At the beginning of this month the Minister of Finance and Economic Development announced an increase in the Intermediated Money Transfer Tax [i.e. the tax on electronic money transfers] from five cents per transaction to two cents per dollar transferred. The increase, he said, would become effective immediately.
In this Bill Watch we shall examine the three stages in the Minister’s attempts to impose the tax – the initial announcement, the regulations and the Bill – to answer an important question: when, if ever, can the Minister start levying the increased tax?
The Initial Announcement of the Tax
The Ministers announcement of the purported tax elicited a chorus of disapproval and even outrage. Economists and unionists said the new tax would impact unfairly on low-paid workers and on those in informal employment. The business community said there should have been more consultation before the Minister took action as it would impact adversely on them.
Lawyers and legal organisations, including Veritas and the Law Society, said the tax was illegal because the law did not permit the Minister to impose or increase a tax by merely announcing it; taxes can be imposed or varied only by Act of Parliament or by a statutory instrument specifically authorised by an Act of Parliament.
The Minister and his advisers must have accepted that his announcement of the tax had no legal effect whatever. It is an elementary principle of law that taxes cannot be imposed or varied or abolished by ministerial decree. Section 298(2) of the Constitution makes this clear:
“No taxes may be levied except under the specific authority of this Constitution or an Act of Parliament.”
So the Minister’s initial announcement on the 1st October did not and could not impose a new tax or alter an existing one.
In response to the hostile reaction the Minister climbed down somewhat. Four days later, in a second announcement, he said that some electronic transfers would be exempt from the new tax: for example transfers of $10 or less, transfers of money for salaries and wages, and transfers of money in payment of tax. He also said that the tax would not come into force immediately but only on the gazetting of “the relevant regulations”.
On the 12th October the Minister published the regulations, the Finance (Rate and Incidence of Intermediated Money Transfer Tax) Regulations, 2018 (SI 205 of 2018).
Their publication did not, however, end legal controversy over the new tax: several eminent lawyers said publicly that they were illegal. Their validity is being challenged in the High Court.
These regulations – the Minister’s second attempt to impose the tax – are fatally flawed for at least three reasons:
1. The statutory provision under which they were made is unconstitutional
The regulations purport to have been made in terms of section 3 of the Finance Act, which reads as follows:
“(1) The Minister responsible for finance may make such regulations as he or she may consider necessary or expedient for the administration of this Act and the better carrying out of its purposes.
(2) Regulations made in terms of subsection (1) may amend or replace any rate of tax … that is charged or levied in terms of any Chapter of this Act …”
The section is extraordinarily wide, giving the Minister power to alter the rates of all the taxes imposed under the Finance Act, which include income tax, PAYE, VAT and capital gains tax. The section gives the Minister a general blanket authority to alter taxes; it is certainly not a “specific authority” envisaged by section 298 of the Constitution, quoted above.
In other words, section 3 of the Finance Act is so broad that it is unconstitutional and void. Hence the regulations, which were made under the section, are also void.
2. The regulations purport to amend the Finance Act
The regulations contain two operative sections, one of which purports to repeal and replace section 22G of the Finance Act, the other of which purports to replace a paragraph of the 13th Schedule to the Income Tax Act. In other words, both sections of the regulations purport to amend Acts of Parliament. Again, it is an elementary principle of law that a Minister cannot make regulations amending an Act of Parliament unless he or she is specifically authorised to do so by an Act of Parliament. Section 3 of the Finance Act, even if it is valid, authorises the Minister to alter rates of tax but it does not permit him to replace provisions of the Act itself. And it certainly does not permit him to amend the Income Tax Act.
Hence the regulations are ultra vires and void.
3. The regulations alter the incidence of the tax
The third reason that the regulations are invalid is that they alter the incidence rather than just the rate of the tax.
Section 3 of the Finance Act – assuming it is valid – allows the Minister to amend or replace “any rate of tax”, i.e. to alter the amount of tax that taxpayers have to pay. It does not however allow him to alter the incidence of a tax, i.e. to alter the persons who must pay the tax or the transactions that are liable to the tax. He cannot therefore exempt particular transactions from the tax, which is what he has purported to do in the regulations.
These three reasons make the regulations so clearly invalid that they cannot possibly form a basis for collecting the new tax. It may be noted that some banks are not in fact collecting the tax: presumably their legal advisers have warned them that the regulations are invalid.
Finally, on the 19th October the Minister gazetted a Bill, the Finance (No. 2) Bill, which if passed by Parliament will amend the Finance Act and the Income Tax Act in the same way as his regulations purported to do a week earlier. The Bill is also available on the Veritas website [link].
The Bill contains the same provisions as the regulations: it will replace section 22G of the Finance Act and amend paragraph 1 of the 13th Schedule to the Income Tax Act.
- The first point to make is that the Bill is not yet a law – it has not even been presented in Parliament – so it cannot authorise the Minister to do anything, much less collect a tax.
- The second point is that before it becomes a law it will have to be passed by Parliament, and with all the controversy that has been raised by the new tax it is by no means certain that Parliament will pass the Bill, at least in its current form.
If the Bill is enacted it certainly will authorise the tax, but from when? The Bill states that its provisions are back-dated to the 13th October, when the Minister issued his regulations, so the tax will be legalised retrospectively or, to use a more precise word, retroactively.
This may be unconstitutional. What the Bill will be doing is to penalise financial institutions which fail to collect and remit the new tax – and they are entitled to refuse to collect it, for the moment at least, because the regulations are void. In other words, if financial institutions do not collect the tax now, they will be liable to penalties for tax evasion as soon as the Bill is enacted into law; their conduct, which is perfectly legal now, will be rendered unlawful.
It is to be hoped that the retroactivity of the Bill is an issue that is raised during the Bill’s passage through Parliament.