Retro-active Legislation - The Weapon of Mass Destruction of Tax Legislation
Evasion leading to Amendment
Any attempt to evade tax should be checked and tackled by administrative action or investigation and not necessarily by change in legislation. This also must be appreciated. That is precisely how the machinery of the department must be used so that the signal is sent across the board. Those who abuse should not be beyond the reach of the department. They should be caught and dealt with severely, which will inspire those who honestly comply with the law. There is no point in having the law, which is observed more in breach than by compliance and that leads to a scenario where tax evasion is rampant. It is better to tackle tax evasion by punitive measures than by amending the law making it harsh and rigid, which would affect the genuine tax-payers who deserve a better law.
We find that there is a saying that behind every successful person there is a spouse. But these days of search and survey, the saying goes that behind every successful person there is a spouse and the Income Tax Department. The former takes the credit and latter takes the cash which reflects undisclosed income. The long term stability of fiscal policy is very crucial and critical and that needs to be borne in mind.
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Ideal Scenario
There are four limbs, which are essential for the successful implementation of tax legislation in any country.
The first limb is for any tax law to be successful it should be fair and reasonable, which should promote an atmosphere of better compliance. I have made an analysis of the tax-payers in India, presumably the analogy is equally applicable to Sri Lanka or any developing country. The population can be classified into 3 segments, one segment who are born honest, may be in a minority, who even if the government stipulates a tax rate of 99%, they pay that and live within the 1% balance. They will pay the 99% because they would love to comply the law and sleep peacefully. That is their mindset.
Another segment at the other extreme, again a minority, are those who are born dishonest. Even if the government prescribes 1% as the tax rate and allows them to keep 99%, they will resist compliance and will try to avoid paying the 1%. They are to be dealt with only by investigation. Legislation should not be addressing them in policy formulation and get influenced. Legislation should focus on the vast majority of the population who are not falling into either of these minorities but are in between. These are the vast majority of population who are willing to pay the taxes, if the tax rate is reasonable. They are willing to comply with the law if the law is conducive enough to induce them to pay the tax. That is why the rationale and reasonableness of the policy is the first and foremost important ingredient to make a fiscal law successful in any country.
India’s first Prime Minister Pandit Nehru said "any law is not as good as it is enacted, but only as good as it is implemented". A good law badly implemented can be an utter failure and lead to chaos. But a good law implemented with an assessee friendly approach can bring laurels and voluntary compliance beyond government expectation. Therefore, the role of the tax assessing officers or the bureaucracy is equally important. There should be no performance gap between the policy and the implementation efficiency. Therefore, assessee friendly implementation, in my view, is the second ingredient.
The third aspect which is very crucial is the culture of the tax paying population which should consider that laws are meant to be complied with. Professionals like us may have to contribute in large measure creating awareness among the general public on the need to comply with the laws. The tendency of human psychology, human behavior is to get everything free. There is enough in this world for human beings' need but there is not enough for their greed is what Mahatma Gandhi mentioned. Justice Holms said "you pay taxes to buy civilization". So civilization is not just given to you unless you pay the price in the form of taxes. This needs to be appreciated by the citizens who should take pride in paying taxes and make the nation prosperous.
Fourthly, the tax-payers’ money should be used by the government for really providing civilization to the society. It should be used for productive purposes and the growth of the economy by those who rule the nation. If that is demonstrated that will be the real factor that would motivate the tax payers to voluntarily come forward and comply. In fact, Justice Chinnappareddy, in McDowells case in India, stated that in a developing country like ours, tax avoidance through colorable devices should be condemned because unless the due share comes, the government will not be able to implement its welfare schemes. The government will not be able to provide infrastructure in the form of roads, telecommunications and so on and so forth. But later, Justice Sabyasachi Mukherji in Aravind Northam's case, remarked - "no doubt Justice Holms said you pay taxes to buy civilization but an ordinary citizen of this country is bound to ask the question “am I buying civilization by paying taxes or am I enabling those who are in power to use it for ostentation or wasteful expenditure?” Further he stated that “unless the government effectively uses the tax payers’ money for growth of the economy or all round prosperity of the country no amount of moral sermons will motivate a person to voluntarily pay what he ought to pay and comply with the tax laws.”
Tax should be collected as how the bees collect honey from the flowers. Without hurting the flower, the bees collect the honey. Similarly, tax gatherer should use assessee friendly measures to collect taxes. Let us visualize yet another happening in nature. Due to sun's rays, which is focused on the sea, the water evaporates and formulate itself into clouds. Later the clouds dissolve and pour down as rain for the prosperity of all the living beings on earth. Similarly, the government should collect the tax like the water evaporates. It should not be visible, or felt by anyone. It should be collected in such a smooth manner. But when the government uses tax-payers' money for all the productive purposes and infrastructure, it should be like the rain pouring down and it should pave way for the prosperity of the humanity. This should be the philosophy of the government. If tax-payers’ money is effectively utilized for all round growth and development, the tax payer will keep his head high by paying taxes proudly and declare with pride his contribution to make his nation’s economy strong. Let us hope that such a day would dawn and all the parties concerned will realize their respective roles and we will also march ahead and build a society, which will be a better place to live.
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Conclusion
Let me now highlight and recapitulate important points before I conclude my oration. Ordinarily, a statute is prospective in its operation. Normally, unless there are compelling reasons for making a retrospective amendment in public interest, such a retrospective amendment is not injected since it runs the risk of being declared unreasonable or arbitrary and violative of Articles 14 and 19(1)(g) of the Constitution of India. But the legislature has power to make laws with retroactive force. Such retroactive operation may be expressed totidem verbis as shall have effect and shall be deemed for all purposes to have had effect as if had ordinarily been enacted or by any other words which would manifest a clear intention to retroact.
Similarly, there is no doubt that the legislative power in question includes the subsidiary or the auxiliary power to validate laws, which have been found to be invalid. If a law passed by a legislature is struck down by the courts as being invalid for one infirmity or another, it would be competent to the appropriate legislature to cure the said infirmity and pass a validating law so as to make the provisions of the said earlier law effective from the date when it was passed. When the law is amended with retrospective effect, the court has to apply such retrospectively amended law as if it were in force at all material times.
In matters of substantive law, the presumption is against retrospectivity. This is the law even in matters of procedure, where substantive power is conferred for the first time. Retrospectivity in penal law is ruled out.
Any legislation can be successful if:
a) tax rates are reasonable and the policy is fair and equitable;
b) tax administrative resorts to assessee friendly implementation;
c) there is adequate awareness among the public to comply with the tax laws; and
d) the tax payers’ money is used by the Government for the benefit of the people and for the growth of the economy.
Ladies and gentlemen, I should thank you for your patient listening. Your President Mr. Yohan Perera mentioned about this Oration and invited me one year ago when I casually acknowledged and accepted his invitation. I thought, over a period of time he will forget about it but that is not to be the case and he meticulously renewed the invitation at the appropriate time and, therefore, it has been my privilege to accept and address all of you on this occasion. I must acknowledge, ladies and gentlemen, you have been a captive audience and it has been an enjoyable experience addressing all of you. I wish you have the same thing to say about listening to me.
I bring along with me the good wishes of the entire fraternity of Chartered Accountants in India and I wish the Institute of Chartered Accountants of Sri Lanka, with whom we are having closer ties and bondage to scale greater heights. We will grow from strength to strength and we will jointly perform to make Asia proud in the international scenario. Thank you very much.
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