Financial Times

How to handle a tax default notice
By D. S. Kamantha Amarasekera (BSc, Attorney-at-Law)
First reaction
Don't panic. It is natural that you get a shock when you suddenly receive a notice from the Inland Revenue, (sometimes backed by a telephone call from a Collection Assessor to come with the cheque for the payment of tax!) claiming that legal action will be taken against you to recover the taxes, unless the full amount of tax due is paid within two weeks. Don't rush into any decision (to pay or not to pay) without properly considering your position. Sometimes, you may presume that since the tax amnesty has now been taken out, you have no answers to this tax in default notices rather than paying these taxes. That is not correct. First study the nature of purported tax in default and as to how it has arisen.

Tax as per returns
Tax which you reported in your returns, but which were not paid will have to be paid irrespective of the Tax Amnesty. But note that in the case of income tax, which is in default for more than five years, shall not be collected and even if the tax is as per the Return submitted.

Tax, which is stated in the default notice, may be an assessed tax against which you have made a valid appeal. You should not rush into paying this tax. Request the department to activate the appeal process by sending a copy of appeal originally submitted to them. Sometimes, you may have destroyed those documents, because you genuinely thought that your tax affairs are finalized up to March 31, 2002 due to tax amnesty.

In such a situation, tell the Assessor in Charge of your file and I am sure he will have all these documents. In activating the appeal process, you shall also note that for GST and Income Tax, your appeal shall be settled or determined within three years (in case of VAT within two years) from the date on which the Revenue (department) receives such appeal. If it has not been settled the appeal is deemed to have been allowed.

Taxes not assessed as yet
Sometimes, you may get inquiries from the Revenue pertaining to your tax compliance prior to the Amnesty period for which assessment has not yet been made. Note that for GST/VAT and Income Tax there are time bars for making assessments. You need to check whether these time bars are applicable for the periods under review.

In case you receive an assessment for taxes pertaining to periods prior to the Tax Amnesty, note that you have time till 30 days to make an appeal against the assessment.In case of VAT, if you have not charged the alleged taxes from your client, you are entitled to request from the Revenue to holdover the recovery action for taxes assessed.

In case of other taxes too, if you could reasonably establish that the assessment is not correct or assessed tax is excessive, Revenue cannot arbitrarily exercise their recovery action.

Refunds
It has been noted that even if the Revenue rushes in to issue tax in default notices, they are very lazy in issuing the refunds. Even though the Revenue insists on a penalty for delayed payment and even though their computers are adjusted to issue assessment and tax in default notices with automatic calculation of penalties, they or their computers are not used/programmed to calculate interest on delayed refunds.

Even though Revenue comes behind the taxpayers to collect the taxes under paid, taxpayers are expected to go behind the Revenue for taxes overpaid.Even though the Revenue Officers are sharp enough to find out the mistake of taxpayers who under pay the taxes as a result of those mistakes, they hardly find any mistakes of taxpayers to voluntarily inform those mistakes to the taxpayers who overpay taxes as a result of those mistakes. This mismatch will have to be dealt with. Same emphasis must be given not only for recovery but also for refunds.

For example Revenue has temporarily suspended the refunds pertaining to the periods prior to 31.03.2002 for taxpayers who have made Amnesty Declarations. Since now the amnesty has been taken out (or in legal terms will be repealed once the Speaker signs the Regulation of Tax Amnesty Bill) Revenue shall process those suspended refunds. Even though the Revenue has started, even before the law comes into effect, the recovery procedures for the periods subjected to the said amnesty, they have not yet taken any positive steps to activate those suspended refunds.

The same emphasis that the Revenue gives for the recovery procedures shall be given for the refund procedures too. If not, the taxpayers must be allowed to set off those refunds against taxes payable. For example, if a taxpayer is now asked to pay the Economic Service Charge without processing his previous years income tax refunds, such taxpayer must be able to set off his prior years income tax refunds against this years ESC liability and shall rightly do so.

Retroactive legislation
Introducing retroactive revenue legislations shows the bankruptcy of the government coffers and the disregard it has towards basic democratic norms. There is no question of making or introducing whatever new legislation or amendments to the existing legislation with retroactive effect.

When one government tries to repeal a legislation enacted by the previous government with retroactive effect, even though it may be constitutional, its simply a challenge and interruption to the mandate given to the previous government by the people. You are given a mandate from a particular date and make your legislation and whatever amendments to the existing legislation effective from that particular date.

If this practice is encouraged, in a desperate situation for raising Revenue, governments may even go five/ten years backwards and make legislation or undo the existing legislation with retroactive effect. How can a sensible person justify this action? Take for example, the repeal of Section 15(t) and Section 10(eeee) of the Inland Revenue Act.

These were the Sections, which exempted, effective from April 1, 2002, the profits and income and interest arising on secondary market transactions in dealing with Treasury Bills, Treasury Bonds etc. Now the Inland Revenue Amendment Bill passed by the present parliament in September 2004 has repealed these exemptions effective from April 1, 2002.

Taxpayers have already claimed the exemptions, have already filed their Tax Returns (2002/2003) and some of them may have already declared dividends and even the ownership may have changed hands.

Who is responsible for this confusion created and who is now paying for the confusion? Does this government have a democratic right to do this and is this repeal with retroactive effect reasonable? If the said repeal would have been made effective from 2004/2005, no one would have questioned this because it is a policy decision of the present government for which they have a mandate from the people. But how can the present government change the policy decisions of the previous government? True, the Constitution provides for retroactive legislation. But every one should know that the word "reasonable" has a different meaning to the word "constitutional".

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