Tax expert challenges key clauses of Inland Revenue (Amendment) Bill before SC

Prasad Dasanayaka

A significant constitutional challenge has been filed before the Supreme Court (SC) against provisions of the proposed Inland Revenue (Amendment) Bill 2026, raising concerns over judicial independence, taxpayer rights, and fiscal transparency. 

The petition has been lodged by Prasad Dasanayaka, who is a Fellow Member of the Institute of Chartered Accountants of Sri Lanka. He argues that two specific clauses of the Bill, Clauses 4 and 31, are inconsistent with fundamental provisions of the Constitution.

At the heart of the petition is Clause 31 of the Bill, which introduces new provisions allowing the Commissioner General of Inland Revenue to issue certificates confirming tax defaults. According to the petitioner, these certificates would be treated as conclusive evidence in Court, effectively preventing Magistrates from questioning their accuracy. 

The petitioner contends that this framework undermines the role of the judiciary by reducing Magistrates to what is described as a “mere conduit,” with no discretion to assess whether the tax in question is excessive, incorrect, or under appeal. 

Such a mechanism, the filing argues, amounts to an unconstitutional transfer of judicial power to an administrative authority, in violation of Articles 4(c) and 105 of the Constitution, which vest judicial power exclusively in courts and legally established institutions. 

Clause 4 of the Bill has also come under scrutiny for its proposed redefinition of “reserves” in calculating allowable interest deductions for companies. The amendment seeks to include negative retained earnings, essentially accumulated losses, within the definition of reserves. 

The petitioner argues that this change would disproportionately affect loss-making companies by restricting their ability to deduct interest expenses, even when their capital structures are identical to those of profitable firms. 

A comparative example presented in the petition illustrates how two companies with identical share capital and borrowings could face different tax liabilities solely based on whether they report profits or losses. 

This, the petitioner claims, violates Article 12(1) of the Constitution, which guarantees equality before the law and equal protection of the law, as there is no rational basis for such differential treatment.

In addition to constitutional concerns, the petition raises serious questions about the legislative process behind the Bill. It alleges that the proposed changes effectively introduce new tax burdens without prior disclosure in the national Budget. 

The petitioner points out that the 2026 Budget speech and related fiscal reports did not mention any intention to redefine reserves in a manner that would increase corporate tax liabilities. 

This omission, it is argued, amounts to a form of “stealth taxation,” bypassing the constitutionally mandated Budgetary process and undermining Parliament’s exclusive control over public finance under Article 148. 

The petition urges the SC to declare the impugned clauses unconstitutional unless approved by a two-thirds majority in Parliament and, if required, a public referendum. 

Legal analysts note that the case could have far-reaching implications for tax administration and legislative practice in Sri Lanka, particularly in reinforcing the boundaries between executive authority and judicial oversight.

The matter is expected to be taken up for determination in the coming days.