Economic Service Charge requires amending laws
Sri Lankan tax authorities along with the Finance Ministry have been caught napping once again; imposing the Economic Service Charge (ESC) without the mandatory, amending legislation in place.
In a newspaper advertisement on January 16, the Inland Revenue Department (IRD) directed that final date of payment for the ESC for the quarter ending December 31, 2016 is January 20 (Friday). Taxpayers were told to pay before January 20 as this day has been declared a half holiday for banks.
The notice said ESC ‘is payable as proposed in Budget 2016 and passed by parliament’.
However just like last year’s fiasco when the Supreme Court ordered that the VAT cannot be enforced until a proper gazette notification is issued, enforcing the ESC through a press notice is illegal, accountants say.
VAT was also, initially, enforced through a newspaper advertisement. In fact any order by the IRD to charge ESC for all the quarters in 2016 (starting April) is invalid as there is no amending legislation and such charges cannot be done by just an administrative order as seen through a newspaper notice.
After the court issued order in August 2016 following a petition by parliamentarian Wimal Weerawansa challenging the legality of the 15 per cent VAT imposition in April without a gazette and amending legislation, the Government was forced to revert to the old 13 per cent rate. Subsequently the 15 per cent rate was enforced towards the end of 2016 after the required laws were promulgated. “I just can’t believe the government would make the same mistake twice,” noted a tax consultant. Experts said that the IRD was trying to introduce changes to the ESC Act No 13 of 2006 through a newspaper notice. Even in April 2016, a press notice was issued by the IRD on the ESC charge but unlike the similar notices issued for VAT and NBT which were struck down by the Courts, there was no challenge mounted against the ESC press notice. As a result, some companies have been paying the rate.
The April notice was based on the 2016 budget presented in November 2015 with the tax proposals to take effect from April 2016.
Under the existing ESC amendments, the ESC rate is 0.25 per cent. Only loss making institutions and companies under income tax holiday are liable to pay ESC. Also as per the present law there is a ceiling on the total ESC payable which is Rs. 120 million per year.