by the rules of statutory interpretation in a court of law.
The process by which legislation is enacted is beyond the scope of this presentation but, it is to be seen in the Standing Orders of Parliament and some
provisions of the Constitution, with regard to the constitutionality of bills and the like. However, the initiation of any enactment, as you know, is by way of a Bill.
Article 152 controls who shall introduce legislation relating to public finance, and under what circumstances, thus ensuring parliamentary control over finances.
Article 152 of the Constitution reads as follows,
“No Bill or motion, authorizing the disposal of, or the imposition of charges upon, the Consolidated Fund or other funds of the Republic, or the imposition of any tax or the repeal, augmentation or reduction of any tax for the time being in force shall be introduced in Parliament except by a Minister, and unless such Bill or motion has been approved either by the Cabinet of Ministers or in such manner as the Cabinet of Ministers may authorize”.
The Constitution is careful to address not merely the imposition of taxes but also of the repeal, augmentation or the reduction of any tax for the time being imposed. Any endeavour to impose, repeal, augment or reduce tax requires a bill or a motion. Such bill or motion maybe introduced in parliament only by a Minister. Thus attempts to grant amnesty, exemption, or any favoured treatment is brought under parliamentary oversight and scrutiny.
So far well and good. But sometimes what is given with the right is taken away with the left! The legislative sleight of hand. You need a hawk eye to spot it. Let us do a reality check.
Let me flag an important fact of life in this regard. Article 152 speaks only of a “Bill or motion”. But we know, day in and day out, the Minister of Finance issues,
usually at mid-night, Gazettes, imposing or exempting or reducing taxes and levies.
A case in point you might be familiar with is section 2A of the Value Added Tax Act where the power vested on the Minister to change the VAT rate (section 2A of the Value Added Act 14 of 2002 introduced via VAT amending Act No 06 of 2005) empowers the Ministry of Finance to vary the VAT rate at his discretion by Order published in the Gazette.
Section 2A(1) Value Added Tax Act reads as,
“The Minister may by Order vary the rates specified in Section 2 insofar as the same relates to the increasing or reducing of the rate previously specified, and to such extent as it relates to the imposition of Value Added Tax specified under the aforesaid Section. Minister may vary the rates by Order
(2) The Order made by the Minister under subsection (1) shall be in operation immediately upon the Minister affixing his signature thereto.
(3) Every such Order shall as soon as convenient be published in the Gazette.
(4) Every such Order shall as soon as convenient thereafter be approved by a Resolution of Parliament.
(5) Where any such Order is not approved by Parliament it shall be deemed to be rescinded with effect from the date of such Resolution”
Though section 2A(4) mandates that “Every such Order shall as soon as convenient thereafter be approved by a Resolution of Parliament”, any disapproval by Parliament would not impact the application of the varied rate during the period prior to the Parliament rescinding it, and during this period of time, seemingly with no time limit, the act and deed of the Minister in charge of the subject of Finance determining at his will and pleasure the augmentation and reduction of the VAT rate reigns supreme in the country to the exclusion of the Parliament!
More importantly though section 2A (4) and (5) contemplates a resolution being passed by Parliament, either approving or disapproving the Order, there is no
compulsion to place the Gazette before Parliament for its approval or disapproval! What happens if the Gazette is not placed before Parliament for approval at all?
Does not the section 2 A of the VAT Act, therefore defeat the very spirit and the core underpinning of Article148 read in conjunction with Article 152 of the Constitution?
You are aware that recently the Minister was empowered to exempt any financial institution from payment of Debt Repayment Levy by Order published in the Gazette.
On the 1st of November 2018 there was certified an Act of Parliament styled the Finance Act No 35 of 2018, which introduced, inter alia, the Debt Repayment Levy (DRL), which imposed on financial institutions a 7% levy on the value addition attributable to the supply of financial services by such institutions. However the Act also empowers the Minister to grant exemptions from the payment of the levy by Order published in the Gazette. But the curious thing is the said Finance Act has not imposed a requirement, as is done normally, for the Gazette so published by the Minister to be laid before the Parliament for its approval ! Why may we not ask??
Section 37 of the Finance Act No 35 of 2018 states,
“The Minister may, having regard to the economic development of the country, by Order published in the Gazette, exempt any transaction of a financial institution specified in such Order, from the payment of the levy payable under this Part, subject to such condition as may be specified in such Order”.
Any exemption of the application of the Debt Repayment Levy, to a particular tax payer could then be effected by the Minister in charge of Finance, contrary to Article 152 of the Constitution!
But alas, there are many similar provisions in various tax statutes to like effect as you well know. One is therefore well entitled to ask, is not the carte blanche power thus given to the Minister violative of Article 152 of the Constitution and hence unconstitutional?
Unfortunately all these have passed muster, sub silentio or simply out of disinterest of those concerned, prior to, during and after the bill stage. The statutory time bar for challenging a bill has lapsed, since Article 78 of the Constitution mandates,-
“78 (1) Every Bill shall be published in the Gazette at least fourteen days before it is placed on the Order Paper of Parliament.”
There is then a further bar to a challenge in Article 80(3) of the Constitution. It declares,-
“Where a Bill becomes law upon the certificate of the President or the Speaker, as the case may be being endorsed thereon, no court or tribunal
shall inquire into, pronounce upon or in any manner call in question, the validity of such Act on any ground whatsoever.”
One may well ask, have these unconstitutional provisions in the aforesaid tax statutes empowered the Finance Minister of Sri Lanka to assume powers that
were denied to the King John via the declaration of the Magna Carta of 1215, that no tax will be levied without the authority of the Parliament?
Recently it was published in the newspapers that the Cabinet has approved a proposal to amend the VAT statute to empower the Minister in charge of the subject of finance to introduce exemptions from VAT via Gazette notifications!.
I believe the time has come to go looking for Barons at the Institute of Chartered Accountants to take the fight to the State. We the lawyers can offer our services!
I believe the answer lies in the enactment of a constitutional provision permitting a post enactment challenge to any Act of Parliament. This is now prohibited and therefore not available. Could we look forward to it, if and when the promised new Constitution comes?
Powers given to Provincial Councils to impose taxes
As you know with the passage of the Thirteenth amendment to the Constitution in 1987, and the establishment of the Provincial Councils in addition to the power of the Parliament to impose taxes, the Thirteenth amendment also devolved power to impose taxes upon the Provincial Councils in respect of any
matter set out in List 1 of the 9th Schedule to the Constitution, commonly referred to as the “Provincial Council List”. This includes turnover taxes on wholesale and retailer, betting taxes, and taxes in prize competition in lotteries, license taxes, arrack, toddy rents, tapping license fee and liquor license
fee, Motor vehicle license fee, Stamp Duty on transfer of properties, taxes on mineral rights and the like.
Even here the like principles of law with regard to the exercise of the power to levy taxes etc., at the centre will apply to the periphery as well.
Fundamental Rights and Tax Legislation
The Magna Carta apart from being a peace treaty between the rebel Barons and King John, in time came to be regarded, especially in the modern era, as a potent, international rallying cry against the arbitrary use of power. It became famous as the symbol of justice, fairness and human rights
It has been said that “At their core, taxpayer rights are human rights”. Is there then a correlation between fundamental rights and revenue legislation
One of the core principles of human rights is that all persons are equal in the eyes of the law. Our Constitution enshrines this principle in Article 12 of the Chapter on Fundamental Rights.
Article 12 of the Constitution, insofar as is relevant, reads,-
“(1) All persons are equal before the law and are entitled to the equal protection of the law.”
(2) No citizen shall be discriminated against on the ground of race , religion, language, caste, sex, political opinion, place of birth or any one of such grounds.”
Implicit in this principle is the prohibition against discrimination. Naturally, a question therefore arises whether subjecting persons to different taxes, tax rates or providing exemptions as per the economic and fiscal policy of the Government amounts to a breach of the Article that endeavors to provide equal protection of the law to all citizens and eliminate discrimination. As far as I am aware this question appears not to have been addressed by our Courts.
The levy and collection of tax has historically been one of the most controversial exercises. Its critics have considered it nothing less than theft sanctioned by law.
Its protagonists elevate it to the platform of a great instrument to finance State welfare and achieve the elusive dream of egalitarianism
But judgements pronounced in foreign jurisdictions indicate that laws relating to taxation should be afforded a greater latitude compared to the laws regulating religion, freedom of speech and other civil rights.
This is because laws regulating taxation essentially reflects the requirements of the Government of the day and the courts are not so quick to interfere with the economic policies of the Government. It is argued that it cannot be for a court to suggest in any case that a more equitable mode of assessment or rate of taxation might be adopted than the one prescribed by the legislature. Parliament ought to have wide discretion, it is said, and a provision in a taxing statute cannot be likely be held to be invalid on the ground of violation of Article 12 of the Constitution.
Therefore a person engaged in the business of tobacco or alcohol may not have a case based on violation of fundamental rights or discrimination for slapping of a higher rate of income tax of 40% compared to a standard rate of 28% applicable
to a manufacturer or concessionary rate of 14% applicable to a person engaged in agriculture.
Another example would be the concessionary income tax regime applicable to foreign currency owners from the service provision as opposed to the service providers to local persons earning income in rupees.
N S Brindra discussing this subject in his book on “Interpretation of Statutes” opines that “in a tax legislation, as the legislature has to deal with complex problems, the legislature must be given a greater latitude and greater play in the joints… the laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc.” Citing R K Garg V Union of India he reminds that the “constitution bench of the Supreme Court pointed out that there may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid…the Court must…adjust the Constitutionality of such legislation by generality of its provisions and not by crudities and inequities or by the possibilities of abuse of any of its provisions. In regard to taxing statutes the Courts have conceded greater latitude to the legislators both in the matter of classification of the persons as also the mode and method of recovery.”
Therefore, we might as well reconcile to the fact that mounting a successful legal challenge against a taxing statue on the basis of violation of fundamental right would be a difficult if not a herculean task.
Fiscal Laws and retrospection
Jean-Baptiste Colbert, (1619–1683) Minister of Finances of France, under King Louis XIV, famously said that,
“The art of taxation consists of so plucking the goose as to obtain the
`largest amount of feathers with the smallest amount of hissing.”
Retrospective tax laws are abhorred in every jurisdiction as these laws cause great inconveniences and introduce uncertainty into any tax regime. As Sir Edward Coke, (1552 - 1634) the great English jurist, put it “a new law to be prospective, not retrospective in its operation”.
Our Constitution however, permits retrospective legislation by Article 75. It is also recognized by section 6 of the Interpretation Ordinance.
Article 75 of the Constitution reads,-
“Parliament shall have power to make laws, including laws having retrospective effect and repealing or amending any provision of the Constitution, or adding any provision to the Constitution:
Though many find it repugnant, Article 75 of the Sri Lankan Constitution empowers the legislature to enact laws with retrospective effect. This includes fiscal statutes as well, so that taxes may be levied retrospectively under authority of the law without the violation of the Constitution.
The Interpretation Ordinance also deals with the question of retrospection but differently. It declares that when any written law is repealed, the repealing Law will not have retrospective effect, therefore a clear provision should be made with regard to the retrospective effect of such Statutes. So that whilst Article 75 empowers retrospection, the Interpretation Ordinance, affirms the rule that ordinarily no written law will have a retrospective effect unless Parliament expressly declares it to be so.
The retrospective effect of a law is required to be unambiguously stated because otherwise all rights acquired under the existing laws, legitimate arrangements made and the like may be rendered either illegal or of no effect in law. This is made clear by the Interpretation Ordinance.
Thus section 6(3) (b) of the Interpretation Ordinance No. 21 of 1901 provides as follows,
“Whenever any written law repeals either in whole or part of a former written law, such repeal shall not, in the absence of any express provision to that effect, affect or be deemed to have affected –
Therefore a clear provision should be made in such statutes with regard to the retrospective effect of such statutes.
Bindra on “Interpretation of Statutes” explains the treatment by courts of retrospectivity with regard to fiscal laws especially in respect of limitation and procedural provisions. He states as follows,-
“ Law of limitation is intended to give certainty and finality to legal proceedings and to avoid exposure to risk of litigation to the litigant for an indefinite period on future unforeseen events. Proceedings, which have attained finality under existing law due to bar of limitation cannot be held to be open for revival unless the amended provision is clearly given retrospective operation so as to allow upsetting of proceedings, which had already been concluded and attained finality. Even a procedural provision cannot in the absence of clear contrary intendment expressed
therein be given greater retrospectivity than is expressly mentioned so as to enable the authorities to effect finality of tax assessments or to open up liabilities, which have become barred by lapse of time,” citing the case of KM Sharma v Income-tax Officer, Ward 13 (7), New Delhi, (2002) 4 SCC 339.
What the Supreme Court of India has enunciated is that even where procedural matters are concerned, as opposed to substantive law, clear intendment should also be there to apply it retrospectively.
Currently, I am told, there is pending before the Supreme Court of Sri Lanka an appeal from a decision of the Court of Appeal in Seylan Bank PLC Vs Commissioner General of Inland Revenue in which the Court of Appeal had held that an Assessment made under S.163 (5) of the Inland Revenue Act 2006 was not time barred on the basis that it is a procedural law. The Court of Appeal, I am told has taken the view that “It regulates the procedure of sending an assessment against the assessee by an assessor in the event that the tax return send by the Assessee is not accepted by the Assessor. Even if the amendment has a retrospective effect, it applies, if the amendment is only on procedural law. No party can have vested right on procedure”.
The principle that one cannot have a vested right on procedure is established in law. Indeed, Maxwell on The Interpretation of Statutes 12th edition page 222 articulates it as follows,-
“The presumption against retrospective construction has no application to enactments which affect only the procedure and practice of courts. No
person has a vested right in any course of procedure, but only the right of prosecution or defence in the manner prescribed for the time being, by or for
the Court in which he sues, and if an Act of Parliament alters that mode of procedure, he can only proceed according to the altered mode.”
However, Maxwell goes on to state that the presumption that enactments affecting only the procedure and practice of courts are retrospective is a rebuttable presumption. As you well know in the eyes of the law presumptions
are two fold, rebuttable presumptions and irrebuttable presumptions.
Maxwell also says,-
“ Alterations in the form of procedure are always retrospective, unless there is some good reason or other why they should not be”
Clearly therefore where there is some good reason or other the presumption becomes rebuttable. I believe that this argument might well assist the Appellant in the Seylan Bank case in the Supreme Court, namely the presumption that enactments pertaining to procedure and practice of courts is rebuttable, in addition to relying on the provisions of the Interpretation Ordinance section 6(3) (b) that an acquired right cannot be affected by an amending law repealing the existing law in the absence of any express provision to that effect. Further when one compares the two amendments effected to S.163 by Acts No 19 of 2009 and No 22 of 2011, the intention of Parliament is clear and that the presumption has been rebutted in terms of S.6(3)(b) of the Interpretation Ordinance.
Ergo, the holding of the Court of Appeal, that it is retrospective simply because it is a procedural provision ought not to be accepted as a correct interpretation in the circumstances, because a provision of a statue cannot be amended so as
to affect any rights acquired under the repealed statute, in the absence of clear and express provision to that effect.
The Faculty of Taxation no doubt awaits the determination of the Supreme Court with great expectations to establish a milestone in its efforts in protecting the rights of the tax payer.
Talking of procedure, perhaps the most critical and important right afforded to a tax payer to safeguard his or her rights springs from the right to challenge the decisions of the Tax Collector provided for under various fiscal statutes.
I cannot, because of constraints of time, present to you the complete picture in respect of the Appeal and Recovery process as provided for in the Inland Revenue Act No. 24 of 2017. I will therefore focus only on certain areas which I believe warrants attention.
Up until the introduction of the Inland Revenue Act No. 24 of 2017, the Sri Lankan tax regime provided a four stage appellate procedure: first, an appeal from the decision of the Assessor to the CGIR; second, an appeal from the decision of the CGIR to the Board of Review, later replaced by the Tax Appeals Commission; third, from the Tax Appeals Commission to the Court of Appeal by way of Stated Case on a question of law and finally from the Court of Appeal to the Supreme Court.
In providing for the rights of appeal, the Nation Building Tax (NBT) Act and the Economic Service Charge (ESC) Act achieves this by incorporating by reference the appellate procedure set out in the Inland Revenue Act, whereas the Value
Added Tax (VAT) Act has its own appellate procedure, which is almost identical to the one under the Inland Revenue Act.
The enactment of the Inland Revenue Act of 2017 however, has brought in its wake inconsistencies, to use an euphemism, with regard to the application of its provisions to other fiscal Statutes that are now extant and the applicability of the appellate procedure in respect of challenges to decisions in pending matters under those Acts and the Act of 2017.
The appellate procedure in the Inland Revenue Act of 2017 applies to the ESC Act, whereas in respect of NBT assessments and appeals, the appellate procedure under the older regime would continue to apply as per the rules pertaining to incorporation by reference notwithstanding the repeal of the principal Act.
By rules of ‘incorporation by reference’ is meant, the principle of law that when a current statute A, refers to another current statute B, in its text, in respect of
any given matter, (example appellate procedure) notwithstanding the repeal subsequently of the statute B, the provisions of B referred to in A will continue to apply.
NBT Act declares that, “Inland Revenue Act” means the Inland Revenue Act, No. 10 of 2006.” Which means that notwithstanding the repeal of the Act of 2006 by the Act of 2017, the 2006 Act apply in respect of NBT.
ESC Act declares that, “Inland Revenue Act” means the Inland Revenue Act, No.10 of 2006 or any successor thereto providing for the taxation of income;”.
So that as and from 1st April 2018 the Act of 2017 only will apply.
On the rules of incorporation N S Bindra’s Interpretation of Statutes - 10th Edition - Page 1538-1539, opines
“… It is not necessary that such incorporation must be with reference to a valid or existing law. Such an incorporation makes the Section so incorporated a part of the new statute and even the repeal of the statute containing the incorporation Section does not have the effect of repealing that provision in the statute in which it is incorporated.”
However, section 16 - Interpretation Ordinance declares,
“Where in any written law or document reference is made to any written law which is subsequently repealed, such reference shall be deemed to be made to the written law by which the repeal is effected or to the corresponding portion thereof.”
This conflict is further confounded by the provision pertaining to appeals to the Tax Appeals Commission enacted in the Inland Revenue Act No. 24 of 2017, running parallelly with like provisions in the Tax Appeals Commission Act No 23 of 2011 creating a veritable trap and vexation to the tax payer in relation to the requirement of furnishing a security by way of a deposit/bank guarantee when an appeal is taken.
Section 140 (4) of the Inland Revenue Act No.24 of 2017, provides-
“(4) Notwithstanding anything contained in Chapter XVI, where the Tax Appeals Commission is satisfied that tax in accordance with its decision upon the appeal may not be recovered, the Tax Appeals Commission may require the appellant to furnish security for payment of the tax, if any, which may become payable by the appellant as may seem to the Tax Appeals Commission to be proper.”
However, section 7(1) of the Tax Appeals Commission Act No. 23 of 2011, commands-
“Provided that, every person who wishes to appeal to the Commission under paragraph (a) shall, at the time of making of such appeal, be required to pay into a special account which shall be opened and operated by the Commission for such purpose, an amount-
How equitable is it to request a nonrefundable 10% or refundable 25% security to obtain a right to Appeal to Tax Appeals Commission? We might well agree with Judge Sturgess that “Justice is open to everyone in the same way as the Ritz Hotel”.
You will note that nothing is said in the Act about the encashment of the bank guarantee. There is no provision to prohibit the Tax Appeals Commission from encashing the bank guarantee while the matter is pending in the Court of Appeal. Therefore the Tax Appeals Commission can encash the bank guarantee. Is this equitable from the point of view of a tax payer?
The Act of 2017 has also introduced new terminology in respect of challenges by dissatisfied tax payers of the decision of the Assessor. Thus under section 133(1) the tax payer is provided a right to administrative review of “an assessment or other decision” of an Assessor, as opposed to an appeal. Question. Does “other decision” include pre-assessment decisions as well as post assessment decisions? That question that may well arise.
Be that as it may, an aggrieved tax payer is now required to make a request for “review” within 30 days of the notification of the Assessment or other decision to the CGIR. So what is provided for is a ‘review’ and not an ‘appeal’.
Section 139 (2) of the Inland Revenue Act states
“: A request for review shall be made to the Commissioner-General in writing not later than thirty days after the taxpayer was notified of the decision, and shall specify in detail the grounds upon which it is made.”
However, where you seek to challenge the determination of the Commissioner, upon the request for a review, section 140 provides for an “appeal” to the Tax Appeals Commission from the decision of “the administrative review under section 139”.
I would like to flag some concerns here. Note the words used in the statue. It speaks of “[A]n assessment or other decision”. It speaks of a “review”, a “decision” and an “appeal”. Questions are bound to arise as to the meaning and scope of these words in the future. Does “review” differ in scope and meaning from an “appeal ”? Does “other decision” in section 139, mean any decision of the Assessor at all? We will have to ask Humpty Dumpty!
Writ jurisdiction of the Court of Appeal and the High Courts
A writ is a quick remedy against injustice, a device for the protection of the rights of citizens against any encroachment by the governmental authority. Writs originated in Britain where they were King’s or Queen’s ‘prerogative’ writs and were commands to the judicial tribunals or other bodies to do or not to do something.
In our Constitution the power to issue writs has been vested in the Court of Appeal and the High Courts under Article 140 and Article 154P(4) respectively.
It is an extraordinary remedy which can be expected to be granted in exceptional circumstances such as, where a court, tribunal or other institution has acted without jurisdiction or contrary to the principles of natural justice resulting in an Order that is void. It will not ordinarily be permitted to supplant the normal statutory appellate procedure -Halwan v Kaleelul Rahuman (2000) 3 SLR 50. As a discretionary remedy it can be refused on the ground of acquiescence, laches (delay) and available alternative remedy.
The writs recognized in our law, insofar as they are relevant here are, the writs of certiorari, prohibition and mandamus.
An Order in the nature of a writ of certiorari is an Order quashing an exercise of power by an officer or authority. The grounds for the issue of certiorari are,-
(i) lack of jurisdiction; or the authority declining jurisdiction where it legally belongs to it.
(ii) excess of jurisdiction.
(iii) abuse of jurisdiction.
(iv) violation of the principles of natural justice.
(v) error of law apparent on the face of the record – it includes not a mere error but a manifest error based on clear ignorance or disregard of the law, or on a wrong proposition of the law, or on clear inconsistency between facts and the law and the decision.
Prohibition is a judicial order to the agencies from continuing their proceedings in excess or abuse of their jurisdiction or in violation of the principles of natural justice or in contravention of the law of the land. It is issued primarily to prevent an inferior court or tribunal from exercising its jurisdiction i.e. exercising power or authority not vested in them.
Mandamus may lie against any authority, officers, government or even judicial bodies that fail to or refuse to perform a public duty and discharge a legal obligation, to compel them to exercise same.
The choice of the remedy is often influenced by several circumstances, but suffice it to say that notwithstanding the statutory remedies provided for in tax statutes the alternative remedy by way of writ remains available as a check on the tax collector where he proposes to act or has acted without jurisdiction or contrary to the principles of natural justice because the law considers the resulting decision as null and void and of no force or effect in law.
Actions for recovery of taxes
Once the normal review/appeal process is over, the time for recovery arrives. Time bar is perhaps the first port of call of the defenders of tax payers from the assaults of the tax collector.
The Commissioner General of Inland Revenue (CGIR) is time barred from commencing any action after the expiry of a 5 year period from the date the tax amount becomes default.
The incidence of ‘Tax in Default’ occurs only after the expiry of 21 days pursuant to serving the Notice in that behalf under section 152 of the Act of 2017.
The CGIR obtains the right to institute action to collect taxes only after the expiry of 21 days pursuant to sending notice to tax payer demanding payment where the tax is not paid by the date on which it is due and payable. Hence sans ‘Taxes in Default Notice’ no legal action could be instituted by the CGIR. This reflects the embodiment of an element of the rule of natural justice’. i.e right to reasonable notice under S.151 of the Act
Though notice is required to be given, a tax payer right has been curtailed since no right has been granted to the tax payer to object or to be heard prior to collection by judicial process. This was a right that was available under the repealed Act.
Extension of time for payment and interest
A salient feature of the new Inland Revenue Act is that S.151 of the Act permits a tax payer to seek an extension of the time for the payment of tax beyond its due date. This includes tax dues on account of self-assessments and other assessments. Where the CGIR fails to respond to the application for extended time within thirty days, the law deems the application for extension as granted. However, the tax payer should be mindful that the extension comes with an interest charged on it. It’s a Greek gift!
Section 157 of the Act contains provisions for interest to be charged on taxes in default calculated at 1.5% per month or part month compounded monthly.
While I am on the subject of interest, I might also mention that the new Act provides for the tax payer to receive interest in respect of refunds. Though a tax payer is not entitled to receive interest from the time of making the claim if the refund is made within 60 days, where however the delay is more than 60 days there is an entitlement to collect interest for the total period.
Extinguishment of tax
An interesting provision in the Act of 2017 is the power to write off monies due by way of taxes to the State by the Minister. The Minister will rise and shine!
The Act empowers the Minister, on the recommendation of the CGIR and with the approval of the Cabinet, to order the extinguishment of the tax liability as a tax due to the Government. A convenient fiscal pardon! Can you imagine the queues outside the Finance Ministry?
Thus, section 162 of the Inland Revenue Act No 24 of 2017 states,-
“(1) Where the Commissioner-General is unable to recover an amount of tax, interest, or penalty due and payable by a person under this Act, the Minister may, on recommendation of the Commissioner-General and approval by the Cabinet, order the extinguishment of the liability as a debt due to the Government.
But take note of sub-section (2) ! It states,-
(2) Where the Commissioner-General determines that a person whose debt was extinguished under subsection (1) has assets that may be attached to recover all or part of the unpaid amounts, the liability for the debt may be reinstated by an Order of the Minister, approved by Cabinet, revoking the Order made under subsection (1).”
Can anybody tell me why this was enacted? The IMF perhaps? Does sub-section (2) imply that the “pardon” is available only when the tax payer is without assets or had assets but the Commissioner did not know about it?
This is strange because as you know many an avenue is available to the CGIR to recover the taxes – Courts proceedings (section163), Lien (section 164), Execution against the tax payer property (section 165), Sale of seized property (section 166), Departure Prohibition Order (section 167), Priority in bankruptcy (section 168), Offset against payments (section 169), Third party debtors (section 170), Preservation of Assets (section 172), Non arm’s length transferees (section 173), Transferred tax liabilities (section 174), and Receivers (section 175). Should all these avenues be exhausted before the Commissioner acts under section 162 and the Minister and the Cabinet rise in unison in support?
In this context I would like to recall what the former British Prime Minister and “Iron Lady” Margaret Thatcher said of the nature of taxes. She said,-
“Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking someone else will pay - that 'someone else' is you. There is no such thing as public money; there is only tax payers' money”.
Tax representative be vigilant!
Another alarming development on recovery of taxes is that, now a tax collector has the right to take recovery action not only against the “tax payer” but under certain circumstance from his “representative” as well – S.146.
The tax collectors right against a “representative” is twofold. He could pursue action against the representative to the extent of any assets of the tax payer that are in his possession or under his control. In addition, the representative is personally liable with regard to the taxes in default -
The defence of the representative of the tax payer in such an instance would be to plead that he had no knowledge of the liability or that the payment was made on behalf of the tax payer to fulfill a priority in law or equity over the tax payment.
However, an important nuance that every tax payer has to bear in mind is that a failure to perform duties stemming from the Inland Revenue Act cannot be shielded by pleading the negligence or failure to perform such duties by his representative.
The Tax Collector’s right against the shareholders
Tax collector may also proceed against the representative or even a shareholder in the event of a winding up.
Hitherto we were familiar with provisions in various tax statues extending their tentacles to catch the directors in respect of the taxes in default of a company even after it is wound up. The Act of 2017 is even more enterprising in that has entrenched the provision to extend the tax net even to shareholders upon the company being wound up.
According to section 148 of the Inland Revenue Act, where a company has wound up without having satisfied its tax liabilities including withholding tax liability, the shareholder of the company at the time of winding up or during the preceding year, shall be jointly and severally liable to pay the unpaid tax to the extent of a distribution of cash or property received from the company within one year to its winding up.
However, the person liable for the tax of a company under this Section may invoke any rights as against the department that would have been available to the company.
Section148 of the Inland Revenue Act No 24 of 2017, reads,-
“(1) This section shall apply to a company which is wound up without having satisfied its tax liabilities, including any liability to withhold and remit tax,
(2) A person who was a shareholder of the company at the time of the winding-up or during the preceding year shall be jointly and severally liable to pay the unpaid tax to the extent of a distribution of cash or property from
the company received as a shareholder within one year prior to its winding up.”
(3) A person liable for tax of a company under this section may invoke any rights as against the Department that would have been available to the company.
No shields for directors – a sword for tax collector
Defenses that were available to directors from the time of M.E de Silva V Commissioner General of Inland Revenue, 53 NLR 280, that the “Income Tax Ordinance does not make the principal officer of a Company chargeable out of his personal assets with income tax levied on the Company’s assessable income” has been gradually eroded by various tax statutes over the years, and has now culminated in a clear expression that the company’s tax liability can become the personal liability of the Directors.
The new Act imposes crystal clear personal liability on the directors, Chief Executive Officers, Chief Financial Officer’s and every person who is purporting to act as a “manager”.
Section 149 of the Inland Revenue Act No 24 of 2017 provides,-
“149. (1) Where an entity fails to pay tax on time, every person who is or has been a manager of the entity at any time since the relevant time shall be jointly and severally liable with the entity and every other such person for payment of the tax.
(2) Subsection (1) shall apply irrespective of whether the entity has ceased to exist or not.
(3) Provisions of subsection (1) shall not apply to a manager who has exercised the degree of care, diligence, and skill that a reasonably prudent
person in the position of the manager would have exercised in preventing in the initial and continuing failure to pay tax.
(4) Amounts payable to the Commissioner-General by a manager under this section shall be a personal tax liability of the manager.
(5) Where a manager pays tax by reason of a liability under subsection (1), the manager may recover the payment from the entity as a debt due.
(6) A manager of an entity may not be assessed for an amount under this section after the period of limitations for collecting the relevant tax from the entity has expired.
(7) In this section-
“entity” means any taxpayer other than a partnership, unincorporated body, or an individual;
“manager” of an entity includes a person purporting to act as a manager of the entity and, in the case of a company, includes a director, the chief executive officer, and the chief financial officer of the company; and
“relevant time” is six months before the events that gave rise to the entity’s tax liability.
The saving grace appears to be that one who has suffered for the tax sins of the company has recourse to recover the amount as a debt due from the company. A Director who has exercised that degree of care, diligence and skill that a reasonably prudent person would have applied in the initial and continuing failure to pay tax is afforded a defense against the collector.
Protection of the rights of tax payers
Finally, one of the concerns expressed to be addressed is the absence of proper mechanisms to articulate and lobby the interests and concerns of the body of
tax payers in general and of tax reform in particular with the tax policy makers and the government on an ongoing basis.
Sri Lankan tax regime has provided safeguards to preserve the rights of the tax payers by way of administrative review by the CGIR under the New Inland Revenue Act, right to appeal to the CGIR under some other tax statutes, right to appeal to the Tax Appeals Commission and thereafter on a question of law, to the Court of Appeal and the Supreme Court, as we have already noted. However, this process is limited in scope to the interpretation and construction and application of the relevant tax statutes only.
A tax payer who desires a clarification on a matter pertaining to the interpretation of tax statutes may also resort to private and public rulings referred to in Chapter IX of the Inland Revenue Act. This too is strictly in relation to interpretation, construction, and application of the technical aspects of the tax statutes.
Outside of the statutory scheme for addressing grievances, there is also the independent grievance redressing institutions such as the Ombudsmen.
In Sri Lanka out of the two types of Ombudsmen, the public Ombudsman called the “Parliamentary Commissioner for Administration” was established by Article 156 of the 1978 Constitution. His mandate was to investigate and report upon complaints or allegations of the infringement of fundamental rights and
other injustices by public officers and officers of public corporations, local authorities and other like institutions in accordance with and subject to the provisions of such the law. I understand an appointment to that office was recently made.
There are also two private Ombudsmen functioning in Sri Lanka. They are the Financial Ombudsman and the Insurance Ombudsman.
The concept of “Tax Ombudsman” was introduced in the Budget of November 2004 by the then incumbent Minister of Finance and the office was established on 15th September 2005 with the appointment of a retired High Court Judge who was the first and only holder of the office. The administrative framework and operational guidelines pertaining to the Tax Ombudsman mandated the appointment to be a period of 2 years. No successor was appointed pursuant to the completion of his tenure. Hence that office remains in abeyance.
Tax Ombudsmen – Foreign Jurisdictions
In Pakistan, Federal Tax Ombudsman Ordinance of 2000 governs the institution and appointment of the Tax Ombudsman under the hand of the President. Within 60 days of lodgment of a complaint, the Ombudsman is obliged to communicate his findings & recommendations to the Revenue Division, who in turn is required to report on remedial action taken within the time stipulated.
The South African Tax Ombudsman has been constituted by the Tax Administration Act of 2011 while the tax ombudsman office was set up in 2013. The Tax Ombudsman is appointed by the Minister of Finance and is accountable to the Minister of Finance. The key responsibilities of the South
African Tax Ombudsman Office has been identified as ‘to maintain a balance between Revenue Authorities’ powers and duties, on the one hand, and taxpayer
rights and obligations on the other. Achieving this balance will enhance the degree of equity and fairness in tax administration and improve taxpayers’ perception of the country’s tax system as being fair and equitable. International experience shows that taxpayers are then more inclined to fully and voluntarily comply with their tax obligations’.
The Canadian Tax Ombudsman appointed by the Governor in Council with a three year tenure. Canadian Tax Ombudsman's mandate is to assist, advise and inform about any matter relating to services provided to a tax payer by the tax office.
The Indian Tax System consists of Income Tax Ombudsman and many Indirect Tax Ombudsman.
The need for a “Tax Ombudsman” is now more urgent than ever before due to the changes in the income tax regime and the implementation of the Revenue Administration Management Information System (RAMIS), to prevent see tax payers running pillar to post.
I believe the time is opportune to address the concerns of the tax payers by appointing a Tax Ombudsman, along the lines of the South African experience to achieve a balance that will enhance the degree of equity and fairness in tax administration.
We should not be wanting the phenomenon of the Parisian “yellow vests” with our proposed “carbon tax”.
In conclusion I wish to refer to popular phrase used by American revolutionists “no taxation without representation,” which is also one of the R's in the 4 R's of Taxation ( Revenue, Re-pricing, Re-distribution and Representation) which demonstrates the ‘Objects of Taxation’. The taxpayers know the Government may be able to tax them, but they also need to know the use of such taxes. Accountability is mandatory. Reasons for and uses of collected taxes should be made available to the public and this in turn brings accountability. Hence one cannot deny that "Representation" is one of the most significant right of the tax payer.
As the former President of the United States of America Ronald Reagan said “The problem is not that the people are taxed too little. The problem is that government spends too much.”
Before I conclude I seek your permission to record a debt of gratitude to Ms. Rifka Ziyard, Associate Director, Tax and Regulatory, KPMG, for her immeasurable assistance in the preparation of this presentation.