News
Govt. gets millions from unlawful land taxes
By Namini Wijedasa
For more than one year, the Government has been levying a 15 per cent tax on leases of property to foreigners without first introducing legislation through Parliament.
The Government has also banned the transfer of private or state land to foreigners without amending the legislation—the Finance Act No. 11 of 1963—that continues to make it lawful for properties to be acquired by non-nationals. There is still no legal provision to prohibit the sale of land to foreigners.
Instead, the new rules are being implemented on letters sent by an official of the Ministry of Finance to the Registrar General’s Department under whose purview the Land Registries lie. In the case of the 15 per cent levy, which is paid to the Department of Inland Revenue, this is also unconstitutional.
Section 148 of the Constitution states, “No tax, rate or any other levy shall be imposed by any local authority or any other public authority, except by or under the authority of a law passed by Parliament or of any existing law”.
Despite knowing they are in legal limbo, lawyers representing foreign clients are going along with the changes because they have no choice. Letters to the Ministry of Finance seeking explanation and an early resolution of the anomaly have gone unanswered. A request from the Bar Association of Sri Lanka (BASL) for a discussion with Treasury Secretary P B Jayasundera has not been acceded to.
Several lawyers told the Sunday Times that their protests have been met with advice to challenge the status quo in court. While nobody has done so yet, it is learnt that the BASL is now drawing up papers. Last week, lawyers reiterated that the current situation—with the Finance Ministry saying one thing and the law another—is untenable.
Prospective foreign investors were discouraged by the absence of clarity, warned a senior partner at a well-established Colombo law firm that has a large portfolio of international clients. This was particularly true of the tax on the lease of property to foreigners. “I have clients who are willing to pay the 15 per cent but I have also had four or five clients who pulled out,” she said.
As with others in this interview (all of them leading lawyers with many years of practice behind them), she wished to remain anonymous.
“How do we advise foreigners?” she asked. “When they express interest, we have to concede that we don’t really know what Government policy is. Even the Board of Investment takes up the position that they cannot advise people about the law and its implementation. Their letters state that they are expecting an amendment in the relevant laws.”
“Officials keep saying this is a temporary thing but we have been going on like this for almost 18 months,” said another partner of the firm. Other lawyers said it was “embarrassing” to explain the aberration to foreign clients who expect straightforward answers to questions on a country’s laws. The trade and commerce sections of international missions based in Sri Lanka are also in a twist.
“I have asked the Finance Ministry many times about the prohibition of the sale of property to foreigners and it says it is in effect,” said a diplomat in one such mission. “But when I ask them whether it is codified and whether they can let me have the law, they cannot show me one. This is creating a lot of uncertainty.”
Some influential law firms have started writing to the authorities seeking clarification on legalities. One of them showed the Sunday Times a copy of a response from the Ministry of Finance. A paragraph in the letter read: “I wish to confirm that the policy relating to the acquisition of immovable properties as informed to the implementing authorities in the letters dated March 27, 2012, and May 21, 2013, issued to the Registrar General is implemented subject to formal legislation in place.” There is no indication of when such legislation will be presented in Parliament.
The lack of transparency also frustrates lawyers. The changes were first proposed in the 2013 budget which was read out in Parliament in November 2012. This was followed by written instructions from the Ministry of Finance dated December 28 of that year. Further directions signed by Director General of the Department of Fiscal Policy K.M.M. Sirwardana were issued in March and May, 2013.
None of these was released to firms and notaries who continued to execute deeds according to the law. But when they took these deeds for registration, they were cited the new instructions. Eventually, some in the legal fraternity used contacts to get copies of two out of three letters and circulated them.
For those who then consented to cough up the unlegislated tax —which amounts to 15 per cent of the total value of the lease and is payable by the lessee —it meant an additional trip to the Department of Inland Revenue.
Some clients have told their lawyers that they will pay up once the law is established. Such agreements are now on hold. “I have three or four clients who say they will definitely comply within the period of their lease if the legislation is in place,” said one of the senior lawyers earlier quoted. “As it stands, however, they cannot get a refund of this tax from their parent companies abroad.”
Under the new provisions, taxes on expensive, long-term leases can work out to millions of rupees. Lawyers say it is nothing short of incredible that the Government has got away with operating in a vacuum for so long -where letters from a Ministry official effectively supersede the laws of the land.
| PBJ says the procedure is normal
In a recent, wide-ranging interview with Treasury Secretary P. B. Jayasundera, the Sunday Times asked him why amendments had not been passed to give legal effect to some of the budget proposals. “It is law in the sense that regulations have been issued to respective line ministries from January 2013 that no foreigner can get outright land,” he said. “Land can only be leased up to 99 years, except if it is for diplomatic or strategic investment purpose.” Earlier, he said, a land transfer tax of 100 per cent was payable by a purchaser except when the investment was more than US$ 10 million. “The circular instructions are there and the law is going to Parliament for amendment,” he said, reassuringly. “The new law will come. It is with the Cabinet now.” “The budget proposal has applied a break,” Dr Jayasundera explained. “Otherwise, till the law comes, people will buy all the land speculatively. They can now go on the basis of this new circular which has been approved by the Cabinet subject to the relevant legislation from Parliament. Even the VAT (Value Added Tax) has been implemented from January 1 subject to Parliamentary legislation coming.” Finance bills are generally done with the announcement of the budget, he continued. “That’s why there is a budget,” he said. “An announcement is made in the budget, Parliament debates and passes it, circular instructions are issued and enabling legislation follows. That’s the normal procedure.” Registrar General E. M. Gunasekera said he was merely implementing Finance Ministry instructions. The President said in the budget that the sale of land to foreigners was prohibited,” he pointed out. “That proposal was passed by Parliament.” If laws have to be amended, Mr. Gunasekera said, it was the Finance Ministry that must do it: “We implement Finance Ministry orders. When instructions are sent, we pass them on to branch officers for action.”
Bad governance casts cloud over inheritance rights The Government first said in the budget proposals of 2013 that “the sale of state land to foreigners will be prohibited”. When the Finance Ministry issued instructions to the authorities in March 2013, however, the “sale” of state land had turned into “the transfer of land (state owned or privately owned)”. This now threw a cloud over inheritance rights. Among other provisions, the law still states that ownership of land “can be transferred by gift or testamentary disposition by an individual to his spouse, child, parent, brother or sister and the issue of such child, brother who is not a citizen of Ceylon”. But since the Finance Ministry’s directives “prohibited” any transfer of property to foreigners (except for apartments above the fourth floor), inheritance became a grey area. Today, parents who wish to leave their property to children have only one choice -divest themselves of it and invest the money in flats above the fourth floor. “This is a serious matter,” said an eminent lawyer. “I had a client, a mother, who gifted her property to her son. He is a United States citizen. The son accepted the gift on a power of attorney. The land registrar turned it down saying under new regulations land cannot be gifted to a foreigner”. While the budget proposals made no mention of a 15 per cent land tax on leases of property to foreigners, the Finance Ministry introduced this provision in its letter of March 2013. It said the Registrar General “may proceed with registration having collected an interim payment equivalent to 15 per cent of the related value”. There is concern about the inclusion of the word “interim” here. “Does this mean lessees will be slapped with additional charges in future?” asked one legal expert. “What is the amount of the tax the Government actually proposes to take? What is the meaning of these stopgap measures?” The 15 per cent tax was then explicitly mentioned in the 2014 budget proposals which said, “From this year, foreigners can have access to state and private land only through long-term lease arrangements.” It said a 15 per cent “upfront” tax would be imposed -regardless of the fact that this had already been claimed for a year. The Finance Ministry also held, among other things, that if the foreign shareholding of a company was under 50 per cent, it could own land. But the absence of a clear, legal definition has complicated matters. “We are representing a local company that bought a property in the South,” said a partner in a reputed law firm. “The shareholders of this company are other local companies. When the deed was sent for registration, the regional land registrar wanted documents from the Registrar of Companies showing the shareholders of the shareholding companies, their shareholders, the shareholders’ shareholders and so on. He said the documents must go right up to the time when its shareholders were individuals. This is misuse of the law.” The legal fraternity is uneasy that other authorities, such as the Attorney General’s Department, are not questioning the status quo. Those who hold a constitutional right to challenge this anomaly must take action, they say. But the way governance is done now, even they realise that hell would have to freeze over first. |