Inland Revenue Bill introduces criminal penalties for tax procedural failures

• Bill to introduce criminal liability for procedural failures 
• Penalties include a fine of up to Rs. 400,000, six months imprisonment, or both

By Shannine Daniel

A proposed amendment to the Inland Revenue Act is set to introduce strict criminal penalties for taxpayers who fail to meet key procedural requirements, marking a significant shift in enforcement.

Section 185A, a new provision in the bill, identifies several compliance failures that will now constitute prosecutable offences.  Under section 185A, a new section under section 185, certain offences have been identified; failure to file the annual statement, failure to file a return of income or any tax return, including capital gains, tax returns, income tax returns, withholding tax returns, and any other returns, failure to register with the Commissioner General of the Inland Revenue Department (IRD), and failure to appear before the tax authority when formally notified.

These obligations, previously treated largely as administrative requirements, will now carry penalties if ignored, and once a taxpayer is issued a written notice by the Commissioner General, non-compliance could result in immediate legal action. Offenders may face a fine of up to Rs. 400,000, six months imprisonment, or both.  “The Inland Revenue Act cannot be taken lightly going forward and there is nothing that we can do because the Supreme Court has given their mind to this,” KPMG Sri Lanka Head of Tax and Regulatory Suresh Perera cautioned, while speaking at a recent webinar on recent amendments to the Income Tax, Valued Added Tax (VAT) and the Social Security Contribution Levy (SSCL).

“The Supreme Court has said that this is within the constitution and this can be passed in the Parliament with a simple majority,” he added.

Furthermore, according to Perera, Section 18 seeks to broaden the definition of “reserves” to explicitly include negative retained earnings, accumulated losses and deficits in reserves. However, reserves arising from the revaluation of assets will continue to be excluded. 

“The definition of reserves we have to take from the Court of Appeal judgement of the Samson Rajarata Tiles Ltd. case,” Perera stated adding that in this case, the Court of Appeal ruled that the reserves do not include negative figures. “So, in other words when you are doing your calculations, keep in mind if you do not have positive figures for the reserves you put zero. Do not put a negative figure,” Perera stressed. According to Perera, the proposed amendment reflects a broader effort to strengthen compliance and improve revenue collection by holding taxpayers more accountable. 

However, he cautioned that the scope of the provision is wide, capturing routine obligations that businesses and individuals may sometimes overlook.

The bill is expected to be taken up for its second reading in Parliament on May 20.