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Sunday Dec 15, 2024
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By S.S. Selvanayagam
In relation to the Written Submission to the Supreme Court in respect of the Inland Revenue Bill, the Attorney General has shrugged off insinuations on the Inland Revenue Bill and is amenable to address the genuine concerns and prejudices by appropriate amendments.
Additional Solicitor General Farzana Jameel with Senior Deputy Solicitor General Arjuna Obeysekera, State Counsels Suren Gnanaraj, Kaniska de Silva, Chaya Sri Namuni and Hashini Opatha appeared for the Attorney General and Finance Minister Mangala Samaraweera has made this submission on behalf of Finance Minister Mangala Samaraweera and the Attorney General.
The Written Submissions are made further to the oral submissions on the following matters:
(1) Background to the present law and the need for a new law;
(2) The object and purpose of the new Inland Revenue Bill;
(3) The jurisdiction of the Supreme Court in respect of Bills concerning taxation;
(4) Parliamentary control over public finance;
(5) Impugned clauses of the Bill and why the arguments of the Petitioners are misconceived
Clause 67 of the Bill was the Secretary of the Insurance Association of Sri Lanka and the Association itself, on the manner in which the profits and income of life insurance companies was to be computed for tax purposes. Attorney General states that the complaint of the Petitioners did not give rise to any violation of any provisions of the Constitution, and only related to the manner of determining the profits and income of such businesses.
In the spirit of co-operation adopted by the Government of accommodating the views and concerns of all stakeholders, the discussions continued even after the filing of these two applications, and the parties reached an agreement on 20 July 2017 on the manner in which the profits and income of life insurance companies were to be taxed.
Clause 68 (1) of the Bill was impugned on two grounds that Non-Governmental Organisation (NGOs) is loosely defined and that there is no means by which the authenticity or genuineness of its activities can be ascertained, and that the Commissioner General has been vested with an unfettered discretion to reduce or remove the total tax payable by the NGO.
AG submitted that the interpretation clause (Clause 195 of the Bill, page 181) defines an NGO for the purposes of this Bill as follows:
“Non-Governmental Organisation” means any organisation or association, whether incorporated or unincorporated, formed by a person or a group of persons on a voluntary basis and which is nongovernmental in nature, and established and constituted for the provision or relief and services of a humanitarian nature to the poor and destitute, the sick, orphans, widows, youth, children; or generally, for the provision of relief to the needy, unless such organisation or association is determined by the Commissioner-General not to be a non-governmental organisation, but in all cases does not include a charitable institution;”
This definition is similar to the definition of a Voluntary Social Service Organisation under the Voluntary Social Service Organisation (Registration and Supervision) Act No 31 of 1980, as amended by Act No. 8 of 1998. This Act and the Regulation made thereunder is the currently applicable law which governs the registration, de-registration and administration of NGOs operating in Sri Lanka and is a law implemented by the Registrar of Voluntary Social Service Organisations. Therefore, it is respectfully submitted that the NGOs referred to in the impugned Inland Revenue Bill are those NGOs which are registered under Act No. 31 of 1980 as amended. In those circumstances, it is respectfully submitted that there is no merit in the Petitioners first contention.
Clause 68(1) of the Bill requires a NGO to pay an additional tax of three percent on amounts received in each year of assessment by way of grant, donation or contribution or in any other manner. Therefore, the power of the Commissioner General to reduce or remove the tax payable by a NGO under Clause 68(2) of the Bill is a power to reduce or remove only the “additional tax of three percent” payable by a NGO under Clause 68(1) of the Bill.
Clause 68(2) of the Bill does not confer power on the Commissioner General to remove the total tax payable by the NGO on other sources of income. In those circumstances, it is respectfully submitted that the Petitioners second contention is entirely misconceived. Accordingly, AG submitted that clause 68 in its totality is not vague, or unreasonable and is not inconsistent with the Constitution.
The complaint of the Petitioners in is that exemptions granted to religious institutions under the present Act No. 10 of 2006 have been taken away and that religious institutions that were hitherto not liable to pay tax, will now become liable under the proposed Bill. The Respondents state with respect that the complaint of the Petitioners is based on a complete misunderstanding of the existing law.
The present law on sources of income is contained in Section 3 of the Inland Revenue Act No.10 of 2006. In respect of income from immovable property, there are two sources of income, namely (a) Net Annual Value and (b) Rent. Net Annual Value is computed using a notional income which is chargeable with income tax even though the owner receives no income from it.
The exemptions from income tax are contained in Section 7 of the present Act. In terms of the said Act, the Net Annual Value of a place of public worship and other premises owned, occupied or administered by such institution had been exempted from income tax, to the extent provided for in Section 7 of the Act.
In relation to other income generated by charitable institutions, there are currently no exemptions in force following the enactment of the Inland Revenue (Amendment) Act No.08 of 2012. Therefore, all such business profits generated by charitable institutions are liable to tax.
In terms of the new Bill, net annual value is no longer a taxable source of income. In those circumstances, charitable institutions would no longer be required to pay tax on the nett annual value of place a place of public worship and other premises owned, occupied or administered by such institution. Therefore, the need to grant a tax exemption in this Bill as sought by the Petitioners, in relation to on a ‘non-existent’ source of taxable income is entirely without merit.
In relation to other taxable income of charitable institutions, the Bill seeks to grant a tax credit against income tax payable by such an institution in restricted circumstances as set out in Clause 68(3) of the Bill.
For the purposes of meeting the argument of the Petitioners the relevant definitions in the Bill need to be considered. “Charitable institution” means the trustee or trustees of a trust or corporation or an unincorporated body of persons established for a charitable purpose only or engaged solely in carrying out a charitable purpose; “charitable purposes” means a purpose for the benefit of the public or any section of the public in or outside Sri Lanka, including the following categories:
(1) The relief of poverty;
(2) The advancement of education or knowledge other than by any institution established for business purposes or by any institution established under the Companies Act;
(3) Activities for the protection of the environment or eco-friendly activities;
(4) The advancement of religion or the maintenance of religious rites and practices or the administration of a place of public worship;
(5) Any other purpose beneficial to the community, not falling within any of the above categories;
It is thus evident that the definition of a charitable institution is wide enough to include places of religious worship.
Clause 68(3) of the Bill seeks to grant a tax credit against income tax payable by a charitable institution which provides in any year, institutionalised care of the sick or the needy. Clause 68(3), reads as follows:
“(3) Where any charitable institution provides in any year of assessment institutionalised care for the sick or the needy and where the Commissioner-General is satisfied that the cost of provision of such care is borne by such charitable institution, the Commissioner-General may, subject to specified conditions, grant a tax credit against the tax payable on the charitable institution’s taxable income for the year of assessment, provided it appears to the Commissioner-General that such reduction or remission is just and equitable in all the circumstances of the case.”
The AG submitted that the present Bill seeks to provide a tax credit to a charitable institution under restricted circumstances, which benefit is currently not available under the present law to such institutions.
The AG submitted that taxing other income of a place of religious worship does not amount to an infringement of a fundamental right guaranteed to every Citizen under Article 14(1)(e) of the Constitution – i.e. the freedom, either by himself or in association with others, and either in public or in private, to manifest his religion or belief in worship, observance, practice and teaching. In those circumstances, the Petitioners contentions are entirely devoid of merit and should be rejected.
The Petitioners have complained that the words, ‹and other tax officials, as may be necessary› in Clause 97(1) and the inclusion of the words, ‹any person appointed, employed or engaged by the Department in any capacity› in paragraph (b) of the definition of ‹Tax Official› in Clause 195 (page 186 of the Bill) violates Article 12 (1) of the Constitution. The Petitioners further complained 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.
The AG stated that on instructions received from the Ministry of Finance, due consideration has been given to the concerns of the Petitioners and that it is proposed to make the following amendments to Clauses 97, 98, 100 and 195 of the Bill during the Committee Stage of Parliament:
Clause 97(1) – the words, ‘and other tax officials, as may be necessary’ to be deleted.
Clause 97(3) – the words, ‘or any other person authorised by the Commissioner General to perform any functions under this Act’ to be deleted.
Clause 98(1) – the word, ‘officer’ to be deleted and substituted with the words, ‘Tax Official’.
Clause 98(2) – the words, ‘or to the incumbent of a specific post’ to be deleted.
Clause 98(3) – the words, ‘such other person’ to be deleted and substituted with the words, ‘Tax Official’.
Clause 99(1)
Clause 99 of the Bill provides for the establishment of the ‹Inland Revenue Incentive Fund› and the management thereof. It was the complaint that Clause 99(1) provides the Minister in charge of the subject of Finance 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 AG stated that the concerns of the Petitioner are clearly misconceived. Clause 99(1) is drafted in mandatory terms, as it uses the word, ‹shall›, thus leaving no discretion to the Minister. Furthermore, Clause 99(1) is in fact an improvement of Section 210 of the present Act, for the reasons that Section 210 does not specify who should have established the said Fund, whereas that ambiguity has now been removed, by clearly placing a mandatory obligation on the Minister to establish the Inland Revenue Incentive Fund.
Thus, the argument of the Petitioner in respect of clause 99 is ex facie flawed and without basis.
It was submitted by the Petitioner that the use of the word, ‹other agents› is inappropriate as the Department of Inland Revenue consists only of Tax Officials. The Respondent informed Your Lordships’ court that the relevant amendments will be moved during the Committee Stage by the deletion of the words “other agents”.
Clause 100 of the Bill provides that every person having a duty under the Act or being employed in the administration of the Act, shall regard as secret and confidential all information and documents the person has received in an official capacity in relation to a specific taxpayer, and may disclose that information only to the persons specified in paragraphs (a)-(j) of Clause 100(1).
The Petitioners challenged the constitutionality of this clause on three grounds, namely:
The Minister in charge of the subject of Finance has no power to supervise the Inland Revenue Department and therefore cannot be permitted to have access to information relating to taxpayers for such an unlawful purpose.
There is no rationale for permitting the Minister of Finance to have access to information relating to a specific taxpayer.
If such confidential information is disclosed, it could be abused by the Minister for other extraneous purposes not contained in the Bill.
In response to the first challenge, AG submitted that Article 43(1) of the Constitution provides that the President shall in consultation with the Prime Minister inter alia determine and assign subjects and functions to Cabinet Ministers.
The President has by virtue of the powers vested in him under Article 43(1) of the Constitution, by an Order published in Gazette Extraordinary No. 2022/34 dated 9 June 2017 [Annex ‹J›], expressly assigned the Department of Inland Revenue to the Minister of Finance. The President has also assigned the duty of implementing the present Inland Revenue Act No. 10 of 2006 to the Minister of Finance.
The President has further assigned inter alia the duties and functions of «Formulation of policies and programmes, monitoring and evaluation with regard to subjects of public finance and taxation and those subjects that come under the purview of departments» that come under his purview, «Management of national tax policies and productive use of Government Revenue» and «Overall supervision of revenue agencies».
The Minister of Finance has therefore been lawfully assigned the subject of supervision over the Inland Revenue Department in accordance with the provisions of the Constitution. There is thus no merit in the Petitioner’s first challenge to this clause.
With regard to the Petitioner’s second challenge, AG submitted that in terms of Article 148 of the Constitution, Parliament shall have full control over public finance. Article 42(2) of the Constitution provides that the Cabinet of Ministers shall be collectively responsible, and answerable to Parliament.
The Ministers are also individually responsible for matters that take place in the Ministries, Departments and agencies under their purview. Ministers are, or ought to be responsible to Parliament for their own decisions and the policies and efficient administration of their Departments.
Ministerial responsibility remains important, both in the operation of government and the executive’s relations with Parliament.
By constitutional tradition, a Minister answers to Parliament for his or her department. In the practice of Parliament, praise and blame are addressed to the minister and not civil servants. Ministers may not excuse the failure of policies by turning upon their expert advisers and administrators. The corollary of the minister’s responsibility is that civil servants are not directly responsible to Parliament for Government policies or decisions, although they are responsible to ministers for their own actions and conduct. The device of Parliamentary questions is a feature of Parliamentary democracy and must relate to public affairs with which a Minister is connected, matters of administration for which he is responsible, that is, which come within the work of his department or a Next Steps Agency, or his official duties or powers.
An admissible question is one that asks for information or action, and not merely raises an interesting topic for the day. The question must relate to a matter within the Government’s responsibility, or one that can be made so by legislation or administrative action.
Accordingly, the Minister of Finance is ultimately answerable to Parliament in respect of all matters affecting State revenue and in particular, matters relating to the administration of the Inland Revenue Department.
For example, if a question is raised by a Member of Parliament during question time from the Minister of Finance as to whether Sri Lankan residents whose names appeared in the “Panama Papers”(which revealed the largest illegal offshoring of taxable income in to tax havens) are registered tax payers paying taxes in Sri Lanka, the Minister of Finance would be required to call for such information in relation to such persons from the Inland Revenue Department in order to provide a response to Parliament, as it relates directly to Parliament’s control over public finance in terms of Article 148 of the Constitution.
It is therefore axiomatic that the Minister of Finance should have access to information relating to tax payers, which will assist him in monitoring the effectiveness of the Government’s tax policies and the implementation of the relevant tax laws.
The AG submitted that in the event the Minister’s power to obtain such information is removed, it may become impossible for the Minister to be answerable to Parliament in respect of all matters relating to the administration of State revenue. In those circumstances, unless the Minister is empowered as proposed in clause 100(1) (b), Parliament would not be able to exercise effective control over Public finance (which includes the Ministry of Finance and the Inland Revenue Department) as required by Article 148, read with Articles 42(2) and Article 3 of the Constitution, which would, in turn, seriously impinge upon the legislative power of the People. In those circumstances, Clause 100(1)(b) of the Bill is essential given the present Constitutional framework of checks and balances between the Executive and the Legislature. Hence, there is no merit in the Petitioner’s challenge to this Clause.
With respect to the Petitioners third challenge, the AG submitted that Clause 100(1)(b) only seeks to permit the Minister to obtain information in relation to a specific tax payer, where it is necessary for the purposes of carrying out supervision of the Department. Thus, the Minister’s power to call for information is restricted to the purposes for which the power has been granted, and can be used only for the purposes set out in the said clause, namely in the course of and for the purposes of carrying out supervision of the Department.
It must be noted that the said Clause provides for further safeguards to ensure the prevention of any unauthorised disclosure of such confidential information that may come into the hands of the Minister (as well as any other person to whom information can be made available in terms of sub-paragraphs (a)-(j) of Clause 100(1).
Thus, Clause 100(2) of the Bill requires the person disclosing confidential information to maintain secrecy except to the minimum extent necessary to achieve the object for which disclosure is permitted. Therefore, a tax official is empowered to provide to the Minister only such information as is necessary for the Minister to carry out supervision of the Department, which means that the Tax Official can ask the Minister to demonstrate that the said information is necessary for the purposes of carrying out supervision of the Department.
Clause 100(3) of the Bill casts a mandatory obligation on the Minister who receives such confidential information to maintain secrecy, except to the minimum extent necessary to carry out supervision of the Inland Revenue Department.
Furthermore, by virtue of the provisions contained in Clause 100(6) of the Bill, the Minister’s obligation to maintain secrecy continues even after he ceases to hold office.
Clause 191 of the Bill further provides that in the event of any breach of confidentiality, such person shall be guilty of an offence and is liable to be prosecuted and punished, with a fine and term of imprisonment.
It is trite law now that enactments need not eliminate or avoid the conferment of powers but should contain reasonable provision to preclude any ambiguity in the law which could have the potential for abuse of discretion in particular. Thus what needs to be done is to enact legislation that precludes the arbitrary exercise of powers and duties.
The AG submitted that the power vested in the Minister to call for information does not amount to a violation of the Constitution.
Thus the clause taken in its entirety does not amount to the grant of unfettered discretion which is violative of the Constitutional provisions. Thus, the said Clause is not in violation of Article 12(1) of the Constitution and the apprehensions of the Petitioner are misconceived in fact and in law.
