Exotic new Income Tax Law: Is it the solution for the Sri Lankan problem?

In biology an “exotic” species, is a species of animal or plant which is foreign to the region or country. Many nations have strict rules and controls against the introduction of exotic species due to the fear of damage and havoc they may create to the local environment. However, an exception is made when an animal or plant is introduced to solve a serious imbalance in the environment such as another animal overrunning the country.

Our economy is seriously imbalanced, which is indicated by Government spending exceedingGovernment income for many decades. The proponents believe, the new “exotic” Inland Revenue Act imported from Africawill assist in rebalancing the economy.  

It seems the focus is to improve the collection of taxes. The goal is praise worthy, but is this the correct tool? Answering this question requires the outlining of the Sri Lankan problem.

Sri Lankan problem 

Collection of taxes are broadly dependent on the administration, policy and on people’s trust that the taxes they pay are fair. The above three elements are not exhaustive but are the most significant.

Poor administration

Sri Lankan tax administration has been beleaguered for a long time from a lack of Investment in the collection infrastructure and the training and development of Inland Revenue Officers. It seems unclear how a change in the law will resolve the above stated lack of investment.

In addition to the new law the Inland Revenue Department is also introducing a new Revenue Administration Information System. The steep learning curve due to the combination of new law and new IT system will further burden the beleaguered administration

Industry-specific policies to be eliminated

Policy simplification is a mantra repeated by many governments and it seems that when it comes to Income Tax,this new law may be the simplest. Benefits and exemptions have been removed for most industries, excluding a few select industries such as agriculture and tourism. Hence, it is a success in this regard, however it is important to appreciate that different industries have varied requirements, are at varied stages of development and benefit the country differently. 

This new law is definitely strengthening tax collection, but appears to be at the expense of important activities such as research, brand promotion and training as the triple deduction benefit related to such activities have been removed. Additionally, the new law does not encourage the setup of global MNCs in sri lanka, the repatriation of income for services and investments in fixed assets. This is a major shift in policy that may affect our foreign currency flows and reserves.

Trust deficit

Tax collection’s other hidden factor is the trust surplus or deficit between the Government and its people, resulting from the imposition, collection and the fairness of appellate procedure in relation to taxes. There is a clear trust deficit between successive governments and the citizens who are liable to pay taxes. 

Trust has eroded due to excessive assessments, arbitrary imposition of new laws, retrospective amendments and not fulfilling promises. One such example is the granting and the subsequent removal of amnesty.  This has resulted in the shadow economy prevailing very vibrantly in the country, as people are uneasy to believe that governments will not completely change policies year on year.

The new law, if retrospectively administered without a clear transition policy between the old and the new law, will result in increasing the distrust between the taxpayers and the Government. Trust is created by consistency.

Principles of the old law

The cornerstone of the old law is the principle of natural justice, which provides a person with the right to be heard and to receive reasons for assessments. These principles have evolved from a public’s necessity for a fair and just process.

In the 1960s, there were many excessive and unreasonable assessments as Inland Revenue Officersabused their power, which led to taxpayers being put under undue stress. The laws were subsequently amended and were held strong and firm by the Judiciary of the country. The Supreme Court ruled many cases in the favour of taxpayers where reasons were not given and where the taxpayer was not given the right to be heard. 

Focus on the purpose

Our country needs a revamp of its tax laws, but in the push for collection of taxes, many of the strengths of the old laws must not be lost. Simply put, we hope that this revamp in the push for simplification and collection does not “throw the baby out with the bathwater”.