Fresh concerns as Super Gains Tax resurfaces via new Bill

• Private sector expresses disappointment over new Govt.’s insistence and lack of respect for the principles of the Rule of Law
• Claims it is unfair to be taxing firms on income that was not legally taxable at the time it arose
• Points to many countries which have abandoned retrospective taxation

With Super Gains Tax resurfacing through the new Finance Bill tabled in Parliament last week, fresh concerns have been raised by the private sector over the move described as “draconian”. 

Finance Minister Ravi Karunanayake has reintroduced the Finance Act (Amendment) Bill which seeks to impose the Super Gains Tax on a company or individual whose profit before tax exceeds Rs. 2 billion.

This and six other bills aimed at raising State revenue were presented to Parliament by the Finance Minister last week amid Opposition protests. 

The bill was earlier presented in Parliament consequent to the interim budget in January. The amendment to the Finance Act also provides for the imposition of Bars and Taverns Levy, Casino Industry Levy, Mobile Telephone Operator Levy, Direct-to-Home Satellite Services Levy, Satellite Location Levy, Dedicated Sports Channel Levy, Mansion Tax, Migrating Tax and the Motor Vehicles Importer Licence Fee.

“Retrospective taxes are a favourite Nazi practice,” quipped a private sector business leader who wished to remain anonymous. 

“There is no difference in principle between taxing people on income that was not legally taxable at the time it arose, or at higher rates than were then in force, and fining, imprisoning, or even executing people for so-called ‘offences’ which were not legally offences at the time they were committed,’ he added.

Another said it was disappointing to see a modern Sri Lanka Government resort to this obnoxious practice once again. 

“One might have hoped that the UNP majority in the National Government would have more respect for the principles of the Rule of Law,” he added. 

A corporate analyst said companies liable for Super Gains Tax (SGT) have already paid taxes previously, apart from dividends and any surplus reinvested already. 

“For group companies, subsidiary companies have to pay SGT even if the profit is far less than the threshold if the consolidated profit exceeds Rs. 2 billion. Some of these group companies have foreign shareholdings and it’s difficult to justify these companies paying SGT irrespective of their profit, just because they are a member of a group,” the analyst added.

Karunanayake has previously stated that only a few companies would be subject to SGT and Prime Minister Ranil Wickremesinghe maintained that those in the private sector who made riches need to give back more to society by way of SGT since the new Government has to give much needed relief to the people. 

Tax experts however said that most progressive countries have abandoned the practice of retrospective measures. 

Retrospective action

India recently confirmed same after the previous regime mooted some retrospective taxation. In the 2014 Budget speech, Finance Minister Arun Jaitley had this to say: “The sovereign right of the Government to undertake any retrospective legislation is unquestionable. However, this power has to be exercised with extreme caution and judiciousness, keeping in mind the impact of each such measure on the economy and the overall investment climate,” he said, adding, “This Government will not ordinarily bring about any change retrospectively which creates a fresh liability.”

In fact last week India went a step ahead by deciding to amend the income tax law with retrospective effect to exempt foreign companies covered under double taxation avoidance agreements from Minimum Alternative Tax (MAT).

In the US, there is a constitutional prohibition against passing ex-post facto laws by Clause 3 of Article I, Section 9 of the US Constitution. However, substance due process amendments in taxation laws have been made retrospectively in certain cases. Notably, these are procedural issues—not issues of imposing a tax retrospectively.

Analysts said where there have been incidents of retrospective taxation it has always been to recover taxes over avoidance. In the case of the proposed SGT this is not the case because the companies concerned were taxpayers in the past. 

Examples of retrospective tax law amendments, particularly if they are anti-avoidance, are not uncommon. In fact, the famous Westminster principle is the supremacy of the Parliament—the right to enact a law includes the right to enact a law retrospectively or retroactively. 

In the UK, Section 58 of UK Finance Act 2008 was changed retrospectively to affect the residential status of foreign partnerships and trusts. The amendment was challenged in R v. HMRC,  [2011] EWCA Civ 89, where the question pertained to the residential status of Isle of Man trusts which, with a negligible contribution of capital from a UK resident, was allegedly use to escape tax otherwise taxable in the UK. The Court of Appeal held: “If Section 58 were not made retrospective, the claimants would obtain a windfall at the expense of the general body of taxpayers. It would be unfair to the general body of resident taxpayers not to have given Section 58 retrospective effect. The claimants entered into schemes with the intention of deliberately avoiding UK tax. HMRC never accepted that the schemes worked and the tax liabilities were not settled before the legislation was applied to them.”

Prior to this, in Robert Huitson Vs HMRC3, the courts had approved retrospective anti-avoidance legislation. To this, the comment of an academic on the BBC was: “Is it the thin end of a very dangerous wedge, allowing HMRC to get its own way without bothering to argue its case in the courts? Or will retrospection be used only exceptionally, most commonly in response to artificial tax planning schemes? What is certain is that backdating legislation is a cheap, quick and certain way of closing a tax loophole, and it may be irresistibly tempting for the Government to use the same method again. ”

Australia has also enacted retrospective laws, including those to overcome adverse rulings of courts. Australian Parliament’s Legislation Handbook, which provides recommendations for legislative procedure, suggests the following with regard to retrospective legislation: “Provisions that have a retrospective operation adversely affecting rights or imposing liabilities are to be included only in exceptional circumstances and on explicit policy authority.”