Note on Assessments under the New Tax Bill
Section 163 of the old Act gives power to the assessor to issue assessments. Assessor can accept or reject the return. Assessor is empowered to estimate the income of the taxpayer. Assessor can issue additional assessments. In the old Act an assessment is a change and a demand to the taxpayer.
The word assessment, is used in the new bill in a different context, it is used here to identify the action of contifying the quantum of tax payable by a taxpayer.
In the new bill there are four types of assessments. Self assessment, default assessment, advance assessment and amended or additional assessment.
Self Assessment: Submiting of a completed tax return. When a tax return is filled this will be the Original Assessment.
Default Assessment: Taxpayer failed to submit a tax return. Commissioner General issues an assessment.
Advance Assessment: Assessment issued before filling of a return. This type was non-existent in the existing Act, accept in the case when a person is about to leave the country.
Amended or Additional Assessments: This is when changes need to be made to the above three assessments. What is notable here is section 135(1)(b) is there to rectify very evident mistakes of the return. Commissioner General need evidence to assess, a hunch is not sufficient. Under the present Act assessments can be issued on hunches or if a reason can be given - which is very different from having evidence.
"Your gross profit is not sufficient", "declared income insufficient", may be reasons to reject a return but those are not evidence, to issue an additional assessment. Suppose evidence is available with the Commissioner General of an undisclosed asset, this can be a reason for a blanket assessment, under the present Act and onus of proving it wrong will rest on the taxpayer, but it is not evidence that income declared in the return is wrong, there can be other reasons. Commissioner General will need to call further returns from taxpayer and arrive at a definite conclusion, with evidence, that the undisclosed asset was acquired by undisclosed income not declared in the return. Having material evidence goes beyond having a reason.
More work for the Inland Revenue and less headaches for the taxpayer. When the system is loose taxpayers will suffer in the hands of tax officials, resulting lucrative business for tax consultants.
The difference between gross neglect and simple negligent can be can be explained like this. An accounting error in the tax return by a lay person compared to the same mistake made in a company tax return by the professional account, responsible to fill it.
Willful neglect is when an error is made in a tax return purposely knowing well that wrong entry is being made.
This way issuing an assessment under 135(2)(a) will be extremely difficult. Inland Revenue needs to do lot of work before assessing, no loose assessments in the future. Further, currently when a return is rejected, the onus of proving it correct rests on the taxpayer-to help the taxpayer, reasons for rejecting the return will be given by the Assessor. With the current bill Inland Revenue will have to prove, fraud, gross or willful neglect.
There is a logic behind drafting the act in these lines. Sri Lanka never moved genuinely from official assessment system to self-assessment. All along the provisions to impose assessments was included in our tax statutes. But collection of tax from this is a mere 3 percent or even lower. The officers manage to fudge the system by forcing tax payers to agree even self assessed, as charge payments. Inland Revenue officers have became arrogant in issuing assessments, this made most of the willing taxpayers shy in becoming registered in the system. I know personally a case where a person willing to pay tax on rent income was asked to produce the rent agreemvent instead of accepting payment.
Excessive workload of tax officials will be greatly reduced when they do not need to check, each and every tax return. 135(2)(a) -fraud or gross or willful neglect, is sufficient to prevent largescale tax evasion. Section 135(1) is sufficient to rectify mistakes in the return. Inland Revenue should concentrate on self assessment and help taxpayers filling the return correctly, instead of finding mistakes after the return is submitted. There will be defiantly an increased tax collection.
Public, specially Sri Lankans detest going to police, courts and Inland Revenue, for good reasons. The new bill has greatly reduce official powers of inland revenue officers in summoning taxpayers at will for interviews.
Section 106(13) of the Inland Revenue Act empowers the assessor to summon the taxpayer for an interview to scrutinize his income. This inconvenience the taxpayer greatly. He has to put leave, find transport, find parking and pay for the consultant- most of time more than the tax due.
However section 106(14) where commissioner general can summon a person is retained in the new bill by section 123(1). By this section commissioner general can summon a taxpayer, but the difference is the notice will specify the subject matter and examination is limited to that subject matter.
Even in a hearing of an appeal taxpayer harassment and cost is made minimal.
In the old Act under section 163(7) "..inquiry to be made by an Assessor..", where taxpayer needs to be present and needs to have a paid consultant. Then section 163(9) "Every appellant shall attend before the Commissioner General... In person or by authorised representative...If he considers that personal attendance of the appellant is necessary for the determination of the appeal, require the appellant shall attend in person...If the appellant or the authorised representative fails to attend...may dismiss the appeal"
In the new bill - wording here is not appeal but "administrative review", the Commissioner General and Assessor hearing is brought together, section 139(5)"The Commissioner General shall consider the taxpayers request and notify the taxpayer in writing..". However the taxpayer is given the option to give evidence to support the appeal, section 139(7)"Where the Commissioner General hears the evidence of a taxpayer or any other person...". The taxpayer need not be present in Inland Revenue for the appeal, his written request is sufficient.
Section 140 allows to appeal to the Tax Appeals Commission against the administrative review. Section 140(4) can compel taxpayer to provide security for payment of tax. If this override compulsory 25% security of section 7 of Tax Appeals Commission Act, this also will lessen the taxpayer burden.
Though section 141 of the bill states that the burden of proof rests with the taxpayer, this will mostly apply to default assessments issued because taxpayer fails to submit the return. (Therefore it is very advantageous for taxpayers to submit their returns in time). In all other cases onus will first rest with the Commissioner General to provide proof of evidence.
Instead of objecting the inland revenue officers should work hard to find new methods to tackle gross evasion, new workflows, methods of reporting their efforts in combating revenue leakages. We need to go forward with the new world order, or perish, like other systems of Sri Lanka.
Lal Silva - former Senior Deputy Commissioner General
