Concerns that Sri Lanka tax changes may violate democratic principles, defy Supreme Court order

ECONOMYNEXT – Concerns have been raised that a series of tax changes by cabinet decree without parliamentary consent may violate a recent Supreme Court order and also go against basic principles of representative democracy.

Sri Lanka’s Department of Inland Revenue has issued a series of directions to firms giving effect to cabinet and finance ministry decrees, without seeking parliament consent.

While some laws have provisions to change taxes by gazette (subsidiary legislation) deliberately by passing the parliament, some taxes require amendments to be passed to make them legal.

Court Order

“There is a principle that there is no taxation without legislation,” N R Gajendran, senior partner of Gajma, a tax consultancy told a seminar at the Ceylon Chamber of Commerce.

“And this was held in Sri Lanka in the recent past when Member of Parliament Wimal Weerawansa went to court when the VAT rates were increased. And the Supreme Court decided there is no taxation without legislation.”

He said the Department of Inland Revenue was told not to issue notices without legislation.

“But in this particular case, I don’t think anyone will go to the courts because the rates have come down,” Gajendran said.

“But hypothetically, it can happen. I don’t think there is foresight that the legislation will be passed before the parliamentary election.

Gajendran said some income taxes of some persons whose total earnings exceed certain thresholds may see an increase in their tax payments, especially after a withholding tax which was a final tax was removed.

“People may have not realized it yet,” he said.

“I don’t know whether the Department of Inland Revenue can put up a notice to say that that your tax rate has increased, to pay more tax in that event, because an order (from Supreme Court) is already there.”

Slashing of value added tax and changes to tobacco tax has already been queried by the Parliament’s Committee on Public Finances, which has asked for explanations on the economic justification.

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Taxation by Consent

Getting parliamentary approval (public discussion) is a fundamental principle democracy going back the origin of parliaments through the Magna Carta in Britain known as taxation by consent.

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British barons rose up against King John in 1214 when he raised a tax (scutage) for the sixth time without discussion. He was forced to sign the Magna Carta giving rise to the principle of taxation by consent.

The principle was further solidified by the British Bill of Rights of 1689 which is part of the un-codified constitution of that country strengthening the principle that “no taxes should be levied without the authority of Parliament” after King James II was seen to have arrogated many arbitrary powers.

The Bill of Rights put to an end to taxation by Royal Prerogative.

Sri Lanka does not have a Bill of Rights while the constitution itself tends to go against basic principle of restraining the state and tends to strengthen the rulers rather than checking their arbitrary powers on citizens, and the judicial system critics have said.

The constitution and arbitrary powers as well as lack of certainty in policy also undermine economic growth.

Economists call the lack of stable taxes and a government rules in the operating environment for businesses ‘Regime Uncertainty’.

Economist Robert Higgs had attributed the delay in the US recovery from the Great Depression, a collapse of the first recovery on state interventions by so-called ‘New Dealers’, a school of interventionist who used Keynesian principles and undermined property right and the business environment in the process.

Any legislation that legitimizes the tax changes should have retrospective effect. Many of the changes made in 2020 however are tax cuts.

In 2015, Sri Lanka’s then finance minister slammed retrospective taxes, undermining the business environment and property rights critics have said which contributed to weak investments under the previous regime. (Colombo/Feb12/2020)

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