When a business has already failed and the taxpayer genuinely lacks the financial capacity to pay, does the law provide sufficient consideration for their ability to repay? What safeguards exist to prevent excessive enforcement or the misuse of power by public officials?
As an MSME owner, I have genuine concerns. The Government has introduced stronger tax laws and tougher enforcement to combat tax evasion. While deliberate tax fraud should certainly be punished, has equal attention been given to protecting honest businesses from excessive or unfair enforcement?
Many business owners have shared stories of severe financial hardship during tax recovery proceedings. Some say they have faced court action, some have been forced to sell assets to settle tax liabilities, and others have struggled to rebuild their lives after business failure. These experiences raise an important question: Does our legal framework provide sufficient safeguards against the misuse of authority, and does it adequately consider a business’s actual ability to pay?
A bankrupt business cannot generate tax revenue. A closed factory cannot employ workers. A business that is forced to shut down contributes nothing further to the economy.
Today, MSMEs are already carrying a heavy burden. Many are struggling with 18.5% VAT, 2.5% SSCL (where applicable), and the costs associated with mandatory digital payment systems, all while operating on increasingly thin margins. Instead of discussing growth and expansion, many entrepreneurs are asking a painful question: “Should we continue trying to survive, or should we close our businesses?” If that is the reality facing our MSMEs, then something is wrong.
We need strong laws against deliberate tax evasion, but we also need strong safeguards against the misuse of power, fair dispute resolution, and practical repayment mechanisms that recognise a business’s financial capacity. The goal of tax administration should be to maximise long term compliance and economic growth, not to unintentionally destroy the very enterprises that create jobs and contribute to Sri Lanka’s economy.
New VAT amendments
The new amendment to VAT Act significantly increases the period within which criminal proceedings may be instituted. Where an offence involves the commission of an Act, proceedings may be commenced within 12 years from the date on which the act was committed. Similarly, where an offence involves a failure to perform an obligation under the VAT Act, proceedings may be instituted within 12 years from the date on which the obligation was required to be performed. This is as against 5 years under the previous law. When the new law is imposed it can go back to 2014. This causes problems to businesses that don’t possess documents that far or have only upto 2019 applicable to the previous law. If a case is filed next year, businesses are clueless as to how to defend this. Ideally this 12 year rule should be implemented from 2031 onwards.
It is unfortunate that this problem and failure by law makers is not addressed by the Committee of Public Finance. The disappointment is that law and policy makers fail to look at challenges from a tax payers perspective. Officers at the Inland Revenue Department also lack adequate knowledge about problems faced by businesses or running a business. Growing frustration, disillusion and bankruptcy has been linked to some of the suicide cases among micro, small and medium entrepreneurs.
Inland Revenue enforcements and immense pressure on many MSMEs
As I have observed, since this Government came into office, Inland Revenue enforcement has placed immense pressure on many MSMEs.
From what I have witnessed and been informed by Deputy commissioner itself, around 600 businessmen in the Central Province were brought before the courts within one month last year to cover their targets. Many were held in custody until bail was granted and I witnessed it.
I have also seen cases where business owners were forced to sell their assets including their only vehicle or even their family home to settle outstanding tax liabilities.
One case that deeply affected me involved a businessman whose business had already become bankrupt and closed down. When the Inland Revenue filed action against him, he was working for a salary that was barely enough to support himself and his family. During the court proceedings, the judge asked whether he could pay a specified amount towards the tax arrears. He explained that he simply could not afford it because his business no longer existed and his salary was insufficient. As a result, he was imprisoned because he was unable to pay.
This raises an important question: When a business has already failed and the taxpayer genuinely lacks the financial capacity to pay, does the law provide sufficient consideration for their ability to repay? What safeguards exist to prevent excessive enforcement or the misuse of power by public officials?
This also raises a fundamental policy question.
If a person has genuinely become bankrupt, their business has already closed, and they have no realistic ability to pay their tax debt, what is achieved by imprisoning them?
While they are in prison, the Government bears the cost of their food, accommodation, healthcare, electricity, water, security, and prison administration, all funded by taxpayers. At the same time, that person is unable to work, earn an income, or make any contribution towards settling the outstanding tax liability.
More practical solution
Would it not be more practical and economically sensible to allow such a person to remain employed and require them to repay what they can reasonably afford through a structured repayment plan? Even if the payments are small, the Government continues to recover revenue instead of incurring the additional cost of imprisonment.
This is not about excusing deliberate tax evasion. Those who intentionally commit tax fraud should be dealt with firmly. However, where a business has genuinely failed and a taxpayer has no financial capacity to pay, should our laws not distinguish between unwillingness to pay and inability to pay?
The purpose of tax enforcement should be to recover revenue while treating people fairly, not to impose additional costs on the State where there is little prospect of recovering the debt.
Perhaps it is time for policymakers to review these laws and consider reforms that protect public revenue while also recognising economic reality and the genuine repayment capacity of struggling taxpayers.
Protect MSMEs. Protect jobs. Protect the future of Sri Lanka.