Pay-first-appeallater tax reforms

Sri Lankan tax authorities, with revenues off target and the government facing a huge cash crunch, are considering a proposal for taxes to be paid upfront with the usual appeal process following instead of in reverse, as it is now.

Tax lawyers said the proposal – set to trigger a major controversy -- was supported at a recent meeting between tax enforcing agencies – Inland Revenue, Excise and Customs – and Treasury officials following reports of tax revenue falling sharply, short of target in the last quarter.

Officials from these agencies and the Treasury were not immediately available for comment but tax experts who learnt about the proposal reacted furiously saying it was “irrational”, “unjust” and a “violation of a fundamental right to appeal.”

Normally tax returns sent by individuals or companies are contested by tax assessors, often in the case when special tax holidays or concessions are granted. Sometimes the disputed amount can run into millions of rupees. The dispute goes before a board of review at the Tax Department for settlement or can end up in court, a process that takes anything between two and four years – during which time the tax is not paid.

In fact one case disputing an income tax claim has been on since 2000 with a stay order being issued against its enforcement – while the case is on. But the tax officials had issued a default notice to the aggrieved party despite the stay order, tax lawyers said. “They are now trying to regularise what is happening informally like in this case,” said one lawyer.

The proposal applies to income tax, customs and excise duties. He said the new proposal, which would have to come as an amendment to current laws, would ruin many a businessman. “Just imagine for example my client being asked to pay a million rupees when we say his tax liability is only Rs 50,000? There will be chaos in this proposal. Since the appeal process drags on our money will be stuck in the system. It could lead to bankruptcy,” he added.

According to the proposal, the appeal process will be allowed only after the payment is made. Other tax specialists said the department, in a desperate bid to increase revenue, was also looking at the prospect of collecting ‘forward’ taxes for coming years and giving credit to taxpayers who respond. This means paying up an agreed amount for the next tax year and being rewarded by the government for ‘being nice’.