The Supreme Court this week issued a ruling on the VAT case, decreeing that the due process was not followed and hence, the imposition of the tax – already in place – cannot be proceeded with.  There was no notice however on the Inland Revenue Department (IRD) website or otherwise informing the public of the [...]

The Sunday Times Sri Lanka

VAT ruling victory for ‘good governance’


The Supreme Court this week issued a ruling on the VAT case, decreeing that the due process was not followed and hence, the imposition of the tax – already in place – cannot be proceeded with.  There was no notice however on the Inland Revenue Department (IRD) website or otherwise informing the public of the court decision, which should have been done like earlier when the IRD posted a notice dated July 12 which announced the suspension of the VAT tax pending a determination of the court.  The ruling not only creates a precedent but also triggers a lot of alarm bells since on many previous instances, mostly by the previous regime, where taxes were imposed without the mandatory authorization of parliament but formalised later with the ‘retrospective effect’ clause.

This is no fault of the courts which was asked to adjudicate on a legal point raised by petitioner – Wimal Weerawansa as to whether the VAT amendment can be imposed without the required bill being submitted to the legislature. After hearing the submissions, the court ruled that it is a ‘nullity (meaning not legally binding)” as set out in the due process which requires that all monies or taxes for state spending must be approved by parliament.  Disappointed government ministers took the position that it was unfair to criticise the state over a process that has been followed for many years – ie. imposing taxes without prior approval of parliament.  In a practice widely resorted to during the Mahinda Rajapaksa regime, the Finance Ministry imposed taxes and only thereafter presented the bills to parliament.

Though it was not the due process, no one in the then opposition (United National Party) chose to challenge this position in court the way Weerawansa did and, succeeded. On the other hand the counter argument could be that parliament (particularly opposition) was clashing with the judiciary headed by chief justice Mohan Peiris and that there was a feeling that justice would not me meted out if taxes were challenged. However the argument that ‘if-they-did-it, we-should-also-be-allowed-to-do-it’ doesn’t hold water as two wrongs don’t make it right and the court has given a clear ruling which in future bars any taxes being imposed without parliamentary approval.  Though the new Maithripala-Ranil administration hoped to get away as they did last year in implementing taxes and submitting the bills thereafter, there were other reasons that led to the delay in the bills being presented to parliament.

Among them were disagreements in the Treasury which has been split into two sections – the old guard and a new team working directly under Finance Minister Ravi Karunanayake – and also the fear that the bills would get defeated by a majority vote. While these were concerns, no one – least of all the minister, prime minister or president – would have imagined the VAT bill being challenged based on ‘due process’.  When the matter came up last month, court ordered the suspension of the tax (which had been increased to 15 per cent from 11 per cent since May 2 and was being imposed) until the case was completed or parliament followed the due process. The government was then planning to discuss the second reading of the bill on August 11 but the court decision conveyed to the Parliamentary speaker on Tuesday stalled the process.

What has surprised tax experts is that the government didn’t use another section of the VAT law to formalize the tax without immediate recourse to parliament. A 2003 amendment to the VAT Act shows that the minister could made order changing the rates and “… shall be in operation immediately upon the Minister, affixing his signature (to the order)” and that such order “shall as soon as convenient be published in the Gazette and that every such order shall as soon as convenient thereafter be approved by a Resolution of Parliament.”  The finance minister is also on record saying at a media briefing soon after the court suspended the VAT increase that he would use the above law but that never happened.

On the other the authorities may have been reluctant to resort to this regressive piece of legislation in an environment of good governance and transparency, and cannot be faulted for that. But resorting to a ‘blind leading the blind’ practice of dumping taxes on the population sans the due process has brought greater headaches – foremost being the struggle to collect much needed revenue. There is little doubt the government needs money, desperately too for, among other matters, to settle off old debts mounting to billions of rupees. Borrowing has rapidly increased to pay off loans while tax revenue is not coming in.

Even if a new VAT bill is quickly presented to parliament, whether it would command the support of the government from both parties is uncertain.  The chaotic state of affairs in the tax collection and implementation process is also a reflection of often ad-hoc decision making and behaviour trends that have nullified much of the ‘good’ by the administration. Two examples being the Central Bank Bond saga which forced the exit of Central Bank Governor Arjuna Mahendran (not seeking a second term) but the latter waiting in the wings for a new appointment and accompanying the Prime Minister on recent foreign tours, while the coal scam examined by a committee has been accused of whitewashing the deal with a report saying there was a saving instead of a corrupt deal.

The joint opposition is overjoyed by the Supreme Court verdict on VAT and has threatened to use the courts to stultify or delay other proposed bills. It is ironic. Opposition parties or even litigants in the last regime were reluctant to seek redress from courts as there were serious doubts about getting a fair judgment whereas the ruling party went to court for they were ‘assured’ of a decision in their favour.  Today the opposition is happy that the judiciary is independent and its recent decisions prove that. An independent judiciary – that’s saying a lot for this government which the current opposition must be thankful for.

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