IMF trying to ‘foist’ Ghana’s tax laws on Sri Lanka? Business groups convey concerns to PM & FM
Posted on April 1st, 2017
by Suresh Perera Courtesy The Island
April 1, 2017, 7:41 pm
The proposed new Inland Revenue Act has run into stiff opposition from key industry players, who described the controversial move to replace the existing law, as a “retrograde step that’s bound to create confusion and impinge on the overall revenue collection mechanism”.
Asserting that the proposed law departs from the very foundation and fabric of the existing Act, financial sector experts warned that if the new proposals are adopted and implemented in their current form, hardly any judicial precedence, interpretations, practices and principles could be applied in the imposition, payment and recovery of income tax in Sri Lanka.
Apart from the phraseology used, which has no relation to the present Act, the new law attempts to fundamentally change the sources of income, method of calculating the taxable income, claiming deductions, assessment procedure and the administrative provisions, they pointed out.
“The biggest disaster is that the envisaged Inland Revenue Act was inspired by the International Monetary Fund (IMF) in a bid to generate more tax revenue but, instead of drafting a law to suit the country’s needs and demands, what this international lending agency did was to impose word by word the tax law of Ghana on Sri Lanka”, the experts noted.
“The IMF didn’t do anything extraordinary for Sri Lanka.It was a case of merely foisting Ghana’s tax law on us”, they said.
The IMF was good at imposing tax laws on dictatorships in countries such as Congo, Ghana, Libya and Myanmar, which had no history of laws. But, there was no fundamental basis to introduce a new tax regime without any knowledge of Sri Lankan businesses and the fundamentals of taxation, which have existed in the country for over 75 years, they said.
“The IMF will not be here everyday; they will slap it on us and go away”.
“If the objective was to modernize the law, the government should have drawn examples from developed systems such as in Singapore or Malaysia for adoption. The objective of falling back on a country like Ghana to enact legislation on taxation was necessarily flawed; the whole approach to this process was flawed”, they observed.
Any new tax law takes at least 10 years to settle down. Under these circumstances, who will take care of the loss of revenue? Moreover, there is no guarantee that the proposed Act will increase revenue. People will interpret it the way they want as nobody will know the correct definition of the new law, industry officials said.
“What happened was that the government discussed with the IMF the financial crisis facing the country and the relief package to stave off the balance of payment crisis. At that point, the IMF had observed that the tax law in Sri Lanka is too complicated and insisted on strengthening revenue collection. It would have been acceptable if this process was accomplished through more computerization, better HR resources, IT and software”, the experts explained.
The government, instead of saying the situation could be rectified by asking the Inland Revenue Department to draft a new tax law, had wanted the IMF to shoulder this task. It was entirely the government’s fault, they said.
“It will be a big achievement for IMF’s CV to say they drafted the tax law of Sri Lanka. For that matter, even an individual credited with drafting our tax law can secure a top job in the US, they added.
Any tax law in the world is complicated. There are no uncomplicated tax laws as taxation itself is inherently complicated, and it’s not everybody who can understand it. What was the fundamental concept and principle behind the attempt to replace the present Inland Revenue Act and change the status quo in a sphere that generates enormous tax revenue for the government?, they queried.
The fundamental question that arises in this backdrop is: who wanted these drastic changes through a new tax law? Was a new Act being envisaged because revenue collection is poor or the existing law has drawbacks due to bad drafting that people cannot understand it? If mistakes exist, the relevant provisions can be redrafted and there is no reason to kick out the whole Act, they explained.
The Sunday Island understands that representatives of the Institute of Chartered Accountants of Sri Lanka, Ceylon Chamber of Commerce and industry practitioners had raised their concerns with Prime Minister Ranil Wickremesinghe and Finance Minister Ravi Karunanayake at a recent meeting.
“The premier understood our position that there was no requirement for a new Act, but it was too late as the IMF had warned that the reversal of the process would mean there will no tranche forthcoming. As there was no choice, the IMF was asked to go ahead, the experts asserted.
“On examining the draft law, we wanted certain amendments incorporated, and it was with great difficulty that we managed to get something in, not everything. However, the proposed Act is still fundamentally flawed”,
Financial sector experts who have evaluated the Inland Revenue draft law believe that the proposed Act does not add any new sources of revenue and instead of plugging the existing loopholes would add new ones due to the brevity of the drafting. The existing knowledge of Inland Revenue officers will be obliterated overnight and they will need at least four to five years to study and understand the new law.
“The wealth of knowledge acquired over the past few decades by the Inland Revenue Department, judicial system, practitioners, students and tax payers will be lost overnight”, they cautioned.
The proposed Act is also not consistent with the existing law and until the transitional period ends, two regimes of law will continue. For example, taxation of finance leasing will change dramatically and until existing leasing agreements expire, two regimes will continue creating confusion and making administration more difficult, they pointed out.
The experts were of the view that the current law has more depth, better drafting and most parts of it are consistent with international best practices. The proposed Act also gives undue emphasis to less important sections, which have little relevance to the economy and ignores the more important sections on imposition and recovery.
If revenue collection falls below expectations, the main reason for loss of potential revenue is poor administration and collection effort and government policy on continued tax incentives. Introducing a new Act will not increase revenue collection, but instead reduce it due to lack of understanding of the law amongst tax payers as well as revenue officers at least in the short to medium term, they elaborated.
Recommending the rationalizing of tax incentives over a period of time to enhance the tax net, the experts called for the consolidation of the IR Act of 2006 and subsequent legislation enacted each year into one Act and remove repugnant sections, change the language, if certain sections are unclear or in doubt and introduce some sections drafted in the new Act especially on transfer pricing, international tax and advance rulings into the existing law without changing its fundamental structure.
If the government’s concern is to enhance tax collection, what needs to be done is to plug the loopholes in the law that leads to tax avoidance or evasion and make the IR department a more efficient and vibrant tax collection body. The solution is not to abolish the existing Act which was in force for over a century and replace it with a new law unknown to the IR department and the public, which, in any case, will not guarantee a higher collection of tax revenue, the experts noted.
Commissioner-General of Inland Revenue, Mrs. Kalyani Dahanayake, said that the proposed Act drafted by the IMF was referred to her department for observations.
There are some good aspects in the proposed law, she emphasized. “In fact, they agreed with us to a certain extent on the proposals we made”.
On the proposed adoption of the new law, she said it was the wish of the government that the Inland Revenue Act be replaced in keeping with international best practices.
With some amendments proposed by the Inland Revenue Department, professional bodies and industry practitioners, the draft law has now reverted to the Legal Draftsman for incorporation, The Sunday Island learns.