Dr. K. Kanag-Isvaran
Following is the third part of the full speech made by Dr. K. Kanag-Isvaran, President’s Counsel, at the 22nd Annual
Oration on Taxation, organised by the Institute of Chartered Accountants of Sri Lanka.
Once the normal review/appeal process is over, the time for recovery arrives. Time bar is perhaps the first port of call of the defenders of taxpayers from the assaults of the tax collector.
Actions for recovery of taxes
The Commissioner General of Inland Revenue (CGIR) is time barred from commencing any action after the expiry of a five-year period from the date the tax amount becomes default. The incidence of ‘tax in default’ occurs only after the expiry of 21 days pursuant to serving the notice in that behalf under Section 152 of the act of 2017.
The CGIR obtains the right to institute action to collect taxes only after the expiry of 21 days pursuant to sending notice to the taxpayer demanding payment where the tax is not paid by the date on which it is due and payable. Hence, sans ‘taxes in default notice’ no legal action could be instituted by the CGIR. This reflects the embodiment of an element of the rule of natural justice’. i.e. right to reasonable notice under Section 151 of the act. Though notice is required to be given, a taxpayer right has been curtailed since no right has been granted to the taxpayer to object or to be heard prior to collection by judicial process. This was a right that was available under the repealed act.
Time extension for payment, interest
A salient feature of the new Inland Revenue Act is that Section 151 of the act permits a taxpayer to seek an extension of the time for the payment of tax beyond its due date. This includes tax dues on account of self-assessments and other assessments. Where the CGIR fails to respond to the application for extended time within 30 days, the law deems the application for extension as granted. However, the taxpayer should be mindful that the extension comes with an interest charged on it. It’s a Greek gift!
Section 157 of the act contains provisions for interest to be charged on taxes in default calculated at 1.5 percent per month or part month compounded monthly.
While I am on the subject of interest, I might also mention that the new act provides for the taxpayer to receive interest in respect of refunds. Though a taxpayer is not entitled to receive interest from the time of making the claim, if the refund is made within 60 days, where however the delay is more than 60 days, there is an entitlement to collect interest for the total period.
Extinguishment of tax
An interesting provision in the act of 2017 is the power to write off monies due by way of taxes to the state by the minister. The minister will rise and shine! The act empowers the minister, on the recommendation of the CGIR and with the approval of the Cabinet, to order the extinguishment of the tax liability as a tax due to the government. A convenient fiscal pardon! Can you imagine the queues outside the Finance Ministry?
Thus, Section 162 of the Inland Revenue Act No 24 of 2017 states: “(1) Where the commissioner-general is unable to recover an amount of tax, interest or penalty due and payable by a person under this act, the minister may, on recommendation of the Commissioner-General and approval by the Cabinet, order the extinguishment of the liability as a debt due to the government.”
But take note of sub-section (2)! It states: (2) Where the commissioner-general determines that a person whose debt was extinguished under subsection (1) has assets that may be attached to recover all or part of the unpaid amounts, the liability for the debt may be reinstated by an order of the minister, approved by the Cabinet, revoking the order made under subsection (1).”
Can anybody tell me why this was enacted? The International Monetary Fund perhaps? Does sub-section (2) imply that the “pardon” is available only when the taxpayer is without assets or had assets but the commissioner did not know about it?
This is strange because as you know, many an avenue is available to the CGIR to recover the taxes – courts proceedings (Section 163), lien (Section 164), execution against the taxpayer property (Section 165), sale of seized property (Section 166), departure prohibition order (Section 167), priority in bankruptcy (Section 168), offset against payments (Section 169), third party debtors (Section 170), preservation of assets (Section 172), non-arm’s length transferees (Section 173), transferred tax liabilities (Section 174) and receivers (Section 175).
Should all these avenues be exhausted before the commissioner acts under Section 162 and the minister and the Cabinet rise in unison in support?
In this context, I would like to recall what the former British Prime Minister and ‘Iron Lady’ Margaret Thatcher said of the nature of taxes. She said: “Let us never forget this fundamental truth: the state has no source of money other than money which people earn themselves. If the state wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking someone else will pay - that ‘someone else’ is you. There is no such thing as public money; there is only taxpayers’ money.”
Tax representative be vigilant!
Another alarming development on recovery of taxes is that, now a tax collector has the right to take recovery action not only against the ‘taxpayer’ but under certain circumstance from his ‘representative’ as well – Section 146.
The tax collectors’ right against a ‘representative’ is twofold. He could pursue action against the representative to the extent of any assets of the taxpayer that are in his possession or under his control. In addition, the representative is personally liable with regard to the taxes in default:
- Where one alienates, charges or disposes of money received or accrued in respect of which the tax is payable or
- Where one disposes of or parts with moneys or funds belonging to the taxpayer in his possession or which comes to his hand after the tax is payable if taxes in default could have been recovered from such money.
The defence of the representative of the taxpayer in such an instance would be to plead that he had no knowledge of the liability or that the payment was made on behalf of the taxpayer to fulfil a priority in law or equity over the tax payment.
However, an important nuance that every taxpayer has to bear in mind is that a failure to perform duties stemming from the Inland Revenue Act cannot be shielded by pleading the negligence or failure to perform such duties by his representative.
Tax collector’s right against shareholders
Tax collector may also proceed against the representative or even a shareholder in the event of a winding up.
Hitherto, we were familiar with provisions in various tax statues extending their tentacles to catch the directors in respect of the taxes in default of a company even after it is wound up. The act of 2017 is even more enterprising in that has entrenched the provision to extend the tax net even to shareholders upon the company being wound up.
According to Section 148 of the Inland Revenue Act, where a company has wound up without having satisfied its tax liabilities, including the withholding tax liability, the shareholder of the company at the time of winding up or during the preceding year, shall be jointly and severally liable to pay the unpaid tax to the extent of a distribution of cash or property received from the company within one year to its winding up.
However, the person liable for the tax of a company under this section may invoke any rights as against the department that would have been available to the company.
Section 148 of the Inland Revenue Act No 24 of 2017, reads: “(1) This section shall apply to a company which is wound up without having satisfied its tax liabilities, including any liability to withhold and remit tax, (2) A person who was a shareholder of the company at the time of the winding up or during the preceding year shall be jointly and severally liable to pay the unpaid tax to the extent of a distribution of cash or property from the company received as a shareholder within one year prior to its winding up.”
(3) A person liable for tax of a company under this section may invoke any rights as against the department that would have been available to the company.
No shields for directors – a sword for tax collector
Defences that were available to directors from the time of M.E. de Silva V Commissioner General of Inland Revenue, 53 NLR 280, that the “Income Tax Ordinance does not make the principal officer of a company chargeable out of his personal assets with income tax levied on the company’s assessable income” has been gradually eroded by various tax statutes over the years and has now culminated in a clear expression that the company’s tax liability can become the personal liability of the directors.
The new act imposes crystal clear personal liability on the directors, chief executive officers, chief financial officers and every person who is purporting to act as a ‘manager’.
Section 149 of the Inland Revenue Act No 24 of 2017 provides”: “149:
(1) Where 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 shall be jointly and severally liable with the entity and every other such person for payment of the tax.
(2) Subsection (1) shall apply irrespective of whether the entity has ceased to exist or not.
(3) Provisions of subsection (1) shall not apply to a manager who has exercised the degree of care, diligence and skill that a reasonably prudent person in the position of the manager would have exercised in preventing in the initial and continuing failure to pay tax.
(4) Amounts payable to the commissioner-general by a manager under this section shall be a personal tax liability of the manager.
(5) Where a manager pays tax by reason of a liability under subsection (1), the manager may recover the payment from the entity as a debt due.
(6) A manager of an entity may not be assessed for an amount under this section after the period of limitations for collecting the relevant tax from the entity has expired.
(7) In this section “entity” means any taxpayer other than a partnership, unincorporated body or an individual; “manager” of an entity includes a person purporting to act as a manager of the entity and in the case of a company, includes a director, the chief executive officer and the chief financial officer of the company and “relevant time” is six months before the events that gave rise to the entity’s tax liability.”
The saving grace appears to be that one who has suffered for the tax sins of the company has recourse to recover the amount as a debt due from the company. A director who has exercised that degree of care, diligence and skill that a reasonably prudent person would have applied in the initial and continuing failure to pay tax is afforded a defence against the collector.
Protection of taxpayers’ rights
Finally, one of the concerns expressed to be addressed is the absence of proper mechanisms to articulate and lobby the interests and concerns of the body of taxpayers in general and of tax reform in particular with the tax policymakers and government on an ongoing basis.
Sri Lankan tax regime has provided safeguards to preserve the rights of the taxpayers by way of administrative review by the CGIR under the new Inland Revenue Act, right to appeal to the CGIR under some other tax statutes, right to appeal to the Tax Appeals Commission and thereafter on a question of law, to the Court of Appeal and the Supreme Court, as we have already noted. However, this process is limited in scope to the interpretation and construction and application of the relevant tax statutes only.
A taxpayer who desires a clarification on a matter pertaining to the interpretation of tax statutes may also resort to private and public rulings referred to in Chapter IX of the Inland Revenue Act. This too is strictly in relation to interpretation, construction and application of the technical aspects of the tax statutes.
Outside of the statutory scheme for addressing grievances, there is also the independent grievance redressing institutions such as the ombudsmen.
In Sri Lanka, out of the two types of ombudsmen, the public ombudsman called the ‘Parliamentary Commissioner for Administration’ was established by Article 156 of the 1978 Constitution. His mandate was to investigate and report upon complaints or allegations of the infringement of the fundamental rights and other injustices by public officers and officers of public corporations, local authorities and other like institutions in accordance with and subject to the provisions of such the law. I understand, an appointment to that office was recently made.
There are also two private ombudsmen functioning in Sri Lanka. They are the Financial Ombudsman and the Insurance Ombudsman.
The concept of ‘Tax Ombudsman’ was introduced in the budget of November 2004 by the then incumbent finance minister and the office was established on September 15, 2005, with the appointment of a retired High Court judge, who was the first and only holder of the office. The administrative framework and operational guidelines pertaining to the Tax Ombudsman mandated the appointment to be a period of two years. No successor was appointed pursuant to the completion of his tenure. Hence, that office remains in abeyance.
In Pakistan, Federal Tax Ombudsman Ordinance of 2000 governs the institution and appointment of the Tax Ombudsman under the hand of the president. Within 60 days of lodgment of a complaint, the ombudsman is obliged to communicate his findings and recommendations to the Revenue Division, who in turn is required to report on remedial action taken within the time stipulated.
The South African Tax Ombudsman has been constituted by the Tax Administration Act of 2011 while the Tax Ombudsman office was set up in 2013. The Tax Ombudsman is appointed by the finance minister and is accountable to the Finance Minister. The key responsibilities of the South African Tax Ombudsman office have been identified as ‘to maintain a balance between Revenue Authorities’ powers and duties, on the one hand and taxpayer rights and obligations on the other.
Achieving this balance will enhance the degree of equity and fairness in tax administration and improve taxpayers’ perception of the country’s tax system as being fair and equitable. International experience shows that taxpayers are then more inclined to fully and voluntarily comply with their tax obligations.
The Canadian Tax Ombudsman is appointed by the Governor in Council with a three-year tenure. The Canadian Tax Ombudsman’s mandate is to assist, advise and inform about any matter relating to services provided to a taxpayer by the tax office. The Indian Tax System consists of Income Tax Ombudsman and many Indirect Tax Ombudsmen.
The need for a Tax Ombudsman is now more urgent than ever before due to the changes in the income tax regime and the implementation of the Revenue Administration Management Information System, to prevent see taxpayers running pillar to post. I believe the time is opportune to address the concerns of the taxpayers by appointing a Tax Ombudsman, along the lines of the South African experience to achieve a balance that will enhance the degree of equity and fairness in tax administration.
We should not be wanting the phenomenon of the Parisian ‘yellow vests’ with our proposed ‘carbon tax’.
In conclusion, I wish to refer to popular phrase used by American revolutionists “no taxation without representation”, which is also one of the Rs in the four Rs of taxation (Revenue, Repricing, Redistribution and Representation), which demonstrates the ‘objects of taxation’. The taxpayers know the government may be able to tax them but they also need to know the use of such taxes. Accountability is mandatory. Reasons for and uses of collected taxes should be made available to the public and this in turn brings accountability. Hence, one cannot deny that ‘Representation’ is one of the most significant rights of the taxpayer.
As the former President of the United States of America Ronald Reagan said, “The problem is not that the people are taxed too little. The problem is that government spends too much.”
Before I conclude, I seek your permission to record a debt of gratitude to KPMG Tax and Regulatory Associate Director Rifka Ziyard for her immeasurable assistance in the preparation of this presentation.