Sri Lanka’s fiscal tyranny by midnight gazette: retrospective taxes must end

The new United National Party-led administration got off to a bad start in January in public finance, violating old and new principles of governance, and hurting economic freedom and justice, sending danger signals with arbitrary and unjust taxation

The new administration now has considerable economic challenges to sort out, with macroeconomic problems self generated by its own deficit spending and money printing. The budget was probably the worst since the 2004 Rata Perata subsidies, which is driving the country to currency depreciation and inflation.

Large volumes of money were given to state workers, which will have to be taken from the rest of the society through future taxes. Some commentators have explained this as the price private society has to pay to get better governance and freedom, while others say it is the price paid for the incompetence of the then opposition.

Quite apart from triggering balance of payments pressure and currency depreciation by high spending and money printing, the budget also undermined people’s freedom through retrospective and targeted heavy taxes.

The retrospective and targeted taxes on selected companies under- mined the rule of law and justice and if any new administration wants to create better conditions for invest- ment and property rights, these taxes on unarmed citizens should be taken off the table forthwith.

The retrospective and targeted taxes on selected companies undermined the rule of law and justice, and if any new administration wants to create better conditions for investment and property rights, these taxes on unarmed citizens should be taken off the table forthwith

Taxation without consent

● The new ‘revenge’ levies come
on top of an entirely arbitrary and unparliamentarily system of taxation that already exists, which is com- pletely against the basic principles of democracy and justice.

In Sri Lanka, many taxes are hatched in secret and slammed on an unsuspecting public by midnight gazette while they are sleeping, which goes completely against the principle of taxation by consent, which was the reason for setting up parliaments in the first place.It is sad that Sri Lankan citizens are so badly off decades after independence from British rule and subject to the tyrannies of the midnight gazette and taxation without consent.

The origins of the modern nation- state backed by police, a standing army and a legislating parliament are in Europe. The Magna Carta, or the Great Charter of Liberties of England is considered to be the first constitution- style document to limit the arbitrary rule of a king or sovereign. The feudal barons of England forced King John to sign a document limiting his pow- ers in 1215 mostly because a series of taxes were imposed on them without consent.It was later re-issued by several kings, and a key subsequent confirma- tion in 1297 following a controversial tax on wool under Edward I strengthened the principle.

Through the Confirmation of Charters the King agreed that….for no need will we take such manner of aid, mises (taxes) or prises (assess- ments) assessments from our realm henceforth, except with the common assent of all the realm and the common profit of the same realm, saving the ancient aids and prises due and accustomed.”

In 1689, the principle was further strengthened by the English Bill of Rights, under William and Mary which further promised that there will be no taxation by Royal Prerogative and that the agreement of the parliament was necessary for new taxes.

In the US, a key plank of its independence struggle from Britain – no taxation without representation – was related to consent.

Taxation by gazette on a Minister’s Prerogative through midnight ga- zette is continuing in the 21st century while the citizenry is asleep. The hue and cry by those who were victimized by the sudden tax on hybrid cars in January 2015 was a result of the mid- night gazette and taxation without consent.

Taxation by midnight gazette has to be abolished as soon as possible, if we are to become a free people. Sri Lanka did not gain freedom in 1948, we got self-determination. After gaining self-determination, we have ‘self-determined’ our way to lose many freedoms, including on taxation.

Unfortunately, Sri Lanka’s people are losing their freedoms decades after independence, in the new serfdom created by an elected parliament.

Rule of law or unruly legislation?

● Retrospective taxes are even worse. They violate a fundamental principle of the rule of law, which is predict- ability.

No free citizen should be subject to a rule that did not exist when he initiated an action.

Economist and philosopher F A Hayek in his work Road of Serfdom explains:“Stripped of all techni- calities [the rule of law] means the government in all its actions is bound by rules fixed and announced before- hand – rules which make it possible to foresee with fair certainty how the authority will use its coercive pow- ers in given circumstances, and to plan one’s affairs on the basis of this knowledge”.

Retrospective taxes may be legisla- tion but they are not laws in the sense of it being a just law that con- tributes to the rule of law. Instead, they are unjust sovereign commands that undermine the rule of law by falling short of being a just law.

Retrospective taxes were invented in Europe just like post-feudal nationalist hate and Marxism. So was taxation, by consent. But while Sri Lankan rulers are quick to deny taxation by consent – which enhances peoples’ freedom – they are quick to impose retrospective taxes on the people.

The 2015 budget also contained billion rupee taxes against a sports channel, which was mis-using state resources, and gaming firms which are clearly too large for those companies to bear. They were characterized by the opposition as revenge taxes.

If companies have ill-gotten gains, it has to be dealt with by the criminal justice system, not by arbitrary taxes. The origins of such taxes also lie in the West, called windfall taxes.

Imposing taxes that may bankrupt companies goes not just against prin- ciples of parliamentary governance but also historical governance principles practiced in the South Asian region even by feudal rulers. This goes to show that legislation enacted by the parlia- ment can be even worse than feudal laws, just like post-feudal nationalism.

A billion rupee tax violates a fundamental principle of tax law that goes back thousands of years particularly in South Asia, which is the ability to pay. “The ruler should act like a bee that collects honey without causing pain to the plant,” says the Mahabharata

Milk and honey

● A billion rupee tax violates a funda- mental principle of tax law that goes back thousands of years particularly in South Asia, which is the ability to pay.”The Ruler should act like a bee that collects honey without causing pain to the plant,” says the Mahabharata.

In Anushasana Parva, its 13th book, the sage Bhishma further counsels Yudhishthira, likening tax collecting to a man milking his cow every day. This principle has also been articulated by Chanakya (Kautilya) in his Arthashastra.

The rule of public finance embodied in the milk and honey analogy has been followed by Kings of Sri Lanka and India for centuries.

Even the International Monetary Fund now uses the principle as a basis for public finance in its handbooks, and Western countries follow the principle.

It is a liberal rule of state restraint and public finance that originated from this region and has spread to the entire world.

The irony is that it was a budget that was prepared by an administra- tion that promised Yahapalanaya (Good Governance) that desecrated this ancient liberal principle of good governance with its tax proposals.

If Sri Lanka’s new rulers want to make the country into a land that flows with milk and honey, where foreign and domestic investors will be clamouring to invest their money, and creating jobs and prosperity, fiscal tyranny is not the way to go about it. It can be inferred with a fair degree of certainty that the Lichchavi kings would not have done it either.