Tax reforms 2011, a tool for better compliance

Kalyani Dahanayake Commissioner of Inland Revenue

As we all know taxation is considered as a powerful instrument to generate revenue and occupy a very important place in lives of people. Any country in the world has to make endeavours to finance its immense necessities by taxation.

It is the primary source of revenue to meet the government’s financial requirements.

The tax reforms paved the way for the simplified tax system that may reflect the social, economic and political aims of the government and we being the administrative machinery should be able to implement the system equitably and efficiently.

The budget proposals for the year 2011 indicate the commitment of the government for changing the tax structure into a simplified regime.

The first task of any tax administration is to facilitate compliance that is to make sure whether those who should be in the system have been registered for tax purposes and to comply with the rules and regulations that prevails.

In general people do not like to pay taxes. But taxes are necessary both to finance desired public spending in a non inflationary way and to ensure that burden of paying for such spending is fairly distributed.

Taxpayers should understand that taxes they pay are returned to themselves by the government through its development activities by way of supplying of goods and services necessary for their existence in a justifiable way.

The worldwide taxation systems based on collecting taxes on voluntary basis before tax authorities making assessments of income or taxable supplies.

The parliament makes laws and set down necessary legal provisions in respect of computation in tax payable, date of payments, information to be reported in the returns, due dates of returns, powers of authorities and their duties and consequences of noncompliance to tax laws such as penalties and prosecutions with other requirements.

If the tax payer complies with tax law and makes payments on time, the functions of the tax authorities are confined to collection, accounting and reporting for appropriation by the government. This is the desired objective of any efficient taxation.

The efficiency of the tax administration is measured by high volume of revenue collection by voluntary payments. Hence if tax administration makes more assessments and collects more tax by their enforcement machinery it is self-explanatory that such administration has failed in self-assessment system to that extent.

Simplification of tax system means that tax laws are made in such manner that an average intelligent person can understand what is stated by the legislator and the intention of the legislator. It is necessary to continuously adapt the tax system to changes in economic strategy, structure and needs.

Let me briefly indicate the reforms that were proposed by the government relating to taxes mainly focus several aspects.

a) The tax rates and the principles of taxation.

b) The distortions that prevailed in indirect taxes.

c) Capital formation and further investments within the country is widely expected.

d) Inducement for use of financial instrument and reducing the cost of financial transactions. (Ex. abolition of the debit tax)

e) Withholding Taxes on specified services and Value Added Tax discontinued reducing unnecessary correspondence and accounting problems.

f) Most of the development projects that are in progress have been exempted from taxes.

According to the policies and objectives of the government, the main theme that needs to pay attention is for recovering more taxes from more people widening the tax base. Accordingly there may be a decisive shift in the process of development aiming at a higher revenue growth.

The indirect taxes play the main role in tax revenue in most of the developing countries including Sri Lanka. One of the main reasons for such a situation may be poor compliance to direct taxes.

Inland Revenue is expected to enforce compliance to being treated fairly and reasonably, having their privacy respected and receiving timely and helpful advice and information.

As mentioned earlier, this has led them to understand the main risks to compliance with the intent of the tax laws to come which ought to be in the path of growth and progress of the economy.

Policy responses are required to promote revenue growth as well. We might move responsively to harvest tax by touching the right drivers at the right moments.

Tax compliance

Tax compliance could be simply defined as “to comply with the tax legislation and the tax administration. A more recent definition consists of three distinct types: Payment compliance, filing compliance and reporting compliance are the three mutually exclusive and exhaustive measures.”

Tax payments on various levels are an important obligation for any company. In other words Tax is a payment made by a company to the society that grants that company its right to operate. Taxpaying companies frequently turn to consultants for advice on:

* Constant changes in legislation

* Tax administration procedures

* Implementation of legislation in practice (decisions of local tax authorities and court practice)

Interpretation Committee

One of the most important aspects that need emphasize in the recent legislations is that a committee has been appointed to interpret the provisions wherever relevant and whenever necessary of enactments govern under the purview of the Department.

The committee has also been mandated to issue necessary guidelines and instructions to ensure uniformity in the application of respective provisions even within the organization if any. The enactments covers on any provision that ought to be clarified under different circumstances are being requested by this committee for clarifications or necessary rectifications.

The scope of the work process has been widened allowing any person or authorized representative of a taxpaying company, a person or any individual may also seek for interpretations of any provisions of such enactments of any matter arisen as a result.

The officers of Inland Revenue are also requested to forward any question of law or its applicability to the committee to maintain a smooth functioning of the expected policy of the legislation. In addition the facts related to the matter should be provided if relevant.

Not every piece of tax legislation has been without diligent consideration. “The government department which plans an Act and steers it through Parliament usually has very definite ideas about what it is intended to mean.” (Bennion on Statutory Interpretation 3rd Edition Page 63)

What is an Interpretation?

“It is settled law that the expression used in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention. It is equally settled law that, if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention.”

The Inland Revenue is in the best position to shed light on tax matters to the drafters of the tax laws as well as to the Minister of Finance.

The Revenue has to take all endeavours in making proper use of its privilege and good offices.

Further, the Inland Revenue Department adds to the complexity through its own interpretations of the tax laws and its scattered guidelines “to safeguard Revenue.”

A complex tax system makes the taxpayer compliance burden and costs high, so taxpayers have less incentive to comply with the tax laws. Revenue officials must interpret the law with care and responsibility, keeping in mind the broader social and economic aspects and consequences of taxation.

Where this is absent, not only will there be inequity, there can be no hope of removing the unnecessary complexities that will surely arise as a result.

The Revenue Officers should be trained to ensure that as far as possible their interpretation of the tax laws will be consistent with the interpretation by the judiciary.

For this purpose the interpretation committee can play a major role in order to implement what the legislation expected uniformly.

In this regard, the following judicial observations are illustrative:

“Tax payers frequently need to know the tax consequences of a transaction before carrying it through. To meet this need, the Revenue is prepared in certain circumstances to give advanced assurances as to the tax repercussions of a transaction so that the parties can proceed with confidence.

This practice is of the great benefits to tax payers and it would not be in the public interest to discontinue it” Lord Browne Wilkinson in Matrix Securities vs. IRC 1944 1WLR 356.

The function of the committee appointed is to explain the intention of the legislator in respect of the legal provisions when there is ambiguity or doubt.

Other than the above, the main purpose of the committee is to maintain the uniformity among the Inland Revenue officers when taking decisions because there can be one or two alternative options on a particular issue.

Officers could anticipate clarifications from the Committee giving necessary information of the related issue for a better service delivery.

Therefore everybody should be aware that the task of the interpretation committee is exercised vigilantly and diligently within the guidelines of the interpretation of statutes.

As a result, the taxpaying community could pay their taxes in time, having got clarified any matters in advance that is not clear which may ultimately results in timely revenue compliance to the state.