Prime Minister Ranil Wickremesinghe told the Bar Association convocation last week that the Government hoped to introduce new laws to replace archaic ones and that while Sri Lanka could be proud of having an old legal tradition in Asia, the country was behind others in the region when it came to enacting modern laws. Speaking [...]


New tax law: Capitulating to the IMF


Prime Minister Ranil Wickremesinghe told the Bar Association convocation last week that the Government hoped to introduce new laws to replace archaic ones and that while Sri Lanka could be proud of having an old legal tradition in Asia, the country was behind others in the region when it came to enacting modern laws.

Speaking further, the lawyer-premier named some of the laws in the pipeline as being, a new counter terrorism law to replace the PTA (Prevention of Terrorism Act), a new anti-doping law – and a new Inland Revenue law, which he said, would be presented either in May or June. Of course, he also spoke of the perennial problem of law’s delays.

Much of what he said rings true. Sri Lanka must come to speed with the modern world and its legal system needs not only new laws, but efficient administration of justice. To the credit of this Government, the RTI (Right to Information) Act was passed last year after being on ice for 12 long years under the Kumaratunga and Rajapaksa Governments. There was no political will on their part to pass this law – for obvious reasons. From being the first in South Asia had the law been passed back in 2004 when it was ready, Sri Lanka became the last to pass it in 2016.

In drafting these new laws, the old practice had been to copy British laws. Later, Indian laws were also looked at. In the case of the RTI law, various Indian state laws were studied because India did not have a national law at the time. Sri Lanka’s new Company law drew from New Zealand and Canada and the proposed Financial City (Colombo Port City) law is taking a leaf from Dubai’s law. All these had inputs from Sri Lankan experts in the respective fields to make them eventually, ‘home grown’.

But, lo and behold, the proposed new Inland Revenue law is a copy – chapter and verse — of the International Monetary Fund’s (IMF) model law – for Ghana. Not to discredit a fellow Commonwealth member-state like Ghana by any means, but why must Sri Lanka just cut and paste a law virtually drafted by an international lending agency when, as the Prime Minister correctly said, this country is the proud repository of laws that have stood the test of time – and only need some fine-tuning with the assistance of local stakeholders.

The Government cannot surely be so desperate for the next IMF tranche of US$ 1.5 billion in May/June to jettison decades of judicial precedence and principles of complicated tax law and overthrow the basic structure of the imposition of, payment and recovery maintained for a new law that will only introduce confusion in tax collection for at least the next ten years.

True, the tax net must be widened and tax collection must be robust. The subject has been a major issue for successive Governments as only some 20 per cent of the state’s revenue comes from direct taxes (less than a million tax files –of individuals and companies together) forcing Governments to increase indirect taxes like VAT. Tax avoidance and tax evasion are common in every country as no individual wants to pay taxes, voluntarily. But equally, no Government can function without revenue. Corruption and political interference in revenue collection are also a major factor in the Government losing out. Such was the exasperation that back in 2002, the then UNP Government wanted to bring the Inland Revenue, Customs and Excise Departments under one supra Authority. Trade unions protested and later, the Government was sacked in 2004.

Revenue collection has been facing fresh hiccups in the past two years. The Finance Minister’s Budget proposals either got rejected by his own Government, or they fell down in the implementation. Just this week, the Inland Revenue Department wrote saying the S-VAT system – VAT refunds, will continue (despite a decision to review) because of delays in the necessary enabling legislation.

Many of the stakeholders have already critiqued the Government’s move to ‘copy-cat’ the IMF law for Ghana. The Chartered Accountants of Sri Lanka have written to the Finance Minister saying it will be better if the Government consolidated the existing Inland Revenue Act and its amendments and removed sections “which are repugnant and redraft the sections that require clarity and clarification”. They said the proposed Act would only complicate matters – which is contrary to what the Minister told the Cabinet last week which eventually approved legislation to be in line with IMF commitments and levying a Capital Gains Tax.

Professionals in the field point out a whole host of concerns ranging from the use of unfamiliar American terminology and ignoring the rights of genuine taxpayers (if a self-assessment return is not accepted there is too much powers given to the department), accountants held liable for false declarations by the declarant, complicated calculations of depreciation allowances, no concessions or exemptions for retirement benefits like EPF, ETF, a cascading effect on tax dividends by repeated taxation, and lack of transitional provisions to name but a few.

They point out that due to the brevity of the drafting, new loopholes will open rather than close existing ones, Inland Revenue officers will need to learn the new law and there could be two regimes – the new and the old causing confusion. They believe that the new law will be a retrograde step, not a progressive one in revenue collection because emphasis has been laid on less relevant sections of the Sri Lankan economy rather than the more important ones. They also feel the new law will fundamentally change the sources of income, method of calculating the taxable income, claiming deductions, assessment procedures and the administration provisions. They fear litigation will rise as confusion reigns thus making tax law more complicated, not more simplified as should be the case.

These are what the stakeholders say. Instead, they recommend streamlining the poor administration and collection effort and consistent, rationalised Government policy on continued tax incentives in a bid to increase the tax net apart from consolidating the Act of 2006 and its subsequent amendments.

Many countries are now moving towards a cashless society. This week, the PM launched a new digital banking facility with Indian collaboration. He spoke of the millions, especially in rural Asia and Africa who have entered the banking system through this platform where virtual credit cards and 24×7 business hours will revolutionise the monetary world. Businessmen who fund political parties with undeclared slush funds in return for political favours will be easy to detect.

If the Cabinet last week approved the virtual IMF draft which local stakeholders seem to condemn, is the Government going to seek to implement it whether one likes it or not? Or is the IMF now a bigger stakeholder in Sri Lanka than the local stakeholders?

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