Constitutional provisions pertaining to tax

As part of the interview with KPMG Principal – Tax and Regulatory, LLB, Attorney at Law, FCMA (UK) Suresh R.I. Perera, the Daily FT today deals with what every finance professional should know about Constitutional provisions pertaining to Tax.  

Last week the focus was on the recently gazetted one-off 25% surcharge tax on profits made by companies for the financial year 2020/21.

Q: Who has the power to impose taxes according to the Constitution? 

 As per the Constitution, Parliament has the full control over public finance. 

Therefore, only the Parliament has the power to impose taxes, duties and levies etc. 

If a Public Authority or a Local Authority such as municipal councils, Urban Development Authority are to impose tax, it should be under the authority of the Parliament only. 

Article 148 of the Constitution stipulates that, “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 a Parliament or of an existing law.”

Not only the imposition of any tax, even the power to repeal an existing tax, increase, as well as reduce any tax is under the purview of the Parliament. This is to be gathered from Article 152 of the Constitution. 

This has to be appreciated in the context of Article 148, which states that, “Parliament shall have full control over public finance.”

Therefore, if there is a mechanism that would dilute the Parliament’s “full” control over public finance, such a mechanism may be unconstitutional. 

Q: What is the power of the Provincial Councils to impose taxes?

Provincial Councils were established in 1987 by the 13th Amendment to the Constitution. Article 154G introduced by the 13th amendment empowers Provincial Councils to make statutes applicable to the Province with respect to matters set out in the relevant list of the ‘ninth schedule.’ 

Under item 36 of List I of the ninth schedule, Provincial Councils have been empowered to make statutes pertaining to taxation in the areas mentioned therein.

Accordingly, any Provincial Council can make Statutes to collect taxes and revenues from turnover taxes on wholesale and retail sales subject to conditions, Betting taxes, and taxes on price competitions and lotteries, license taxes, arrack, toddy  rents, tapping license fees,  liquor license fees , motor vehicle license fees, stamp duties on transfer of properties such as lands and motorcars, toll collections, taxes on lands and buildings, Taxes on mineral rights, licensing fees on possession, transport, purchase and sale of intoxicating liquors etc.

Q: What is the procedure for imposing a new tax or introducing an amendment to an existing tax in the Parliament?

 Any bill or motion for introduction of a tax, abolition of a tax, increase or reduction of a tax, first should be approved by the Cabinet of Ministers (or in such manner as the Cabinet may authorise). 

Thereafter, it should be placed in the Order Paper of the Parliament after a lapse of seven days of being published in the Government Gazette. 

If the Bill is not challenged in the Supreme Court under Article 121 of the Constitution within seven days, it may be presented in the Parliament by the Minister of Finance and follow the normal procedure until certification by the Speaker as legally enforceable Statute under Article 80 (1) of the Constitution.

Once the Bill becomes Law upon certification as above, a Court or a Tribunal cannot question the validity of such Act on any ground whatsoever, according to Article 80 (3) of the Constitution. 

Q: What is the relationship between tax and the Consolidated fund?

 As per Article 149 of the Constitution all taxes, duties, levies, rates other revenues & receipt paid to the State will be accrued to the Consolidated Fund, unless already directed to a particular activity. 

Funds in the Consolidated Fund could be drawn out only with the permission of the Parliament, by way of a Resolution or Law, for a specified sum of money for a specified public service to be spent in a particular financial year.  

According to Article 150, thereafter a warrant should be issued by the Minister of Finance for the withdrawal from the Consolidated Fund. 

Q: As per the Constitution is it legal to introduce tax laws with retrospective effect ?

 Article 75 of the Constitution permits Parliament to make laws including laws with retrospective effect. In addition, there are rules stemming from the Interpretation Ordinance S.6 (3) in relation to retrospective Law making. 

There are also Legal presumptions that apply in relation to prospective or retrospective aspects of the Laws introduced depended upon the nature of the Law too. i.e. Substantive Law or Procedural Law

Article 75 of the Constitution:

“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.” 

In Seylan Bank PLC. vs Commissioner General of Inland Revenue - SC Appeal No. 46/2016 delivered on 16 December 2021 (by the three-judge bench composed of PC Priyantha Jayawardena, PC J. Yasantha Kodagoda, J and K.K. Wickramasinghe, J argued by F.N. Goonewardena, Attorney-at-Law  for the appellant) it has been pointed out as follows,

“Article 75 of the Constitution confers power on the legislature to make laws, including laws having retrospective effect. The general principle of interpretation of statutes is described in the Latin maxim ‘lex proscipit non respicit’ (the law looks forward, not backward). 

Thus, amendments made to substantive laws have a prospective effect, unless its effect has been made retrospective by express provision in the Act or by necessary implication. 

On the other hand, amendments made to procedural laws are presumed to have retrospective effect, unless its effect has been made prospective by express provision in the Act or by necessary implication, or such a construction is textually not possible.”

Further, in the same Judgement citing the case decided by the Supreme Court of India (Hitendra Vishnu Thakur) it was pointed out the following;

“…….(iv) A procedural statute should not generally speaking be applied retrospectively, where the result would be to create new disabilities or obligations, or to impose new duties in respect of transactions already accomplished; and

(v) A statute which not only changes the procedure but also creates new rights and liabilities shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication.”

So, one could see this issue of whether Tax Laws could be retrospective or not is not a straightforward issue even in relation to Procedural Tax Laws. 

All depends upon the circumstances and the facts involved. Normally, it is understood that ‘Vested Right’ cannot be affected by Retrospective Legislation. 

The reading of the fascinating judgement by the Supreme Court of Sri Lanka in the above referred Seylan Bank case provides many dimensions in relation to this retrospectivity of Tax Laws.

Q: What are the powers of the President in relation to taxation as per the Constitution?

The President is vested with grant of Pardon under Article 34 of the Constitution. 

Acting under the powers stemming from Article 34 of the Constitution, once a person is convicted for any offence under a Tax Statute under any Court, the President can grant a pardon, free or subject to lawful conditions, grant any respite on the execution of any sentence passed on such offender, substitute a less severe form of punishment or remit the punishment, or the penalty or the forfeiture.