The tax collector and rights of the taxed

Following is the first part of the full speech made by Dr. K. Kanag-Isvaran, President’s Counsel, at the 22nd Annual Oration on Taxation organized by the Institute of Chartered Accountants of Sri Lanka.

Mr. Jagath Perera, President of The Institute of Chartered Accountants of Sri Lanka, Ms. Shamila Jayasekara, Chairperson of the Faculty of Taxation, Honourable Council Members of the Institute, Distinguished Invitees, Ladies and Gentlemen.

I am greatly honoured to have been invited to address this august assembly of the members of the accountancy profession. I thank you for it. I was at first a little hesitant because I could not fathom what the Faculty of Taxation would require of me as to the content of the presentation.  That hesitancy was soon dispelled when I was given a list of topics to speak on. I have endeavored to stick to it.

I must congratulate you on your choice of a Lawyer not only because Lawyers and Chartered Accountants are looked upon as allies as we occasion much annoyance and grief to the tax collector but also because we have a complimentary, albeit a little different, perception and approach when we set out to do what we do best in protecting those under our care from the clutches of the tax collector.

I would like to illustrate this with a folk story from a village in Ottoman Turkey:
One day, the tax collector of Akşehir and surrounding towns fell into the river. Since he didn’t know how to swim, he was about to drown. The villagers gathered by the river bank to save him.

“Give me your hand, give me your hand,” they were all shouting. But the man was not extending his hand.

At that time, Nasreddin Hodja happened to be passing by. He was a learned man, of high social standing. He was lawyer.

“Hodja Efendi,” said the good samaritans, “the tax collector fell into the water. He is going to drown. He is not giving his hand.”

“Let me try,” said  Hodja.

“Efendi, efendi,” he yelled to the man bobbing in the water, “take my hand!”

To this, the tax collector immediately extended his hand and grabbed Hodja’s arm. The Hodja and the people around were now able to pull him off the water.

The good Samaritans were amazed!  And looked at him inquiringly.

“You see,” NasreddinHodja clarified, “he is a tax collector, he is more practiced in taking than giving.”

We lawyers understand this reality.

The tension between the tax collector and the taxed is as old as time in terms of recorded history.In every culture, in every part of history, from the tax collectors of ancient Israel to the Inland Revenue Agents of today the tax man has received more than his share of contumely. That is why even the Bible speaks so negatively of the tax collector. 

No one likes to pay money to the Government, especially when the Government is perceived to be oppressive. But they do nevertheless end up paying. 

As the American Humorist Evan Esar would say: 
“Some taxpayers close their eyes, some stop their ears, some shut their mouths, but all pay through the nose”. 

But not without resistance. It is out of such a resistance that the Magna Carta, the Great Charter was born.

You might re-call that the event took place nearly eight centuries ago, in 1215, on Mount Runnemede in England. Rebel nobles, the Barons in England, drafted the Magna Carta to curtail the power of their own tyrannical monarch–King John who taxed heavily his nobles to pay for his military defeats. King John affixed his seal on the document at Runnymede on June 15, 1215, making it Europe’s first written constitution. The Magna Carta is considered one of the first steps taken in England towards establishing parliamentary democracy.

A few hundred years later the Magna Carta would inspire the American colonists to declare independence from the British themselves.
The 39th clause of the Magna Carta declared:

“No freeman shall be taken, imprisoned, disseised, outlawed, banished, or in any way destroyed, nor will we proceed against or prosecute him, except by the lawful judgment of his peers and by the law of the land.”

The principle that no man shall be taxed except by the authority of Parliament became established. It is this principle – a principle of the rule of law- which we as lawyers seek to establish in a court of law against the demands of the tax collector, once the chartered accountants have finished with them.

The burden of this oration will be to discuss the travails of the citizen vis-à-vis the revenue laws of the country.

Constitutional underpinning of the principle
The principle established by the Magna Carta is reflected in our Constitution too, as a constitutional safeguard.
The Sri Lankan Constitution in Chapter XVII mandates that the raising of finances from the citizen shall only be by the authority of Parliament. This is articulated in Articles 148 and 152 of the Constitution.

Article 148 of the Constitution, reads as follows:
“Parliament shall have full control over public finance. 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”.

It is then well established that it is only a “law”, namely an Act of Parliament, now extant or to be passed, that can impose any “tax, rate or any other levy’. Hence no tax, rate or other levy can be imposed except by or under the authority of a law passed by Parliament. Therefore the question whether the burden of any tax, rate or levy has been imposed by Parliament must be clearly and unambiguously spelt out in the very words of the enactment seeking to impose that burden. Otherwise it is unconstitutional and bad in Law. Whether it is so or not, is tested by the rules of statutory interpretation in a court of law.

The process by which legislation is enacted is beyond the scope of this presentation but, it is to be seen in the Standing Orders of Parliament and some provisions of the Constitution, with regard to the constitutionality of bills and the like. However, the initiation of any enactment, as you know, is by way of a Bill.

Article 152 controls who shall introduce legislation relating to public finance, and under what circumstances, thus ensuring parliamentary control over finances.

Article 152 of the Constitution reads as follows:
“No Bill or motion, authorizing the disposal of, or the imposition of charges upon, the Consolidated Fund or other funds of the Republic, or the imposition of any tax or the repeal, augmentation or reduction of any tax for the time being in force shall be introduced in Parliament except by a Minister, and unless such Bill or motion has been approved either by the Cabinet of Ministers or in such manner as the Cabinet of Ministers may authorize”.

The Constitution is careful to address not merely the imposition of taxes but alsoof the repeal, augmentation or the reduction of any tax for the time being imposed. Any endeavour to impose, repeal, augment or reduce tax requires a bill or a motion.  Such bill or motion maybe introduced in parliament only by a Minister. Thus attempts to grant amnesty, exemption, or any favoured treatment is brought under parliamentary oversight and scrutiny.

So far well and good. But sometimes what is given with the right is taken away with the left! The legislative sleight of hand. You need a hawk eye to spot it. Let us do a reality check.
Let me flag an important fact of life in this regard. Article 152 speaks only of a “Bill or motion”. But we know, day in and day out, the Minister of Finance issues, 
usually at mid-night, Gazettes, imposing or exempting or reducing taxes and levies. 

A case in point you might be familiar with is section 2A of the Value Added Tax Act where the power vested on the Minister to change the VAT rate (section 2A of the Value Added Act 14 of 2002 introduced via VAT amending Act No 06 of 2005) empowers the Ministry of Finance to vary the VAT rate at his discretion by Order published in the Gazette. 

Section 2A(1) Value Added Tax Act reads as:
“The Minister may by Order vary the rates specified in Section 2 insofar as the same relates to the increasing or reducing of the rate previously specified, and to such extent as it relates to the imposition of Value Added Tax specified under the aforesaid Section. Minister may vary the rates by Order

(2) The Order made by the Minister under subsection (1) shall be in operation immediately upon the Minister affixing his signature thereto.
(3) Every such Order shall as soon as convenient be published in the Gazette.
(4) Every such Order shall as soon as convenient thereafter be approved by a Resolution of Parliament.
(5) Where any such Order is not approved by Parliament it shall be deemed to be rescinded with effect from the date of such Resolution”

Though section 2A(4) mandates that “Every such Order shall as soon as convenient thereafter be approved by a Resolution of Parliament”, any disapproval by Parliament would not impact the application of the varied rate during the period prior to the Parliament rescinding it, and during this period of time, seemingly with no time limit, the act and deed of the Minister in charge of the subject of Finance determining at his will and pleasure the augmentation and reduction of the VAT rate reigns supreme in the country to the exclusion of the Parliament! 

More importantly, though section 2A (4) and (5) contemplates a resolution being passed by Parliament, either approving or disapproving the Order, there is no compulsion to place the Gazette before Parliament for its approval or disapproval!  What happens if the Gazette is not placed before Parliament for approval at all?

Does not the section2 A of the VAT Act, therefore defeat the very spirit and the core underpinning of Article148 read in conjunction with Article 152 of the Constitution?

You are aware that recently the Minister was empowered to exempt any financial institution from payment of Debt Repayment Levy by Order published in the Gazette.

On the 1st of November 2018 there was certified an Act of Parliament styled the Finance Act No 35 of 2018, which introduced, inter alia, the Debt Repayment Levy (DRL), which imposed on financial institutions a 7 percent levy on the value addition attributable to the supply of financial services by such institutions. However the Act also empowers the Minister to grant exemptions from the payment of the levy by Order published in the Gazette. But the curious thing is the said Finance Act has not imposed a requirement, as is done normally, for the Gazette sopublished by the Minister to be laid before the Parliament for its approval !  Why may we not ask??

Section 37 of the Finance Act No 35 of 2018 states:
“The Minister may, having regard to the economic development of the country, by Order published in the Gazette, exempt any transaction of a financial institution specified in such Order, from the payment of the levy payable under this Part, subject to such condition as may be specified in such Order”.

Any exemption of the application of the Debt Repayment Levy, to a particular tax payer could then be effected by the Minister in charge of Finance, contrary to Article 152 of the Constitution!

But alas, there are many similar provisions in various tax statutes to like effect as you well know. One is therefore well entitled to ask, is not the carte blanche power thus given to the Minister violative of Article 152 of the Constitution and hence unconstitutional?

Unfortunately all these have passed muster, sub silentio or simply out of disinterest of those concerned, prior to, during and after the bill stage. The statutory time bar for challenging a bill has lapsed, since Article 78 of the Constitution mandates:

“78 (1) Every Bill shall be published in the Gazette at least fourteen days before it is placed on the Order Paper of Parliament.”

There is then a further bar to a challenge in Article 80(3) of the Constitution. It declares:

“Where a Bill becomes law upon the certificate of the President or the Speaker, as the case may be being endorsed thereon, no court or tribunal shall inquire into, pronounce upon or in any manner call in question, the validity of such Act on any ground whatsoever.”

One may well ask, have these unconstitutional provisions in the aforesaid tax statutes empowered the Finance Minister of Sri Lanka to assume powers that were denied to the King John via the declaration of the Magna Carta of 1215, that no tax will be levied without the authority of the Parliament?

Recently it was published in the newspapers that the Cabinet has approved a proposal to amend the VAT statute to empower the Minister in charge of the subject of finance to introduce exemptions from VAT via Gazette notifications!.

I believe the time has come to go looking for Barons at the Institute of Chartered Accountants to take the fight to the State. We the lawyers can offer our services!

I believe the answer lies in the enactment of a constitutional provision permitting a post enactment challenge to any Act of Parliament. This is now prohibited and therefore not available. Could we look forward to it, if and when the promised new Constitution comes?

Powers given to Provincial Councils to impose taxes
As you know with the passage of the Thirteenth amendment to the Constitution in 1987, and the establishment of the Provincial Councils in addition to the power of the Parliament to impose taxes, the Thirteenth amendment also devolved power to impose taxes upon the Provincial Councils in respect of any matter set out in List 1 of the 9th Schedule to the Constitution, commonly referred to as the “Provincial Council List”. This includes turnover taxes on wholesale and retailer, betting taxes, and taxes in prize competition in lotteries, license taxes, arrack, toddy rents, tapping license fee and liquor license fee, Motor vehicle license fee, Stamp Duty on transfer of properties, taxes on mineral rights and the like. 

Even here the like principles of law with regard to the exercise of the power to levy taxes etc., at the centre will apply to the periphery as well.

Fundamental Rights and Tax Legislation 
The Magna Carta apart from being a peace treaty between the rebel Barons and King John, in time came to be regarded, especially in the modern era, as a potent, international rallying cry against the arbitrary use of power. It became famous as the symbol of justice, fairness and human rights
It has been said that “At their core, taxpayer rights are human rights”.Is there then a correlation between fundamental rights and revenue legislation

One of the core principles of human rights is that all persons are equal in the eyes of the law. Our Constitution enshrines this principle in Article 12 of the Chapter on Fundamental Rights.

Article 12 of the Constitution, insofar as is relevant, reads:
“(1) All persons are equal before the law and are entitled to the equal protection of the law.”
(2)  No citizen shall be discriminated against on the ground of race , religion, language, caste, sex, political opinion, place of birth or any one of such grounds.”

Implicit in this principle is the prohibition against discrimination. Naturally, a question therefore arises whether subjecting persons to different taxes, tax rates or providing exemptions as per the economic and fiscal policy of the Government amounts to a breach of the Article that endeavors to provide equal protection of the law to all citizens and eliminate discrimination. As far as I am aware this question appears not to have been addressed by our Courts.

The levy and collection of tax has historically been one of the most controversial exercises. Its critics have considered it nothing less than theft sanctioned by law. 

Its protagonists elevate it to the platform of a great instrument to finance State welfare and achieve the elusive dream of egalitarianism
But the judgements pronounced in foreign jurisdictions indicate that laws relating to taxation should be afforded greater latitude compared to the laws regulating religion, freedom of speech and other civil rights.

This is because laws regulating taxation essentially reflects the requirements of the Government of the day and the courts are not so quick to interfere with the economic policies of the Government. It is argued that it cannot be for a court to suggest in any case that a more equitable mode of assessment or rate of taxation might be adopted than the one prescribed by the legislature. Parliament ought to have wide discretion, it is said, and a provision in a taxing statute cannot be likely be held to be invalid on the ground of violation of Article 12 of the Constitution.   

Therefore a person engaged in the business of tobacco or alcohol may not have a case based on violation of fundamental rights or discrimination for slapping of a higher rate of income tax of 40 percent compared to a standard rate of 28 percent applicable to a manufacturer or concessionary rate of 14 percent applicable to a person engaged in agriculture. 

Another example would be the concessionary income tax regime applicable to foreign currency owners from the service provision as opposed to the service providers to local persons earning income in rupees.

N. S. Brindra discussing this subject in his book on “Interpretation of Statutes” opines that “in a tax legislation, as the legislature has to deal with complex problems, the legislature must be given a greater latitude and greater play in the joints… the laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc.” Citing R. K. Garg V Union of India he reminds that the “constitution bench of the Supreme Court pointed out that there may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid…the Court must…adjust the Constitutionality of such legislation by generality of its provisions and not by crudities and inequities or by the possibilities of abuse of any of its provisions.  In regard to taxing statutes the Courts have conceded greater latitude to the legislators both in the matter of classification of the persons as also the mode and method of recovery.”

Therefore, we might as well reconcile to the fact that mounting a successful legal challenge against a taxing statue on the basis of violation of fundamental right would be a difficult if not a herculean task.