The proposed new Inland Revenue Bill provides more certainty to the tax payer than the existing Inland Revenue Act (IRA) as it could be read and understood, said tax experts commenting on the Bill prior to it being taken up for debate in parliament last Friday.
The benefits of the Bill seem to outweigh the shortcomings from a business perspective according to tax analysts. However, the proposed legislation drew heavy flak from within and out the revenue collection body for its lapses.
Partner Nithya Partners Naomal Goonewardena said the new IRA is much more detailed than the Inland Revenue Act No.10 of 2006 (old IRA) and accordingly it can be read and understood and therefore provides much more certainty to the tax payer than the old IRA.
He said the amounts to be treated as business income and investment income and amounts to be allowed as deductions against such income is clearly spelt out in the new IRA.
The starting point to determine business profits under the new IRA are accounts prepared in accordance with the ‘generally accepted accounting principles’ which taken together with the definitive sections on the amounts taken as income and allowed as deductions provides a much greater certainty to the tax payer. This is what the corporate tax payers have been agitating for a long time.
The manner in which income is attributed on joint investments and how compensation payments are to be dealt with is clearly set out. Tax avoidance schemes have been specifically dealt with based on principles which have developed from English Case Law.
Residential property
Capital gains tax has been reintroduced with sensible exceptions for transfers to family members of residential property and on transfers arising from death. This was long overdue in the context of a number of people having a lot of wealth with no known sources of income to support such wealth.
Involuntarily realization of assets arising from events such as mergers, demergers and reconstructions have been dealt with in the proposed IRA. It provides detailed provisions with regard to partnerships and trustees giving better clarity than the Old IRA.
Rules to determine as to whether a person is a resident or a non-resident is much more clear in the new IRA than the old IRA. Source of payments from Sri Lanka which forms basis for taxation on non-residents is detailed out and clear in the new IRA.
“The definition of ‘interest’ has been widened to include swap payments and guarantee payments which reflects the commercial reality with regard to the true cost of borrowing,” Goonewardena said.
He noted that a significant advantage is that revenue officials would now be able to update themselves with a modernized Act and would be able to interact meaningfully in a more internationalized framework of taxation. This is important since the English law on which the old IRA was based is no longer applicable even in England and therefore there are no modern text books where our old tax principles are discussed extensively.
In view of the specificity and tightening up of several provisions it is likely that loopholes would be closed and tax revenues would increase in the medium term under the new IRA than if the old IRA was in place.
The proposed legislation contains many pitfalls which need to be given serious thought before it is being enacted into law.
Goonewardena noted that the new IRA states that it would come in to effect on 1st April 2017. This is totally impractical since even though income tax is based on a year of assessment, yet, the incidence of tax on certain items is transaction based, example: capital gains tax on the sale of an asset or tax on the payment of a dividend. Accordingly, the date of operation of the Act should be made prospective from the beginning of the half year which would be 1st October 2017 or ideally from the beginning of the next year of assessment 1st April 2018.
He said the amount payable on an installment of tax seems to be complicated. An important safeguard to the tax payer wherein the assessor was required to state the reasons for not accepting a return has been removed.
The proposed law does not mandate the Commissioner General to give reasons when the return is not accepted.
The time period for the issue of an assessment has been extended from two years to four years and consequently the collection of government revenue could also be delayed since collection procedures can only commence after an assessment is issued.
Glitches
Transitional provisions unless very clearly spelt out may result in practical difficulties with regard to the past years of assessment and the manner in which administrative and appeal provisions relating to such years would be applied under the new IRA.
“In the very short term there could be glitches in computer systems and the like which is inevitable when change of this magnitude would occur,” Goonewardena said.
Partner Ernst and Young Duminda Hulangamuwa said the proposed legislation is a progressive move to fine tune age old law and bring in the much needed revenue to the government.
The existing IRA is over 50 years old and has undergone several amendments since it was enacted in the 1960s.
Tax experts noted that the present tax to GDP ratio of around 12 percent should be increased to around 18 percent to be comfortable.
Hulangamuwa said the simplification of tax laws under the proposed Act which had been a pressing need for a considerable time and rationalizing the rates should be commended .
Three tier structure
Those opposing the Bill say that the existing Act should have been amended instead of being scrapped completely. They call for some fine tuning rather than a complete overhaul to make it more dynamic.
Experts said a noteworthy feature of the Bill is that it has broaden the tax base to boost revenue to the state to fund development projects in the country.
The three tier structure that will be effective from April 1, 2017 is 14 percent, 28 percent and 40 percent. The tax rate for SMEs, exports, education, agriculture, promotion of tourism and IT is 14 percent, banking, finance, insurance, leasing and related services, trading and unincorporated bodies 28 percent and 40 percent for betting, liquor and tobacco.
Key sectors where the rate of tax is increased from 10 or 12 percent to 28 percent are deemed 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.
The income tax under the new Act will be increased from 28 percent to 38 percent on interest. However the issue according to tax analysts is on capital gains with the only exemption being on gifts to children.
Partner Gajma and Co and Tax Consultant N.R. Gajendran said certain vital features of the current law have been left out which would cause problems to tax payers and professionals.
He said the new law is more rule based compared to the existing law which is principle based. In a rule based law if the word payment is defined and if a transaction is not captured with 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 as a ‘Payment’ under the general English definition of the word ‘Payment’.
Unprecedented manner
The Joint Opposition came down hard on the proposed legislation dubbing it as a draconian form of taxation that deprives people from practicing their social, religious and welfare rights.
Joint Opposition Leader Dinesh Gunawardena said that the JO has taken a stance to oppose the new Inland Revenue Act as at the moment it is a draconian form of taxation which deprives people especially entrepreneurs of their right in an unprecedented manner.
‘We have proposed amendments to the Bill but nothing has been taken into consideration. The government has not had any discussion with the JO on the legislation. We will oppose the Bill at the debate,” Gunawardena said.
A another JO spokesman said there are over 100 draconian laws in the new tax legislation which is not favourable to people. These issues could have been ironed out had there been a discussion involving the JO.