Flooding the Court of Appeal with Tax Appeals A Recipe for Disaster?

There are a few classic examples of haphazard amendments brought to tax laws by the Parliament so often in violation of the principles of taxation 

• The attempt by the Government to change the present tax appeal process is akin to a poisoned chalice
• It is an open secret that tax officials issue the assessments just under the wire at the eleventh hour
• Some of the assessments are issued for ulterior motives in clear violation of the provisions of the tax statutes

It was reliably made to understand that the Government is about to bring some radical changes to the existing tax appeal procedures on the pretext of expediting the appeal process and reducing the undue overtime consumed for its finalisation at pre-Court of Appeal (CA) stages.

As a prelude to this radical change, several ruling party parliamentarians have been expressing their concerns about the appeal procedures statutorily adopted by the Commissioner General of Inland Revenue (CGIR) and Tax Appeal Commission (TAC), which are globally accepted as one of the best practices and preferred by appellant taxpayers for several reasons, including the less costly and effective mechanism, before proceeding to the CA.
According to reliable sources, the Government has decided to bring the following drastic amendments to the existing laws regarding the tax appeal procedures, oblivious of the intention of the original piece of legislation they enacted not long ago:

• Reduction of the mandatory period to six (06) months from the two (02) years statutory time limitation given to the CGIR for making a decision or determination on tax appeals.
• In case of dissatisfaction with the decision or determination of the CGIR, the appellant taxpayer can go either to the TAC or CA, depending on the nature of the question of fact or law of the case concerned.
• If the question of the case is solely a fact, then the appellant taxpayer can appeal only to the TAC against the decision/determination of the CGIR.
• If the question of the case is solely law, or both fact and law, the appellant taxpayer can seek redress only from the CA.

Backtracking haphazardly

It is the tragedy befalling the Sri Lankans, especially the taxpayers that their representatives, once elected to the Parliament, think that they are omnipotent and omniscient and pass the laws, amend them, and re-amend them in violation of the basic principles of taxation: fairness, consistency, convenience, and efficiency.

It is needless to reiterate here that the law and policymakers should think before bringing an amendment to an existing law twice, what the original rationale was behind such law, which was passed by the Parliament or rather by themselves not so long ago.

Ironically, these same legislators had raised their hands by shouting “Aye” to these laws and later brought amendments to them after a few years - if not a few months - inconveniencing and embarrassing the general public and the law enforcement authorities who had to endure the ire and fury of the former by way of reminding the latter of their parents and forefathers.

A few classic examples of such haphazard amendments brought to tax laws by the Parliament so often in violation of the principles of taxation are as follows:

• The threshold for liability to income tax and VAT and their tax rates were amended three to four times within a short period of four years.
• Statutory time limitations on issuing assessments were twenty-four months before 01.04.2013, eighteen months from 01.04.2013 to 31.03.2017, and thirty months from 01.04.2017 onwards.
• Statutory time limitations for the finalization of income tax appeals by the CGIR were two (02) years before 31.03.2017. It was effectively reduced to nine months from 01.04.2017 to 07.05.2023, and later it was effectively increased to twenty-four months from 08.05.2023. It is proposed to be reduced again to six months within a few months.

The intention of this article is not to criticize the folly of the lawmakers amending the laws so often, ignoring the original reasoning of the laws. However, it is to underscore the negative consequences that the taxpayers would have to face as a result of bringing the proposed changes to the process of tax appeals followed hitherto.

Fixing the leak while ignoring the flood

The justification of the Government for reducing the statutory periods for the finalisation of a tax appeal by the CGIR and TAC was the acceleration of the recovery process of taxes in appeal. On the face of it, it may sound like a noble objective.

However, on looking at this proposed change from an independent standpoint, the minuses are more than the plusses in terms of potential undue delay by the court proceedings, potential corruption by tax officials, higher cost of litigation by taxpayers, etc.

Justice delayed, justice denied.

Flooding the CA with all tax appeals related to questions on law and a hybrid of law and fact would further complicate the issue and may cause further delays in the determination of the appeals by the CA due to several factors, including the addition of thousands of new tax appeals to the existing lot, a shortage of lawyers conversant in tax matters, and so on.

As per the current tax appeal procedures, none of the tax appeals – barring administrative reviews of income tax commencing from 01.04.2018 – are referred to TAC except after the determination given by the CGIR. Hence, it is easier and faster for the TAC to determine an appeal as the submission of any new evidence or issue is legally prevented before TAC as it was not produced before the CGIR.

If an appellant taxpayer or the respondent CGIR is dissatisfied with the determination given by the TAC, of which the majority of the members are retired justices from the CA and Supreme Court, the case can be stated to the CA for its judgement.

Since the stated case had been determined and analyzed by the members of TAC consisting of the justices, many such determinations either will be accepted by the parties concerned as final and conclusive, or the order of the CA will be delivered faster since half of the job is already done by TAC.

Counterproductive effects

The attempt by the Government to change the present tax appeal process is akin to a poisoned chalice. The consequences of this amendment will be more negative than positive, especially in terms of combating corruption at both ends of taxpayers and tax officials.

Tax appeals originate as a response to dissatisfaction with the additional and amended assessments issued by tax officials rejecting the returns of taxes furnished by taxpayers. It is no secret that more than eighty (80) per cent of such assessments end up in appeals.

Since the appeal process is to be changed by depriving the TAC of its right to determine the appeals and assigning them directly to the CA, the inconvenience of the taxpayers will increase manifold, such as the increased cost of litigation, loss of peace of mind, etc. Such a rigid environment will create a negative externality, fostering a climate of corruption among officials.

Comprehensive analysis

A lawmaker who is a representative of the people must proactively visualize all the possible outcomes through a thorough analysis before proposing an amendment to an existing law.

The proposed solution of increasing the panels of judges dedicated to hearing tax appeals or setting up dedicated tax courts is not a panacea to clear the backlog of the tax appeals.

If the proposed solution is to accelerate the finalization of the backlog of tax appeals, the Government could achieve it even without amending the existing tax appeal procedures which are globally followed as the best practice.

Had the sole intention of the Government been the acceleration of the finalization of the tax appeals, it could have achieved the same objective by implementing several other proactive and progressive measures, including the following:

I. Don’t Reinvent the wheel.

It is a fact that more than 80% of the additional and amended assessments are not collectable as they are disputed by the taxpayers and added to the backlog of unresolved appeals. This fact was confirmed by the Annual Performance Report 2022 published by IRD as the total taxes in default were Rs. 904 billion, and the collectable ones were Rs. 163 billion (19%), while the disputed (appealed) taxes were Rs. 741 billion (81%).

As a remedial measure for controlling these unreasonable and harassing tax assessments, a piece of legislation was enacted in 2010 called the “Default Taxes (Special Provisions) Act, No. 16 of 2010”. 

Section 12 of that Act imposed a mandatory duty upon the CGIR to limit the aggregate of the default taxes issuable for a year to less than 03% of the total taxes collected in the previous year.

In case the total default taxes issued exceeded the limitation of 03%, the CGIR was mandatorily required in terms of section 13 of the said Default Taxes Act to submit a report to the Minister within 04 months, giving his reasons and recommendations for such an excess of default taxes and for remedial actions to overcome such an excess.
It is unfortunate for the country that many, including the legislators, policymakers, and IRD officials - seemingly unaware of this golden piece of the law which aims to curb unnecessary tax assessments that have the potential to harass genuine taxpayers – try to bring in some radical changes to the internationally accepted best practice of the appeal process.

II. Reducing the Limitation of Time for Issuing of the Assessment.

If the Government is serious enough to collect the due additional taxes sooner, it should reduce the statutory time limitation for the issuance of the additional or amended assessment from 30 months to 18 months as was the law before 01.04.2018.

It is an open secret that tax officials issue the assessments just under the wire at the eleventh hour, defeating the statutory time limitation, irrespective of the lengthy number of years or months given.

Hence, it is better to reduce the 30-month time-bar period to 18 months for issuing the assessment and thereby save 12 months for accelerating the collection of due taxes in default, instead of changing the appeal process which would place the taxpayers in an awkward position.

III. Holding public officials personally accountable for unlawful acts.

It is not a secret that all the additional assessments issued by tax officials are not in good faith, which gives them immunity in terms of Section 97(3) of the Inland Revenue Act, No. 24 of 2017.

Some of the assessments are issued for ulterior motives in clear violation of the provisions of the tax statutes and of the circulars issued by the CGIR.

The CGIR has issued two important circulars dated 22.06.2023 as part of the Extended Fund Facility of IMF, under the reference numbers CGIR/2023/3-1(Ins & Cir) 14 and CGIR/2023/3-1(Ins & Cir) 15, outlining the guidelines for preventing unnecessary and unreasonable tax assessments and an effective mechanism for settling income tax appeals within 07 months. It seems that these two instructions are not strictly followed.

Non-published Circulars of the CGIR at IRD Website. 

Even though the CGIR had stated in the two circulars – in compliance with the guideline for “Prevention of Corruption in IRD,” which is available on the IRD website – that these two circulars would be published on the IRD website, they are yet to be published.

The tax officials who issue such assessments get away scot-free, while the appellant taxpayers have to face undue financial and mental suffering to prove the fallacy of the assessment.

A tax official who issued and approved such an assessment, which was nullified by a competent court due to its illegality, should be sued personally on the grounds that such an act was not done in good faith. The absence of such personal liability and accountability too is a reason for the unimpeded accumulation of tax appeals.
Hence, the Government, which is for, by, and of the people, should proactively work for the people, considering a holistic approach for the benefit of the entire population, instead of taking reactive patch-up works which could create backfire effects.

(The writer is a retired Deputy Commissioner General of IRD and can be reached by dropping mail to [email protected]  )