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Sri Lanka: Supreme Court Rules Against New Tax Law

(Aug. 28, 2017) On August 4, 2017, the Speaker of the Sri Lankan Parliament, Karu Jayasuriya, announced that he had been informed that the Supreme Court would not approve the proposed new Inland Revenue Act. (Sri Lanka’s Supreme Court Shoots Down Tax Reforms, DAILY STAR (Aug. 6, 2017).)  Under the Constitution of Sri Lanka, the Supreme Court has “sole and exclusive jurisdiction” to determine whether a bill is inconsistent with the Constitution.  (The Constitution of the Democratic Socialist Republic of Sri Lanka (as amended to May 15, 2015), art. 120, Parliament of Sri Lanka website.)

Background on the Inland Revenue Act

The draft Inland Revenue Act had been prepared with the assistance of the International Monetary Fund (IMF). It was designed to make the country more attractive to investors.  (Constance Johnson, Sri Lanka: New Tax Law Designed to Facilitate Investment, GLOBAL LEGAL MONITOR (July 20, 2017); Inland Revenue Act (last updated Aug. 10, 2017), LAWS OF SRI LANKA; Inland Revenue: A Bill to Provide for the Imposition of Income Tax for Any Year of Assessment Commencing on or After April 1, 2017 (July 5, 2017), Department of Government Printing website.) One goal, as outlined by the IMF, was to increase tax revenue from 12.4% of gross domestic product to 15% by 2019.  The approval of the text of the new law by the legislature was coordinated with the disbursement of the third of three installments of funds from the IMF under a three-year agreement concluded between Sri Lanka and the IMF in June 2016.  The three payments totaled $501.5 million.  (Sri Lankan Daily Discusses Supreme Court Ruling Against IMF-formulated Inland Revenue Act, CEYLON TODAY ONLINE (Aug. 8, 2017), Open Source Enterprise online subscription database, No. SAR2017080840512963.)

The Supreme Court Decision

The Supreme Court reviewed petitions concerning the proposed Inland Revenue Act and determined that one provision should have been the subject of a national referendum, in addition to having been approved by two-thirds of the 225 members of the unicameral Parliament. It also ruled that additional provisions should have been passed by a two-thirds vote, not a simple majority.  (Id.)  The Court found clauses 97, 98, 100(1) (e), 167, and 200 of the bill are inconsistent with various articles of the Constitution. (Sri Lanka Supreme Court Finds Inland Revenue Bill Inconsistent with the Constitution, COLOMBO PAGE (Aug. 4, 2017.)

The clause that the Court ruled invalid because it should have been voted on by the electorate in a referendum, article 200, has to do with interpretation of the Act . (Sri Lankan Daily Discusses Supreme Court Ruling Against IMF-Formulated Inland Revenue Act, supra.) The proposed law as written (under article 167) would have allowed tax authorities to stop a person from leaving the country if the person is suspected of having committed tax fraud. (Id.; Sri Lanka’s Supreme Court Shoots Down Tax Reforms, supra.)  In addition, the Court decided that provisions allowing the authorities to share information with the state attorney general for the purpose of criminal prosecution should have been passed by a two-thirds majority.  (Sri Lanka’s Supreme Court Shoots Down Tax Reforms, supra; Sri Lankan Daily Discusses Supreme Court Ruling Against IMF-Formulated Inland Revenue Act, supra.)