By S.A. Azeez
The Government has proposed to introduce a new Inland Revenue Act with the objectives of simplifying and modernising our Income Tax Law. It is a welcome move to change the tax laws in keeping with time. However, the tax laws have to be country specific and suit the needs and circumstances of the country.
Each revenue authority faces a varied environment within which they administer their taxation system. Jurisdictions differ in respect of their policy, legislative environment, their administrative practices and culture. As such, a standard approach to tax administration may be neither practical nor desirable in a particular instance.
Our current Inland Revenue Act has evolved over many decades coupled with establishment of related judicial precedence with the progress of the country. Changes to current Inland Revenue Act have been done with much care and diligence by successive governments. However, some of the provisions of the Act were not fully enforced to achieve the desired results.
In this context, introducing an altogether new Act based on a new model presumably a model followed by an African country require much discussions and debate with civil society, stake holders and professionals. Since we are a sovereign country, any other country or agency cannot force enactment of any laws. Instead, we have to draft our own laws to suit the needs of our country and the community which pay the taxes.
While commending the inclusion of many good features in the draft bill, it would be highly desirable to reconsider some of the provisions contained in the draft bill to achieve an efficient tax collection and administration and to stimulate the economy while maintaining fairness with taxpayers.
1. Under the existing Inland Revenue Act (IRA) reasons must be given by the assessor before making an assessment. This has been removed in the draft bill. Any taxpayer would not be able to make a proper appeal in the absence of reasons for assessment jeopardising the appeal process to the detriment of the tax payer.
2. In the current Act time bar for assessment is one year and six months if return is filed on or before 30th of November following the year of assessment. Under the new bill this has been extended up to 4 years. The processing time of tax returns could actually be reduced rationally with the digitalisation (automation) of operational activities in the Department of Inland Revenue. Unfortunately in Sri Lanka most business entities spend significant time and effort on tax compliance matters. Why should this processing be delayed for four years when it could be done within one or one and a half years? Even in India, a large country, time bar for assessment is one year.
3. Under existing IRA if a tax payer fails to make a valid appeal before due date for some valid reasons he can make an objection for the assessment. This relief has not been included in the new IRA bill.
4. Under the new IRA bill the consultant-lawyer or accountant assisting in preparing the return also has to sign the return in addition to the tax payer. This doesn’t make sense since consultants assist the tax payer in completing the return only with the information provided to them.
5. Penalties for failure to furnish returns has been increased up to Rs. 400,000. Under current Act it is Rs. 50,000. This penalty provision was in most of the cases not enforced.
6. Penalty for failure to furnish any information required by the Department has been increased up to Rs. 1 million. Surprisingly, a tax payer who pays tax of Rs. 10,000 annually may be called up on to pay a penalty of Rs. 1 million for not furnishing a small piece of information. Thus, this provision, if arbitrarily enforced, may result in an unreasonably high penalties for a genuine small tax payer on account of a minor lapse on his part.
7. If an entity fails to pay tax on time, every person who is or has been a manager of the entity at any time since the relevant time is jointly and severally liable with the entity and every other such person for payment of the tax. This expands tax liability over different parties beyond the actual defaulter of tax.
8. Withholding tax on rent and partners’ income from partnership are not subject to any minimum limit of rent income or partnership income. Even small boutiques will have to deduct and pay this tax. Unless reasonable minimum limits are stipulated it would be administratively difficult to implement these taxes.
9. Capital Gain Tax has been introduced in the new bill. This is long overdue and a welcome move. In fact this is required in line with the concept of equity in taxation due to growing investments in capital assets. Capital gain is calculated as the difference between the consideration received and the cost of the investment asset at the time of realisation. The bill provides for the ascertainment of a deemed gain in circumstances other than death where a transfer has taken place for no tangible consideration. The capital gain will be taxed at the rate of 10%. According to the bill even if an asset is transferred by way of gift it would attract capital gain tax. Since there wouldn’t be any money considerations passing in such transactions people may be called up to pay taxes beyond their ability to pay such taxes. In addition, the capital gain amounts can be considerable since the cost of acquisitions could be very low in many cases. This section needs greater clarity for it be practical at implementation level.
10. The bill does not apparently provide for any tax concessions for Foreign Direct Investment (FDI) other than enhanced depreciation allowances. Foreign Direct Investment is crucial for future growth, development and macroeconomic stability of the country. For instance Malaysia offers tax incentives ranging from partial taxation to 10-year tax holiday for strategic projects, high technology investment etc. India grants many concessions on regional basis for FDI and agricultural income is totally exempt from income tax making it a lucrative investment destination for investors. The policymakers should recognise how important strategic tax planning is from investors’ point of view. We have to consider the reality in the region and international context in formulating tax policies
The taxation policies should not be imposed as punishments to taxpayers. However, policies and procedures can be expanded to deal with tax evasion while focusing on tax content and tax base at the same time. In this direction, integration or interconnection of Inland Revenue Department with the banking system and other vital institutions would be a reliable source of information about taxpayers and potential tax payers. Policy makers should consider socio economic consequences and the effectiveness when implementing tax framework as a developing nation.
(The writer, FCA, ACMA CPA, is a Chartered Accountant and Tax Consultant.)