Proposed Inland Revenue Bill needs longer transition

Monday, 10 July 2017 00:58 -     - {{hitsCtrl.values.hits}}

  • Tax experts appeal for implementation to be pushed to April 2018
  • Insist IRD officials should also be given more time to extensively study new law 
  • Say retrospective nature could be changed by Govt.
  • SC petition filed on Bill, IRD unions meet today to decide on indefinite strike action  

By Uditha Jayasinghe 

Tax professionals have called on the Government to give a longer transition period for the implementation of the proposed Inland Revenue Bill, which was tabled in Parliament last week, allowing it to be enacted from April 2018. 

Ernst & Young Head of Tax Duminda Hulangamuwa told a forum organised to discuss the new bill the Government had indicated the legislation would likely not be implemented retrospectively from 1 April 2017, as specified in the current draft, but could be pushed later into the year. 

5Ernst & Young Head of Tax Duminda Hulangamuwa

“The Government has strongly indicated to us during discussions the bill would be prospective, and implemented after it is passed in Parliament. So implementation could be later, possibly from October. But we still feel a longer transition period is important as tax professionals need time to study and understand the new legislation. Therefore we feel implementation from April 2018 is a more realistic timeline,” he said. 

The bill will give sweeping new guidelines on income tax, investments and imposes stringent penalties on tax evasion. Therefore Inland Revenue Department (IRD) officials also need to study it in great detail to ensure that enforcement is improved significantly, he added. The Government has previously insisted the new legislation is essential to tackle both collection and broadening of the tax net in Sri Lanka.

“It is important that companies must see how the tax function can be integrated with business to make sure that the business can achieve its growth objectives. It is expected that the IRD will aggressively look at what companies are paying and where they are paying,” he said. 

Hulangamuwa, however, observed that the Bill does make an effort to simplify taxes and encourage more people to be folded into the tax net. 

The Government’s aim to increase public revenue is central to its goals of fiscal consolidation and is supported by the International Monetary Fund (IMF). The World Bank has estimated public revenue could rise to as much as 16% of GDP from the current level of about 12% if the new Bill is adopted.

Among key changes is the imposition of Capital Gains Tax, though stock market returns are exempted, and a revision of taxes imposed on Foreign Direct Investment (FDI) projects where tax concessions are given after the actual implementation of projects is begun. 

Certain categories of new FDI projects would also need to employ at least 250 people to be eligible for tax concessions. However the bill gives provisions for pre-existing FDI exemptions or holidays to continue without change.   

Current exemptions including exports of services, services performed outside Sri Lanka, entrepot trade, redemption of units in a unit trust, interest from the sale of sovereign bonds and development bonds, buying from one country and exporting to another country and subsidies given to plantations have been removed from the new draft. 

Proposed tax rates have been divided into a three-tier structure. Businesses falling into SMEs, exports, education, promotion of tourism and IT would be taxed at 14% (up from 12%). All other industries including banking, finance, insurance and leasing would be taxed at 28%. Sin tax on alcohol, gambling and cigarettes would be 40%.

A slew of industries and organisations such as deemed exports, construction services, services to exporters, healthcare services, transhipment and shipping agent services, warehousing, agro processing, alternative energy including hydropower projects, and clubs and associations would see their tax rates rise to 28% from current levels of 12% or 14%.

Harsher penalties for noncompliance would entail that if tax payable is below Rs. 10 million it would come with a 25% underpayment, higher than Rs. 10 million then 75% of underpayment. Wilful evasion of Rs. 10 million would come with a Rs. 10 million underpayment and two-year imprisonment. Since it has been moved in Parliament stakeholders have two months to present their objections and effect committee stage amendments before the bill is debated and passed by Parliament.   

To this end a petition was filed in the Supreme Court on Friday challenging the constitutionality of the Inland Revenue Bill. Chartered Accountant Raja Nihal Hettiarachchi, in his petition says that some of the fundamental features of the present legal regime under the Inland Revenue Act No. 10 of 2006 have been omitted in the new Bill and that this is in direct contravention with Articles 3 and/or 4(c) or 4(d) or 12(1) and/or 14 (1)(a) and/ or 148 of the Constitution.

The petitioner claimed that Section 163(3) of the Inland Revenue Act No. 10 of 2006 makes it a mandatory requirement for the Commissioner General of Inland Revenue to give reasons for the rejection of a return filed by the taxpayer. This fundamental requirement has been omitted in the impugned bill thus rendering the said bill inconsistent with the Constitution. His petition states that the disclosure of reasons for rejection of the return is a mandatory precondition for taxpayers to determine whether an appeal should be lodged.

Clause 135(2) and or 135(3) of the bill which extends the time bar for the assessment against the returns of income and computation of tax liability filed by a taxpayer from one and a half years to four years is arbitrary, unreasonable and unconstitutional, the petitioner states. He notes that the four-year extended time bar contemplated in the impugned bill is made applicable to both a taxpayer who has filed a return under self-assessment and those who do not file a return, which is discriminatory.

The petitioner also calls for clarification on savings or earnings that are kept as foreign exchange, which is not specifically exempted from tax in the proposed bill and says the proposed legislation fails to impose time limits of the IRD Commissioner General to excise certain powers.   

Meanwhile the IRD trade unions will meet today to decide on indefinite strike action over the Government’s decision to revise revenue legislation. The unions charge the proposed tax bill had been introduced without consultations with the unions and opens up the possibility the independence of the department would be affected, allowing the Finance Minister to make appointments and demand confidential details of taxpayers from the department.