The proposed Inland Revenue Act (IRA) is commended by tax experts as a progressive move to refine and reform the decades old law and boost revenue to state coffers.
The existing IRA is over 50 years old and has undergone several amendments since it was enacted in the 1960s.
Experts said, the tax to GDP revenue should be increased to a satisfactory level. The current ratio, which is around 12 percent is unsatisfactory. Ideally, the tax to GDP ratio should be around 18 percent.
Tax specialists also welcome the simplification of tax laws and rationalizing the rates under the proposed Act, which has been a pressing need for a long period.
The new Inland Revenue Bill was tabled in Parliament last week, and a two-week period given for those who wish to raise objections in court.
However, the flip side of the coin is, the existing Act could have been amended instead of scrapping it in toto, the experts ventured.
It is felt by many that policy changes could have been done to the existing law to fine tune and make it more dynamic .
Charitable institutes
Partner, Ernst and Young, Duminda Hulangamuwa said, a vital feature of the new Act is that it has broad based the tax base to help bring in more revenue to the government which is vital for infrastructure development.
He said, simplification and rationalizing tax rates should be commended, as the existing Act is complicated. No one is exempted from paying taxes if he or she crosses the threshold. Even charitable institutes, except orphanages, elders’ and children’s homes will be taxed.
The three tier structure, effective from April 1, 2017 is 14 %, 28 % and 40 %. The rate for SMEs, exports, education, agriculture, promotion of tourism and IT is 14 %; banking, finance, insurance, leasing and related services, trading and unincorporated bodies, 28 %; and 40 % for betting, liquor and tobacco.
Key sectors where the rate of tax is increased from 10 or 12 % to 28 % are, exports, construction services, supply of services to exporters, healthcare services, transshipment and shipping agent services, warehousing, agro processing, animal feed and fishing, services to ships, Clubs and Associations and alternative energy, including, mini-hydro power projects.
Hulangamuwa said, the income tax under the new Act will go up from 28 % to 38 % on interest.
The problem is on capital gains with the only exemption being for gifts to children, he said.
Tax experts are however, not in favour of the retrospective effect of law applied on land. The value should be freezed from the time the law comes into effect.
‘The law can be passed at any time but the application should be April 1, 2018. If not, there will be two laws, which will be a cumbersome task to administer,” Hulangamuwa said.
The difference between the proposed Act and the old law is the accounting standards
The new law is simpler. However, certain income that were not included are included now, for instance, the fair value gains and losses.
However, there are no differences with regard to imposition sections. The sources of income are consolidated into four sections, gains in investments being the only addition.
Partner, Gajma and Co and Tax Consultant, N.R. Gajendran said, the proposed Act being contested in courts is a sign of transparency and true democracy, where people are concerned not only about their fundamental rights, but also wanting to get involved in the legislative process.
He said, refining and reforming the law is a good move. However, there are challenges to reckon with. The IRA is in toto a new law which irks many.
Gajendran said, there is a lot of uncertainty in the proposed law which would require a longer learning period. Certain significant features of the existing law have been left out, which would cause problems to tax payers and professionals.
Therefore, according to experts the abolishing of the existing law would generateplenty of discussion, debating, refining and resetting of the new Bill, before and after it is enacted.
The proposed law is more rule based which even defines the words, ‘Payment’ and ‘Receipt’, whereas, the current law is principle based. Hence, tax experts said, the new law is a shift from a principle based to a rule based system of tax administration.
However, there are pros and cons of both laws according to the experts.
Gajendran said, in a rule based law if the word ‘Payment’ is defined and if a transaction is not captured within that definition, it will not be a payment. Similarly, the defined word ‘Payment’ in the new law may include certain specific circumstances or situations which normally may not constitute a ‘Payment’ under the general English definition of the word ‘Payment’.
“It is vital to realize the entire thought process in reading, understanding and interpreting the law, which is different from that of the principle based law,’ he said.
The year of assessment is another area of concern under the new law, which states that the law is applicable from any year of assessment, on or after April 1, 2017.
If the law is enacted as it is, and retroactively implemented from April 1 2017, it will be unfair, as almost three months have lapsed in the year.
Article 13(6) of the Constitution recognizes the principle that if an act or omission does not constitute an offence at the time of the act or omission, it cannot be reconstituted as an offence subsequently, by a retroactive process.
Nevertheless, Article 75 of the Constitution provides laws to be made retroactive under extreme circumstances of national interests. The Interpretation Ordinance recognizes the principle that acquired rights cannot be abrogated.
Thus, experts said, it is only proper for the proposed law to be implemented from the year of assessment of 2018-2019. It is not fit and proper to have two laws for the year of assessment 2017-18.
A vital factor according to tax experts is that, only the laws that existed at the commencement of the year of assessment should be applied, and not laws enacted or amended during the year of assessment or thereafter.
They said, certain salient features of the existing law should be revisited. For instance, when a return is filed by a tax payer and the revenue officer does not accept the return and makes the assessment, it is mandatory for the revenue officer to give reasons in writing for not accepting the return.
Gajendran said, this is a striking feature which protects the tax payer from excessive, arbitrary and capricious assessments; and also, when the tax payer makes an appeal he or she has to precisely make the grounds for the appeal. Accordingly, he or she has to know the reasons why the revenue officer did not accept the return.
The proposed law does not mandate the Commissioner General to give reasons when the return is not accepted. Therefore, this fundamental need has to be incorporated.
At present, the authorized representative of the tax payer can freely function for or on behalf of the tax payer without the intervention of the Commissioner General.
However, the proposed Bill provides for an intervention by the Commissioner General.
“The authorized representative of the tax payer should be permitted to act for or on behalf of the tax payer without the intervention of the Commissioner General, ‘ Gajendran said.
Responsibility of accuracy
He said, under the existing law the responsibility of accuracy and correctness of the return lies with the tax payer as he or she signs the income tax return.
However, under the proposed law the authorized agent has to take responsibility of the return, which is meaningless.
The proposed law permits the tax payer to amend the income tax return only with the intervention of the Commissioner General which is an undesirable situation.
The tax payer should be allowed freely to amend the return and if the Commissioner General does not accept the return he will have the right to issue assessment.
Also, the rate of income tax for SMEs has been overlooked for individuals and Partnerships. It has been granted only to Companies. This is an oversight which has to be corrected.
Gajendran said, more importantly professionals carrying on a professional practice as a sole proprietor and in partnership had not been classified as an SME even if the qualifying criteria has been met. Experts noted that the new law should have a strong transitional provision. Everyone will appreciate if there is an urge to improve the tax law and administration, as the Customs and Exchange Control law. Nevertheless, the enlightened historical learning and settled legal principles cannot be thrown away, like throwing the baby with the bath tub.
There could be improvements and innovations in simplifying and modernizing the law, but sacrosanct features of recognizing the rights and protection of tax payers and maintaining the status and dignity of the revenue officers without compromising the revenue and the investment climate should be strongly perused.