Sri Lanka’s Income Tax Law

By M.S.M.T. Samaratunga

1. The intention of Parliament is to enact into law how, what, when and where the tax is chargeable or charged on taxpayers and then collected or recovered. The law is drafted by legal draftsmen. In general, the law as drafted is clear. However, draftsmen are sometimes fallible. The law then may not express what Parliament intended. An affected taxpayer may then, acting alone or on advice, dispute the manner in which he is taxed. A majority of such disputes can be settled by agreement with the assessors. However, there remain a few disputes that can be settled only at the level of the Commissioner General or the Board of Review or the Court of Appeal or, finally, the Supreme Court

2. Where a tax dispute is resolved before a court, the judgment will lay down the effective reasons for the judicial decision on the dispute. However, a judge may express certain observations, in passing, that will help illumine the understanding of his reasons. The ability to separate the wheat (reasons) from the chaff (observations by the way) is crucial to the proper tax characterisation of a transaction for the purpose of resolving a tax issue.

3. Judges, lawyers, self-trained taxpayers, consultants and tax officials are guided generally by the reasons underlying cases decided in this country. Foreign decisions are relied on when a local tax situation is not adequately covered in the local cases. However, the reliance on a foreign decision must be exercised with care since, generally speaking, our tax law as a body is not on par with the tax law of another country on which a foreign decision is based. No doubt, a specific piece of tax law in another country may correspond to a like piece of law in our country, wholly or substantially. In such circumstances it seems permissible to adopt or adapt the foreign decision to resolve a tax dispute.

4. The specific definitions of certain words and phrases set out in section 217 of the Act, and, where such definitions are not available, judicial definitions that have won general acceptance and definitions set out in current or recent editions of sound legal and English language dictionaries may be studied. Further, where there is a conflict in meaning between an English word or phrase and the word or phrase that corresponds to it in the Sinhalese language edition of the Act, the Sinhalese language meaning takes precedence. A cautionary reference to a sound Sinhalese-English dictionary is advisable, to help cope with the language trap.

5. In resolving legal tax issues more tools are required than a mere acquaintance with the meaning of a word or phrase. There are certain rules of statutory interpretation that have been evolved and used by judges, legal scholars and lawyers. In this country, statutory interpretation rests on the bedrock of the Interpretation Ordinance (IO). In “Principles of Ceylon Law” (1972) by the late Hon. H.W. Tambiah, Q.C., it is stated (ibid, p 107) that “The IO makes provision for the interpretation of statutes”. What this means in effect is that the IO gives form to every act of Parliament and legitimises the use of commonly accepted rules evolved over time for the interpretation of statutes. There are many excellent works of reference on the subject.

6. Income tax legislation in this country has passed through a process of lineal succession through consolidation and re-enactment, beginning with the Income Tax Ordinance (1932) and moving through successive Inland Revenue Acts, No. 4 of 1963, No. 28 of 1979, No. 38 of 2000 and culminating in the current Act, No. 10 of 2006.

7. Of the several rules of statutory interpretation a few that are commonly invoked in interpreting taxing Acts are:

i. The rule of strict construction – “ Where the language of a statute is clear it would not be competent for a court to adopt what is known as a logical interpretation and introduce words for that purpose which are not found in the statute. Such statutes must be construed according to the plain grammatical meaning of the words contained therein. (Madanayake v Sivagnanasunderam, 1951, 53 NLR 25; Suffragam Rubber & Tea Co. v Mushin, 1953, 55 NLR 44.) (ibid, Tambiah, p 108). See also the more modern approach as enunciated by Lord Wilberforce in W.T. Ramsay v IRC (1982, AC 300 at 323): “A subject is only to be taxed on clear words, not on ‘intendment’ or on the ‘equity’ of an Act….What are ‘clear words’ is to be ascertained on normal principles; these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded…”

ii. It is relevant to observe that Wilberforce made his observation in the context of tax avoidance and not to limit the rule of strict construction that, ordinarily, will continue to apply.

iii. The rule of beneficial construction – “Express and unambiguous language is absolutely indispensable in statutes passed for the imposing of a tax… for such a statute is strictly construed… In a taxing statute, therefore, if two constructions are possible, one in favour of the assessee and the other in favour of the assessor, the Court must adopt that construction which is favourable to the assessee.” (1962, A.H.V. Mohamed v CIR, SLTC Vol. III, 172 at 178.)

iv. The Act must be read as a whole to ascertain the scheme of the Act.

v. Words and expressions used in the Act must be read in their context. Special definitions enumerated in Section 117 will, in general, apply throughout the Act unless the context otherwise requires. This qualification is sometimes overlooked by unskilled readers of the Act.

vi. The courts will try to avoid highly inequitable or manifestly unfair results. ( per Lord Reid in Coutts & Co v IRC, 1953 All ER 418 at 421)

vii. There is a presumption that the machinery of taxation is subordinate to the charge of tax. A withholding tax provision cannot override the charging provision if the recipient of the income on which tax is to be withheld, is not chargeable on the income concerned.

7.1 Some provisions of the Act confer on the Commissioner General power to frame by notice in the Gazette, meanings or explanations of certain words or expressions used in the Act. Section 17(1)( c) of the Interpretation Ordinance clearly provides that the Commissioner General’s power is subject to the consideration that “no rule shall be inconsistent with the provisions of any enactment”.

This topic is of sufficient importance that a reference to an authoritative observation is thought necessary. In “Administrative Law” by H.W.R. Wade & C.F.Forasyth (7th Edn., pp 880-881), the authors comment: “…in a later case* a purchase tax regulation made by the Commissioners of Customs and Excise, and duly laid before Parliament, was held to be invalid… Their regulation provided that where a proper return was not made they might themselves determine the tax due and that the amount so determined should be deemed to be the proper tax payable.

This was held ultra vires as an attempt to take arbitrary power to determine a tax liability which was properly to be determined according to the Act with a right of appeal to the court, and as an attempt to oust the court’s jurisdiction. The court regarded the regulation as an arbitrary and unreasonable exercise of the power conferred.”

(*Commissioners of Customs & Excise v Cure and Deeley Ltd., 1962, 1 QB 340)

(The writer is a tax consultant and past President of the Sri Lanka Institute of Taxation. He has taught taxation to the professional students of the institute and served as an examiner for the professional examinations. He is a writer on tax topics and his articles have been published locally in some newspapers as well as the Sri Lanka Tax Review journal. His specialised articles have been published internationally in the Reports of the Annual Congresses of the International Fiscal Association based in The Hague, The Netherlands. He is the Immediate Past Chairman of IFA – Sri Lanka Branch.)