Inland Revenue Bill was published in the Government Gazette on 19/06/2017 and it was placed on the order paper of the parliament on 05/07/2017. It is now scheduled to be taken for debate on 6th September 2017.After the Bill was gazetted, ten petitions were filed in the Supreme Court by various citizens and associations invoking the jurisdiction of the Supreme Court to determine whether the Bill or any provisions of the Bill are inconsistent with the Constitution.The Bill was taken up for hearing for six days from 13th July 2017 to 25th July 2017 and the Supreme Court has now declared its determination.The Supreme Court has decided that five sections of the Bill are inconsistent with article 12 of the Constitution and may only be passed by a special majority of the Parliament. However, if those clauses are amended as agreed by the Additional Solicitor General, this inconsistency could be removed. It is now scheduled to be taken up for debate on 6th September 2017 in Parliament. Only the parliament has power to impose tax on the citizens in terms of Article 148 of the Constitution. Provincial Council or any other Local Authority has no power to impose taxes on the people except few levies such as rating assessments. Power of taxation was centered in the hands of the Sinhalese kings in the early history too.
Current Tax System in Sri Lanka
However, the present day tax system was introduced by the then British rulers in the year 1932.Income tax was first introduced under the Income Tax Ordinance No. 2 of 1932 by the British rulers in the country based on a report submitted by N. J. Huxham, the first Commissioner of the Department of Income Tax. The tax on income has become a law after two attempts to introduce the tax had failed.
The year 1932 onwards, there have been several tax acts and amendments thereto have been passed by the Parliament and thereby several taxes have been introduced from time to time. Excess profit Duty and Profit tax were introduced in 1941 and 1948 respectively. Taxation of capital gains, imposing wealth tax and Expenditure tax were enacted as a result of the Kaldor Commission proposals in 1958.Business Turn over Tax (BTT) was introduced based on the turnover of a business under the Finance Act No.11 of 1963.In the year 1991, Turn over tax (TT) which was administered by the central government was devolved to the provincial Councils with Provincial Revenue Statute of 1987 under the 13th amendment to the Constitution. There after main and vital tax was a Goods and Services Tax (GST) which was introduced under the Goods and Services Tax Act No.34 of 1996 and which were implemented in 1998. Goods and Services Tax was abolished in 2002 and it was replaced by Value Added Tax (VAT) with the Value Added Tax Act No. 14 of 2002.Economic Service Charge (ESC) was introduced in 2004 by Finance Act No.11 of 2004 and Economic Service Charge Act No.13 of 2006.Nation Building tax was introduced with effect from 1/1/ 2009 by the Nation Building Tax (NBT) Act No.9 of 2009. Stamp Duty on transfer of immovable and movable property was introduced by the Stamp Duty Act No.43 of 1981 ant it was abolished in 2002. It was reintroduced in the year 2006 and continues to date. Accordingly, the present taxes in operation are Income Tax, Value Added Tax, Economic Service Charge and Nation Building Tax. Threshold on Value Added Tax and Nation Building Tax is Rupees 12 million per year or rupees 3million per quarter. Chargeability on Economic Service Charge has been restricted to persons or partnerships those do not have taxable income and those who have losses.
Income Tax is the first and foremost tax continued for a long period of time with its inception in 1932.Original Income Tax Ordinance No.2 of 1932 has been replaced by several Acts from time to time. Finance Act No.11of 1963 replaced the Income Tax Ordinance .Finance Act No.11 of 1963 was replaced by Inland Revenue Act No.28 of 1979 and it was replaced by Inland Revenue Act No.38 of 2000. Present Inland Revenue Act No10 of 2006 is the Act under which income tax is charged and collected at present.
Inland Revenue Act
Inland Revenue Act is an Act which is very often amended with passing of each and every budget in Parliament. A Lot of amendments are introduced in accordance with the budget proposals. There have been lots of discussions with regard to present Inland Revenue Act saying that it is very complex and complicated and especially foreign investors are facing lot of difficulties in the process of investing in projects in Sri Lanka. Therefore it has become a long felt necessity to amend and simplify the Inland Revenue Act in order to facilitate the foreign investors to invest in this Country.In order to introduce changes to the economy or to give relief to the some segments of the society, or group of people, amendments are brought to Inland Revenue Act to change the direction of the economy. In the past, tax was a mere source of income generated avenue for the state but now it plays two roles simultaneously. One is that it brings monies to the state coffers. The other role is that the state can use taxes to encourage or discourage some segments of the economy. If the state intends to increase paddy production in the country, the state can grant tax exemptions to paddy farmers. For example, 200% tax is imposed on the sale of lands to foreigners in order to discourage them buying lands in Sri Lanka. In this context, tax system can be used to decide the direction of the economy.
Inland Revenue Act No.10 of 2006
Present income tax is administered in terms of the provisions of the Inland Revenue Act No.10 of 2006. Income tax is imposed on the net profit of the person. There are two kinds of persons under the Inland Revenue Act. They are resident persons and non-resident persons. Resident persons are taxed on their profits of income earned in Sri Lanka as well as from abroad. Non-residents are taxed for their net income derived from this country only. A person under Inland Revenue Act includes an individual as well as a company.
Tax is charged on a person for a particular source of income based on a specific period of time. It is called “Year of Assessment”. There are ten sources of income enshrined in the section 3 of the Inland Revenue Act No.10 of 2006. They are profits from trade,business, profession, vocation, employment, rent, profits derived from land,dividends, winning from a lottery and betting or gaming .When these sources of income are taxed, expenses related to therewith are allowed to be deducted under section 25 of the Inland Revenue Act. At the same time there are some expenses which are not allowed to be deducted. They are mentioned in section 26 of the Act. There are five schedules in the Inland Revenue Act and Tax rates are mentioned under the said schedules.
New Inland Revenue Bill
It seems that the new Inland Revenue Bill is a clear deviation from the present tax system compared to the past Inland Revenue Acts.Under the new Bill, Provisions for the statutory income has been removed. Under the provisions of the Inland Revenue Act No 10 of 2006, taxable income, assessable income and the statutory income of a person is calculated. Statutory income is the total aggregated income of a person. Under the new Bill, separate sources of Income of a person is separately calculated separately assessed. This means that all the sources of income do not compute together. Each source of income will be separately calculated and separately determined. Accordingly separate tax threshold should be given to tax payer for their each and every source of income. For example, a lecturer who has an employment income as a lecturer from the university and he may have investment income from rent, dividends or annuities. On such occasion, lecturer is entitled to claim Rs. 700,000/= threshold for employment income and another 500,000/= for his investment income. Section 3(3) of the new Inland Revenue Bill provides that the taxable income of each person and from each source shall be determined separately. But under the Present Inland Revenue Act, one person is not entitled for two thresholds for two sources of income. Viz the said tax payer can get Rs. 1,200,000/= tax exemption. But under present tax one person can getonly one threshold even though he may have several sources of income. This tax structure is called” scheduled basis tax system”. The new Bill has an advantage for the tax payers since one tax payer can get several tax thresholds. In the case of a senior citizen who receive interest income will be entitled for a sum Rs 1,500, 000/= tax exemption. This is a considerable advantage when compared to existing taxation on interest income of a senior citizen.
Re-introduction of Capital Gains tax
Capital Gains tax was abolished in the year 2002 by the then Government. Section 50 of the new Bill provides that any person who is authorized by law to accept or register, shall not accept or register such instrument unless there is no any proof to say that due tax for the said instrument is paid. According to this provision, Land Registrar will be provided with necessary instructions to this effect in the near future. Further section 93 of the new Bill provides that every person shall file a return of income for capital Gains with full details of the tax paid. Such tax return for Capital Gains should be filed within one month of the realization of the asset. There were several sections from 7 to 24 which provide various tax exemptions for various sources of income and various sectors of the economy under the Inland Revenue Act No.10 of 2006. The new Inland Revenue Bill has done away with all those tax exemptions and reintroduced some exemptions under section 52 and under the schedules of the new Inland Revenue Bill
Determination of the Supreme Court
Ten petitions were filed in the Supreme Court challenging several provisions of the new Inland Revenue Bill.
Firstly they challenged the clause 67 of the Bill. Clause 67 provides how the life insurance business is taxed.Clause 67 of the bill was challenged by two petitioners in their cases of S.C.S.D.10/2017 and in SC/SD/11/2017. This clause deals with the manner in which the profits and income of companies engaged in life insurance to be computed for tax purpose.The petitioners alleged that this clause violates Article 12(1) and 14(1)g of the Constitution. But the Supreme Court was of the view that this clause is not inconsistent with the provisions of the Constitution as alleged by the petitioners. But the Additional Solicitor General agreed that amendments would be moved at the committee stage of Parliament to Clause 67 of the Bill.
Clause 68 of the Bill refers to granting of tax reductions to Non-Governmental Organizations (NGO) which are providing livelihood support for displaced persons and the NGOs which are providing institutionalized care for the sick and the needy. Clause 68(2) provides that Commissioner General may reduce or remove the tax payable by such Non-Governmental Organizations for that Year of Assessment. Respondents submitted that Clause 68(2) of the Bill doesnot confer power on the Commissioner General to remove the total tax payable by the NGO on other sources of income. Respondents further submitted that Clause 68 in its totality is not vague or unreasonable and is not inconsistent with the Constitution. Accordingly the Supreme Court agreed and allowed the said clause to be remained as it is. NGOs should pay their due taxes under the schedules of the Bill. The Commissioner General has power to reduce the additional taxes paid under the section 68(1) of the Bill only.
Other Tax Officials
The clause 97 of the Bill refers to administration of the act and deals with the appointment of officers. It provides for the appointment of ‘other tax officials’, who can exercise, perform or discharge the power, duty or functions attached to the Commissioner General.
The Petitioners in several cases complained that clauses 97 and 98 violate Article 12 (1) of the Constitution. The Petitioners further argued that in view of the definition of ‘Tax Official’, Clause 98 would enable the Commissioner General to delegate his functions to a person other than an official of the Inland Revenue Department. Petitioners argued that under cover of that word, there is a possibility of bringing outside people into tax administration.At the same time Commissioner General has power to delegate his powers to so called “other tax Officials”. The Additional Solicitor General who appeared for the Respondent agreed to delete the word “Other Tax Officials” and “any other person authorized by the Commissioner General to perform any function under this Act Other tax Officials”
Accordingly the Supreme Court held that the Clause 97 and 98 are inconsistent with the Constitution. However, if proposed amendments are made, the inconsistency could be removed.
Incentive Fund
Petitioners further challenged provision 99 that the minister has taken the control of the incentive fund of the Department of Inland Revenue and as a result Minister can stop the payment of Incentive according to his whims and fancies.This Clause 99 of the Bill provides for the establishment of the ‘Inland Revenue Incentive Fund’ and the management thereof. The Petitioner in SC. SD 13/2017 complained that Clause 99(1) provides the Minister in charge of the subject of Finance has a discretion as to whether the Inland Revenue Incentive Fund should be established or not and that this is a departure from the present provision contained in Section 210, which merely provides that there shall be established a fund called the Inland Revenue Incentive Fund.The Additional Solicitor General on behalf of the Respondents submitted that Clause 99(1) is in fact an improvement of section210 of the present Act for the reason that Section does not specify who should establish the said fund whereas that ambiguity has now been removed by clearly placing a mandatory obligation on the Minister to establish Inland Revenue Incentive Fund. The Supreme Court then agreed with the submission made the Additional Solicitor General and allowed the clause to be remained.
Secrecy of Information and other Agents
Petitioners challenged Clause 100 on the ground that secret information in the Department of Inland Revenue could be leaked to the “Other Agents” who are proposed to be appointed under the Bill. Clause 100 of the Bill provides that persons who are under a duty to act in terms of the Tax Law to maintain secrecy and confidentiality regarding information and documents filed by a specific tax payer. Such information and documents received maybe disclosed to a certain category of persons as contemplated in Clause 100 (1) (a) to (j) of the Bill. Learned Deputy Solicitor General informed court that the words referred to in Clause 100 (1) (a) as ‘other agents’, amendments would be moved during the committee stage by the deletion of words ‘other agents’.
The Petitioner in SC SD 13/2017 took an objection regarding the constitutionality of the Clause 100(1)b regarding the Minister. It was submitted that the Minister of Finance has no supervisory powers over the Inland Revenue Department and as such the Minister cannot have access to such information of a tax payer and that there is no rational to permit the Minister to have access to such information of a tax payer. Thereby there could be an abuse by the Minister for other extraneous purposes.
The Additional Solicitor General submitted that when questions are raised in Parliament regarding the affairs of the Inland Revenue Department concerning a particular tax payer, Minister of Finance needs to answer and Minister should have access to such information in the course of carrying out supervision of the Department. The Supreme Court agreed with the submissions made by the Additional Solicitor General. However, the Additional Solicitor General agreed to restrict the releasing of information to Attorney General by the Commissioner General of Inland Revenue except on the occasions where Commissioner General has requested in writing from the Attorney General.
Private and Public rulings
Section 104 provides that Commissioner General may issue private rulings as guidance to general public and officers of the Department and section 105 provides that theCommissioner General may issue public rulings setting out the Commissioner General’s interpretation of the application of this Act.It was argued that it would lead to arbitrariness, on the part of the Commissioner General. It was submitted, on behalf of the Respondents that before issuing such rulings the Commissioner General of Inland Revenue (CGIR) consult the Departmental officials at various levels prior to the issuance of public ruling. Supreme Court was of the view that there is nothing unconstitutional in the said clauses.
Giving Reasons
Under section 163(3) of the Inland Revenue Act No.10 of 2006Assessors should give reasons when he rejects a return submitted by a tax payer. Petitioners argued that under the new Inland Revenue Bill, tax payers have been denied of the opportunity.On behalf of the Respondents, it was pointed out that Clause 139(5) provides for written reasons to be given where a tax payer applies to make an amendment to his self-assessment. Accordingly the Commissioner General under clause 139(5) of the Bill shall consider the tax payer’s request and notify the tax payer in writing of the CGIR’s decision with reasons. The Supreme Court was satisfied with the clause. There is nothing that offends Constitutional provisions since reasons are given when the tax payer decides to appeal to the CGIR and to the Tax Appeal Commission.
Island Leaving Certificate
Clause 167 of the proposed Inland Revenue Bill empowers the Commissioner General or an authorized officer to issue a departure prohibition order to the Controller of Immigration and Emigration against a person who about to leave the country without paying the tax in default.
The Petitioner in SC/SD/15/2017 allege that it is in violation of Article 12 and 13 and 14 (1) (h) and (I) of the Constitution since the present Inland Revenue Act,such a tax defaulter who is about to leave the island can be stopped only on the order of the Magistrate of the area. Petitioners argued that the power exercised by the judiciary has been encroached by the Inland Revenue. Therefore the Supreme Court was of the view that the said clause 167 of the Bill violates Article 12, 13 and 14(1) h of the Constitution. The Supreme Court recommended including Section 188 of the present Inland Revenue Act No.10 of 2006.
Interpretation of the Act
Clause 200 of the Bill refers to the interpretation of the provisions of the Act. This applies also to Courts of law in interpreting the provisions of the Act.This refers to the manner of interpreting the Act and its provisions and materials to be considered for the purpose of interpreting the Act. Interpretationof statutes is a part of the judicial power. The learned Presidents Counselfor the petitioner in SC/SD/9/2017 strenuously argued that clause 200 encroaches upon the judicial power and it violates Article 3 and 4 of the Constitution.
The Supreme Court held that the said clause is inconsistent with Article 3 and 4 of the Constitution and requires to be passed by a special majority.
Second and Fourth Schedules of the Bill
A depreciation allowance is granted in respect of depreciable assets between 3Million to 5Million and calculating the same is contained in the Second and fourth schedules of the proposed Bill. Investment incentives are granted to those who (1) invest USD 3 million but does not exceed USD (2) provide 250 to 350 new employments. If an investor commences his/her project in the Northern Province, he gets 200% depreciation for his assets. If a person commences his/her project in other part of the Island other than Northern Province he gets only 100% depreciation for his assets. Petitioners argued that this treatment amounts to be a violation of Article 12(1) of the Constitution.
Respondents submitted that the present Act No. 10 of 2006 contains similar provisions that permit the development of areas known as lagging regions as well as special concessions being afforded to those who invest outside Colombo and Gampaha. Section 20 refers to exemptions of the profit and income of any new industrial undertaking. It is not in dispute that Sri Lanka was ravaged by a war for over 30 years. The worst affected region was the Northern Province, followed by certain parts of the Eastern Province. The Supreme Court held that“A law applying to one person or one class of persons is constitutional if there is sufficient basis or reason for it. Any classification which is arbitrary and which is made without any basis no classification and a proper classification must always rest upon some difference and must bear a reasonable and just relation to the things in respect of which it is proposed”
Conclusion
It seems that the Government intends to draw investment into the country, especially to the Northern Province and thereby to bring a rapid development to that region.With the objective of developing the country, the Government can give tax exemptions to the investors. Likewise there have been a lot of tax amnesties given in the past as well.
In the year 1989 a tax amnesty was granted with same objectives. In the year 2003, another tax amnesty was provided. The amendment Act no 21 of 2011 enacted providing whole sale amnesty to the various tax payers. But what is the revenue attracted by the Government as a result of those tax amnesties? There was only a loss occurred to the state coffers. No successful result is reported nor were there any employment opportunities created.
The Proposed Inland Revenue Bill has proposed several tax concessions. In order for them to be effective, there should be a supervisory programs carried out by the Government. If not the aforesaid tax concessions too will be only another tax concession for the investors in 2017. In order to get tax concessions investors should invest US $ 3-5 Million in the country at the same time they should provide job opportunities for more than 250 youths. If the relevant agencies of the Government don’t supervise the projects investors will simply show figures and get the tax concessions. Thus job opportunities for youth will not be created. Eventually they will enjoy the tax benefits but the real development will not take place in the designed areas. Therefore for the aforesaid projects to be a success supervisory projects are a must.
The Government may propose good and reasonable relief to raise the livelihood of the general public. There should be a parallel program to oversee whether the said program is properly implemented or not. If not all these projects will be another project only.
By A.A. Thilakarathne
Attorney At Law
Former Assistant Commissioner of Inland Revenue