Lankan citizens need better treatment when taxed by the State
The recent controversy over an attempt to impose a retrospective tax by gazette notification on interest free loans for housing and some other benefits given to employees illustrates the need for the state and rulers to treat Sri Lankan citizens with more respect similar to people treated in freer countries.
The Sunday Times ran a front page story on July 20 saying that some trade unions were asking for the gazette to be withdrawn. Subsequent reports said the President had given assurances to trade unions that the provisions will not be implemented.
If there is a state providing public services – especially a bloated one stuffed every year with tens of thousands of unemployable graduates taught at tax payer expense like in Sri Lanka – everyone has to contribute taxes to keep it going.
But in all freer countries in the West taxes are imposed with at least the nominal consent of citizens sought from their representatives via a legislative assembly.
Imported system
Sri Lanka’s system of taxation was also imported from the West. As a result, there is little point in looking at Sri Lanka’s own feudal history for inspiration or to draw parallels.
Income tax itself is a peculiarly Western and relatively modern tax, which was not possible to be levied in the feudal era as there were no reliable accounting records.
In the US, the only remaining amendment to the constitution that restricts the freedom of citizens and strengthens the state also relates to federal income tax. All others expanded citizens’ liberties.
When the British came to Sri Lanka, most of the revenues were from port taxes, especially exports.
Except for key officials, public administration was paid for by a system of service tenure on land (Wadawassam), which the Dutch kept on from the time of Sinhala and Tamil kings. With the eventual abolition of service tenure, everyone working for the state had to be paid in money, requiring more taxes.
In the feudal era taxes were collected at different levels by members of the ruling class and a part of it went to the king.
Taxes were imposed by long-held custom and were predictable. Arbitrary tax changes led to revolt not just by ordinary people, but also other members of the ruling class.
When Ceylon came under the Madras Presidency of the British East India Company, a sudden change in the tax system led to a near revolt. It is believed to be one reason for Sri Lanka to be taken away from the Company.
Since Sri Lanka now has a Western style legislature and state, backed by a well-armed police and standing army, it is no longer practical to resist arbitrary taxes by revolt. Then how do people in Western Europe, who invented the machinery of the modern nation-state with its powers of compulsion and coercion, remain free from arbitrary rule and taxation?
Taxation by consent
The freedom from arbitrary taxation came in parallel with the escape from arbitrary rule in general, whether by monarchs or even by the parliament. Post-feudal states with illiberal parliaments – especially inEastern Europe and Asia – have imposed far worse tyrannies on the people than even monarchs.
The Magna Carta or the Great Charter of Liberties of England is considered to be the first constitution-style document to limit the arbitrary rule of a sovereign.
In part due to the levying of a series of taxes without consultation, feudal barons of England forced King John to agree to a set of rules limiting his powers in 1215. By restraining and changing the system instead of toppling him, the door to greater freedom was opened.
The charter itself was re-issued and strengthened under several kings.
A key subsequent confirmation was by Edward I in 1297 following a controversial tax on wool.
The Confirmation of Charters said among other things that….for no need will we take such manner of aid, mises (taxes) or prises (assessments) assessments from our realm henceforth except with the common assent of all the realm and the common profit of the same realm, saving the ancient aids and prises due and accustomed.” In 1689 the principle was further strengthened by the English Bill of Rights, under William and Mary that which promised that there will be no taxation by Royal Prerogative and that the agreement of the parliament was necessary for new taxes.
In the US, a rallying call for the declaration of independence – taxation without representation – was also related to consent.
Minister’s prerogative
Unfortunately in Sri Lanka taxes have been slapped on people for decades by a draconian Finance Minister’s Prerogative, via a midnight gazette while the entire ‘realm’ was literally asleep.
Even in the early days of British rule it can be seen that civil servants who came with Governor North consulted at least the merchants and traders in Colombo about the possible ill effects of duties before imposing them (See ‘A view of the agricultural, commercial, and financial interests of Ceylon by Anthony Bertolacci’).
Sri Lanka did not get freedom in 1948. Sri Lanka gained self determination. Whether there is freedom or not depends on whether the institutions of liberty and the practices supporting freedom are preserved, advanced or dismantled.
The recent attempt to charge taxes on housing interest benefits retrospectively is an even more egregious undermining of rule of law and justice than charging a tax without consent or levying taxes outside the budget.
Freedom comes from rule of law. The very nature of rule of law is predictability. While ignorance of the law is not an excuse, no man can be subject to a rule that did not exist for him to follow.
Economist and philosopher F. A. Hayek in his work Road of Serfdom explained this succinctly:
“Stripped of all technicalities (the rule of law) means the government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s affairs on the basis of this knowledge”
If there is an actual loophole in a tax law, a free country should ‘grandfather’ it and bring new legislation to block it only in the future.
Retrospective legislation was not invented by this administration. They were invented in the West. With vigilant advocates of freedom, and sometimes constitutional guarantees it is now not easy to enact retrospective legislation in the West.
In his 2012 budget India’s then Finance Minister Pranab Mukherjee brought a retrospective tax on telecom firms running back not just one year or two, but many years.
The tax was seen as particularly bad and undermining rule of law because Vodafone, the company in question, had already won a Supreme Court order in its favour.
Justice not Growth
There was hope that the law would be repealed by the Modi administration.
Though Finance Minister Arun Jaitley did not repeal the law, an assurance was given that the current administration was committed to a “stable and predictable taxation regime that would be investor-friendly and spur growth”.
Jaitley is missing the point. The point about retrospective laws is not about creating predictable conditions for investors – or foreign investors – to generate growth but about giving justice and freedom to India’s own citizens to make decisions about their lives.
No state is liberal by nature, unless citizens in the form of a freedom-loving urban intelligentsia struggle to fight and preserve that freedom.
No elected ruling class will give freedom or equality to the people if they do not believe and respect their freedoms.
Our rulers and bureaucrats and also the sections of the urban intelligentsia are fond of saying that ‘what is good for the West is not good us’.
Why not?
A close examination will show that most such statements refer to cases where the state has to give more freedom to individual citizens or has to stop hampering their collective decisions made through markets.When it is a case of denying citizen’s freedoms, rulers and their acolytes have no hesitation in amplifying illiberal practices imported from the West.
Not only taxes, but constitution changes would be hatched in secret and rushed through the legislature, private property would be expropriated through ad hominen laws and judicial redress prohibited, import protection at the expense of the poor would be higher than in the West, the police would put down protests more harshly with greater violence, habeas corpus would be virtually suspended and alleged criminals would be killed extra-judicially without benefit of trial.
In the case of home loans, where interest is tax deductible in the US for income tax, attempts are made in Sri Lanka to tax housing interest benefits. The overall income tax rates in Sri Lanka have been lowered by this administration.
Even in India in the 2014 budget, a home lan interest deduction ceiling was raised by Rs. 50,000 to Rs. 200,000. Though the objective was to “boost the housing sector” by an interventionist administration it did free individual homeless Indians who were trying to put a roof over their heads, from some of the burden of the state.
Freedom cannot be gained by changing leaders. Lasting freedom can only be gained by changing an arbitrary and unjust system, and countering an urban intelligentsia who make ordinary people bow to unjust policies and decisions of rulers by spreading a supporting ideology.
Ending tax hikes outside the budget, the tyranny of the midnight gazette and retrospective legislation would only be a few first steps on a long march to freedom.