The tax authorities are empowered by law to impose penalties for various tax infractions. In this article, we focus on instances where the taxman applies a 200 percent penaltyโa figure that may sound excessive but is very real. Unfortunately, such steep penalties apply under both the Income Tax Act and the VAT Act.
Penalties serve two primary purposes: to punish tax defaulters and to deter potential non-compliance. To make matters worse, interest is charged not only on the outstanding tax but also on the accumulated penalties and previous interest. This compounding effect can push some taxpayers to the brink of insolvency. But what drives the taxman to impose such severe penalties? Letโs explore.
The law
Tax authorities rely on voluntary compliance, meaning taxpayers are expected to pay the correct amount of tax without direct enforcement. The 200 percent penalty essentially serves as a deterrent, sending a clear message:
“I cannot monitor every taxpayer individually, so it is your duty to pay the correct tax. If I have to investigate and find that you underpaid or failed to pay, I will impose a heavy penaltyโ200 percentโas compensation for the resources spent enforcing compliance.”
The Tax Acts outline specific circumstances under which this maximum penalty applies, which we discuss below.
Negligence
Negligence or carelessness in tax matters can provoke the taxmanโs strictest measures. Some examples include:
- A VAT-registered business failing to charge VAT on taxable supplies.
- Incorrect VAT treatment of mobilisation fees received for services yet to be rendered. While accountants might classify such income as “not yet earned,” the taxman sees it differentlyโVAT is due on the earlier of payment receipt or invoice issuance, regardless of when services are actually delivered.
Wilful default
When tax evasion is deliberateโsuch as understating salesโthe full force of the 200 percent penalty is applied. Unlike negligence, this involves intentional non-compliance, often through fraudulent schemes.
It is the taxpayerโs responsibility to prove that their actions do not constitute negligence, fraud, or wilful default. Otherwise, they risk facing the maximum penalty.
Can penalties be waived?
Yes, but waivers are granted at the discretion of BURS. Successfully securing a waiver requires a strong case and solid supporting arguments. While the 200 percent penalty is the maximum allowed by law, it is not necessarily the final amount imposed. With professional tax advice, taxpayers may reduce or eliminate penalties, depending on their specific circumstances.
Final thoughts
We hope this insight clarifies the reality of 200 percent tax penalties. As the saying goes, “Give to Caesar what belongs to Caesar.”
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