Inefficient State and corrupt bureaucrats taking taxpayers for a ride

Successive administrations and corrupt officials have continuously exploited taxpayers

Taxpayers form the backbone of national development, yet they continue to be marginalised by inefficient governance and bureaucratic corruption. The proposed 25% cash deposit requirement for tax appeals places an undue financial and psychological burden on taxpayers, discouraging legitimate disputes and fostering corruption. A more balanced approach would involve enforcing existing tax laws, reducing assessment time limits, and strengthening taxpayer protections

The long-awaited “Pandora’s box” of the 2025 Budget proposal was finally opened by President Anura Kumara Dissanayake (AKD) on 17 February 2025. The Budget has sparked mixed reactions—both positive and negative—among the general public. Personally, I believe that no sensible Government could have crafted a better Budget under such challenging circumstances. 

As a retired tax official and current tax consultant, my focus here is a critical view on the proposed amendment of mandatory requirement of keeping 25% cash deposit with CGIR as a condition to prefer an appeal with the Tax Appeals Commission (TAC) particularly in light of the AKD and NPP Government’s strong stance on combating bureaucratic corruption and of the erosion of taxpayers’ rights. 

Disclaimer: Any positive or negative attribute I assign to a person or institution does not imply a judgment of the entire institution or all individuals within it, and vice versa.

Noble contributions of taxpayers

Before delving the adverse aspects of the proposed amendment to the TAC Act, it is essential to recognise the immense contributions of taxpayers to national development. Despite decades of political mismanagement and economic turmoil, taxpayers have steadfastly fulfilled more or less their financial obligations, sustaining the country’s infrastructure, intellectual capital, and essential services such as education, healthcare, and security.

It is not a secret that people are generally reluctant to part with their possessions unless they receive something of equal or greater value in return—whether tangible or intangible. Tax payments are no exception. The million-dollar question is: What do taxpayers receive in return for their contributions? Instead of appreciation or recognition, they are often subjected to harassment, excessive audits, and punitive assessments. Successive Governments have failed to acknowledge their role, instead treating them as a limitless source of revenue while offering little in return. 

From time immemorial, taxpayers have dutifully fulfilled their patriotic and social responsibilities, regardless of the nature or status of the ruling authorities. Had they not made these contribution, this country would have been in an even worse state today. 

Hence, the whole country should be indebted to our taxpayers who were instrumental in financing the development of this country in terms of its infrastructures, producing intellectuals and professionals, supplying of essential services of education, health, security, etc. 

Yet, they suffer in silence, lacking an effective voice or syndicate to advocate for their rights. Meanwhile, some consortiums and chambers—formed by a handful of elite taxpayers—engage in activities that serve their own interests rather than genuinely protecting and promoting taxpayer rights.

The need for protection of taxpayer rights

It is a harsh reality that no Government or association has proactively established mechanisms to safeguard taxpayer rights and uphold fundamental taxation principles such as fairness, consistency, convenience, and efficiency. Consequently, successive administrations and corrupt officials have continuously exploited taxpayers.

It is noteworthy that a former CGIR had taken in the first half 2023 a bold initiative in publishing four documents strengthening and safeguarding rights of taxpayers as part of the Extended Fund Facility of IMF.

1. Taxpayer Charter – 22 June 2023

2. Instruction to issue an additional or amended assessment – 22 June 2023

3. Scope of the Administrative Review (Appeal) – 22 June 2023

4. Prevention of corruption in Inland Revenue Department – 24 August 2023

It is unfortunate that despite assurances to the contrary, the second and third documents were not yet published in the IRD website. However the adverse impact of non-publishing them in the IRD website is mitigated, since those documents are freely available among the stakeholders. 

Regrettably, taxpayer advocacy groups’ failure to highlight these crucial initiatives reflects a broader systemic neglect of taxpayer rights.

Budget proposal of mandatory requirement of cash deposit of 25% with the CGIR

The 2025 Budget proposal introduces a new requirement: taxpayers must deposit 25% of the disputed tax amount (including penalties and interest) with the CGIR before lodging an appeal with the TAC. The stated objective of this policy is to prevent frivolous appeals and accelerate tax revenue collection. While this may seem reasonable at first glance, a deeper analysis reveals significant concerns.

Taxpayers are often subjected to arbitrary and excessive assessments, some of which are motivated by personal vendettas or corruption. A staggering 80% of additional and amended tax assessments remain disputed, according to the IRD’s 2022 Annual Performance Report. Out of Rs. 904 billion in defaulted taxes, only Rs. 163 billion (19%) was deemed collectable, while Rs. 741 billion (81%) was under dispute. Such figures highlight the systemic flaws in tax assessments, reinforcing the need for a fair and transparent appeals process.

By imposing a financial barrier to appeals, the Government risks discouraging genuine disputes, thereby violating taxpayers’ rights and increasing opportunities for corruption. Instead of addressing the root cause—unfair and excessive tax assessments—the proposed amendment merely shifts the burden onto taxpayers.

Simplifying and streamlining the appeals process help reduce corruption especially at lower levels. Conversely, imposing restrictions and procedural hurdles such as this mandatory requirement can create a conducive environment for corruption for which the people of this country overwhelmingly voted for AKD to eradicate that menace. 

I sincerely urge the Government of AKD, a long-awaited, people-friendly administration, to prioritise safeguarding and strengthening taxpayers’ rights by implementing the following measures instead of imposing restrictions on them.

1. Learning from established legal frameworks

A more effective approach to controlling unjust tax assessments already exists within the Default Taxes (Special Provisions) Act, No. 16 of 2010. Section 12 of this Act mandates that the CGIR limit default taxes to less than 3% of the previous year’s total tax collection. If this threshold is exceeded, Section 13 requires the CGIR to submit a report to the Minister within four months, detailing the reasons and recommending corrective measures.

Despite this legal safeguard, many policymakers and tax officials remain unaware of its significance. Instead of proposing radical changes to internationally accepted best practices in tax appeals, the government should enforce existing laws that promote fairness and efficiency.

It is unfortunate for the country that many, including the legislators, policymakers, and IRD officials - seemingly unaware of this golden piece of the law which aims to curb unnecessary tax assessments that have the potential to harass genuine taxpayers – try to bring in some radical changes to the internationally accepted best practice of the appeal process.

2. Reducing the limitation of time for issuing of the assessment

If the Government is serious about expediting tax revenue collection, a more practical solution would be to reduce the statutory time limit for issuing additional or amended assessments from 30 months to 18 months, as was the case before 1 April 2018. Currently, tax officials often delay assessments until the very last moment, undermining the efficiency of tax administration.

It is an open secret that tax officials issue the assessments just under the wire at the eleventh hour, defeating the statutory time limitation, irrespective of the lengthy number of years or months given.

Hence, it is better to reduce the 30-month time-bar period to 18 months for issuing the assessment and thereby save 12 months for accelerating the collection of due taxes in default, instead of changing the appeal process which would place the taxpayers in an awkward position.

3. Two historical circulars of the CGIR

The CGIR has issued two important circulars dated 22.06.2023 as part of the Extended Fund Facility of IMF, under the reference numbers CGIR/2023/3-1(Ins & Cir) 14 and CGIR/2023/3-1(Ins & Cir) 15, outlining the guidelines for preventing unnecessary and unreasonable tax assessments and an effective mechanism for settling income tax appeals within seven months. It seems that these two instructions are not strictly followed.

The tax officials who issue such assessments get away scot-free, while the appellant taxpayers have to face undue financial and mental suffering to prove the fallacy of the assessment.

The selection of a file for audit may serve as a gateway to corruption. Previously, this selection was at the discretion of tax officials, who had the power either to conduct a fair audit and collect due taxes or to exploit the process for personal gain by blackmailing taxpayers. To prevent such abuse and safeguard taxpayers’ rights, the CGIR issued two circulars restricting these discretionary powers.

It is important to note that taxes collected through additional assessments from official audits account for less than 10%, whereas over 90% of tax revenue comes from self-assessment payments made by voluntary taxpayers. Clearly, prioritising the 90% would yield significantly greater revenue than focusing on the 10%.

Hence, I hope the focal attention of the Government and the authorities concerned be paid on creation of conducive environment where the rights and obligations of taxpayers duly protected.  

4. Appointment of Tax Ombudsman

Independence of a competent Tax Ombudsman office plays a very crucial role in protecting taxpayer rights by ensuring fairness, transparency, higher rate of tax compliance, and accountability in tax administration. The office can act as a check and balance between the tax officials and tax evading and avoiding taxpayers. 

Office of the tax ombudsman can play the following important roles in ensuring a favourable taxpayer friendly environment where taxpayers and tax officials play their respective roles legally and with due respect to each other.

• Ensuring the tax statues, other related guidelines, circulars, and instructions issued by the CGIR and other relevant authorities are strictly followed,
• Ensuring the discretionary powers given by the tax statues are not misused,
• Ensuring fair treatment by protecting taxpayers from harassment, undue penalties and misinterpretation of tax laws, and
• Enhancing transparency by investigating cases of corruption, inefficiency, or bias in tax administration. 

Bureaucratic corruption is more harmful than political corruption

While both forms are harmful, bureaucratic corruption is often more devious and inescapable. It operates at the implementation level and is difficult to detect due to systemic loopholes and discretionary powers granted to public officials.

It is unfortunate that many trade unions, whether knowingly or unknowingly, shield corruption in their workplaces under the guise of protecting State revenue or defending their members’ rights. Even more troubling is the stance of opposition political parties, which often side with these corrupt unions for political gain, prioritising opportunism over patriotism. A prime example of this was the recent uproar and go-slow campaign by customs trade unions when the government attempted to curb deep-rooted corruption and malpractice within Customs.

Conclusion

Taxpayers form the backbone of national development, yet they continue to be marginalised by inefficient governance and bureaucratic corruption. The proposed 25% cash deposit requirement for tax appeals places an undue financial and psychological burden on taxpayers, discouraging legitimate disputes and fostering corruption.

A more balanced approach would involve enforcing existing tax laws, reducing assessment time limits, and strengthening taxpayer protections. The Government must create an environment where both taxpayer rights and obligations are upheld with fairness, transparency, and efficiency. Only then can we achieve a truly equitable and sustainable tax system.

(The writer is a retired Deputy Commissioner General of IRD. He can be reached at [email protected].)