Sri Lanka’s tax collection mechanism is widely criticised for its mismanagement and misconduct, which directly contributes to the decline in the country’s expected public revenue.
To address this issue, every government has taken measures that are sometimes criticised for being unfavourable to the general public. Many parties have also raised concerns about the latest tax policy amendments proposed in the National People’s Power (NPP) Government’s maiden Budget in light of their potential impact on taxpayers.
According to Budget 2025, taxpayers who wish to appeal to the Tax Appeals Commission (TAC) are required to deposit 25% of the disputed tax, penalty, and interest into a special account managed by the Commissioner General of Inland Revenue (CGIR).
According to the Government, this mandatory deposit aims to ensure the seriousness of appeals and discourage frivolous claims. However, this requirement has raised concerns about its potential to deter taxpayers from exercising their right to appeal, thereby limiting access to justice.
Impact on taxpayers, appeals process
In this context, The Sunday Morning looked into this move’s impact on taxpayers and the tax appeals mechanism.
The Tax Appeals Commission Act (as amended) outlines the procedures for taxpayers to challenge tax assessments. According to Section 7 of the act, an aggrieved taxpayer must deposit a 10% non-refundable or 25% refundable amount of the disputed amount (as required) or an equivalent bank guarantee when filing an appeal with the TAC.
The primary objective of this provision is to prevent the TAC from being overwhelmed by baseless appeals and to encourage taxpayers to resolve disputes at earlier stages.
However, speaking to The Sunday Morning, Gajma & Co. Senior Partner N.R. Gajendran termed this proposal as “draconian”.
“Sri Lanka is a democratic country. The fulcrum of democracy is the rule of law and the fulcrum of rule of law is justice. For justice to prevail, the law has to recognise the unconditional right of appeal against administrative decision or action. The right of appeal is a statutory right and it is expressly created and granted by statute.
“Article 138 of the Constitution is an enabling article and confers jurisdiction to hear and determine appeals to the Court of Appeal. A mandatory payment of 25% of the disputed amount of tax, penalty, and interest means the taxpayer may not be able to pay such a large sum to make an appeal, thereby denying them the right of appeal against the assessment,” he said.
He further labelled the Government’s position that the proposal helped to address issues related to tax evasion as a “myth”.
“The Government has been championing the rights of the people. As such, this denial is an unintended consequence and this proposal should not be given effect through law. Imagine a taxpayer who cannot pay the 25%; when the right of appeal is denied, his grievance cannot be heard, leaving him without any alternative.
“There are instances where the Inland Revenue Department (IRD) makes an unconscionably large, arbitrary, capricious, unfair, unreasonable, and unjust assessment. There are instances where 25% of the tax, interest, and penalty exceed company profits.
“There is a myth prevailing that the payment of 25% to validate an appeal will combat evasion. It must be clearly understood that evaders never appeal. They finalise matters very easily and conveniently, in secret or through covert payoffs under the table,” he explained.
Gajendran also said that this proposal would enable a breeding ground for corruption. “It will cause corruption to escalate, making the taxpayer a captive of the revenue officer, who will dictate terms despite being a servant of the taxpayer. This proposal should never be implemented. If it is implemented, revenue administration will become altogether unmanageable,” he said.
Meanwhile, Attorney-at-Law Dinusha Rajapakse, an expert in tax compliance and advisory services, also raised concerns about the regulation’s impact on fundamental rights.
Speaking to The Sunday Morning, she said: “The law currently only requires taxpayers to provide a bank guarantee of 25%, which does not significantly affect their cash flow, apart from bank charges. However, if taxpayers are required to pay 25% in cash and deposit it into a bank account, it will discourage them from pursuing the tax appeal process. This deprives taxpayers of their right to appeal against the CGIR’s decision and acts as a clear deterrent.”
She also stated that this regulation would hinder the entire tax appeals process, which was a part of the country’s legal system.
“There are instances where the CGIR does not fully consider the points of law, sometimes due to differences in interpretation. This makes it essential to have an independent mediator, such as the TAC, to review the issue and interpret the law. However, such regulations will discourage taxpayers from engaging in this process, which is both their right and a legal provision in the country,” she said.
Global context
When considering global examples, similar deposit requirements in tax appeals processes have been a subject of debate in other countries as well.
For instance, in Kenya, a proposal requiring taxpayers to deposit 50% of the disputed tax before appealing to the High Court was met with significant opposition. Critics argued that such a requirement would deny taxpayers access to justice, particularly those unable to raise the required amount, and could negatively impact business cash flows.
Consequently, the parliamentary committee recommended the deletion of this clause from the Finance Bill, acknowledging that it could reduce working capital for businesses and deny justice to taxpayers unable to raise the required amount.
Similarly, in Uganda, a provision requiring a deposit of 30% of the assessed tax before lodging an objection was ruled unconstitutional in July 2020 after a prolonged legal battle. The court held that such a requirement violated taxpayers’ rights to access justice.
Decision forthcoming
However, when contacted by The Sunday Morning, Ministry of Finance Department of Fiscal Policy Director General Kapila Senanayake stated that a final decision on the implementation of this proposal was yet to be made, noting that the topic remained open for discussion.
“Not all proposals are implemented as they are; they undergo certain changes. This proposal will also be amended if necessary. All these changes were suggested after consulting stakeholders. It was specifically proposed to streamline the appeals process to reduce tax evasion and other related issues. All concerns will be reviewed and a decision will be made soon,” he said.
The concerns raised by stakeholders highlight that, while the 25% deposit requirement for appealing to the TAC is intended to streamline the tax dispute process and prevent frivolous appeals, it also creates significant challenges for taxpayers seeking justice.
The financial burden of this deposit may discourage legitimate appeals, especially from Small and Medium-sized Enterprises (SMEs) as well as individual taxpayers with limited financial resources.
This demonstrates that striking a balance between protecting Government revenue and safeguarding taxpayers’ rights requires careful consideration of alternative measures. These measures should uphold the integrity of the tax system while ensuring that taxpayers are not subjected to unnecessary financial hardship when exercising their legal right to appeal.