Chief Collector of Taxes v Fly River Provincial Government [1990] PGNC 90; [1990] PNGLR 284; N886 (22 June 1990)

N886

PAPUA NEW GUINEA
[NATIONAL COURT OF JUSTICE]

CHIEF COLLECTOR OF TAXES

V

FLY RIVER PROVINCIAL GOVERNMENT

Waigani
Amet J

15 June 1990
22 June 1990

INCOME TAX - Penalties and prosecutions - Liability of "employer" - Failure to lodge Statements of Earnings - Where employer provincial government - Definition applicable "except in relation to the imposition of a penalty" - Provincial government not liable for penalty - Income Tax Act, ss 299c, 299g.

Under the Income Tax Act, s 299c "employer" is defined as meaning:

"a person who pays or is liable to pay any salary or wages, and includes:

(b) in the case of a partnership — each partner; and, except in relation to the imposition of a penalty, also includes the State, an authority constituted by or under an Act, a provincial government, a local government body, or a local level government body by whatever name known established by a provincial law."

Held

The effect of the definition of "employer" in the Income Tax Act, s 299, is that a provincial government and the other public legal entities referred to are "employers" in so far as they pay or are liable to pay any salary or wages, but not in relation to the imposition of a penalty for failure to return a Statement of Earnings and Reconciliation Statements under s 299g.

Summons

These were proceedings prosecuted by the Chief Collector of Taxes under the Income Tax Act, s 312 and s 323(1), for recovery of a pecuniary penalty for failure to return a Statement of Earnings and Reconciliation Statements under s 299g of the Act.

Counsel

D L Cannings, for the plaintiff.
I Nwokolo, for the defendant.
Cur adv vult

22 June 1990

AMET J: This is a "taxation prosecution" by the Chief Collector of Taxes pursuant to s 312 and s 323(1) of the Income Tax Act for the recovery of a pecuniary penalty.

The defendant, the Fly River Provincial Government, is an employer pursuant to s 299c of the Act which defines "employer" as meaning:

"a person who pays or is liable to pay any salary or wages, and includes:

(a) in the case of an unincorporated body of persons other than a partnership — the manager or other principal of that body; and

(b) in the case of a partnership — each partner, and, except in relation to the imposition of a penalty, also includes the State, an authority constituted by or under an Act, a provincial government, a local government body, or a local level government body by whatever name known established by a provincial law;

(c) in the case of the payment of a capital amount of any allowance; gratuity or compensation paid in a lump sum under Section 46b, the payer of that amount."

The defendant is obliged under s 299g(4)(f)(i) and (ii) to furnish to the Chief Collector not later than the 14th day of February in each year:

(i) a copy of each Statement of Earnings issued by him to each employee in respect of salary or wages paid by him and the total amount deducted by him as a group employer during the period of 12 months that ended 31 December in the preceding year; and

(ii) a Reconciliation Statement of the total deductions shown in each copy of the Statement of Earnings and the total amount paid to the Chief Collector in respect of those deductions.

The defendant has been charged pursuant to s 299g(9) as having failed to furnish to the Chief Collector of Taxes the Statement of Earnings and Reconciliation Statements for the years, 1986 and 1987. Section 299g(9) provides that:

"An employer who contravenes or fails to comply with a provision of this section that is applicable to him is guilty of an offence."

Section 299g(10) provides the penalty, which is:

"The penalty for failure to comply with any one of the requirements of Subsection 4(a), or with the requirements of that paragraph as varied in pursuance of Subsection 6, is a fine of not less than K500 and not exceeding K2,000 or imprisonment for a term not exceeding six months, and the penalty for any other offence under this section is a fine not less than K200 and not exceeding K2,000."

The defendant has filed a defence contending simply that it is not liable to pay a penalty under the Act. It admits that it is an "employer" as defined under s 299c(1) "except in relation to the imposition of a penalty", as exempted under par (b) of the definition of "employer".

A "person" is defined by s 4(1) of the Act as including "a company, an authority of the State or public authority constituted by or under an Act, a provincial government or a local government body, by whatever name known established by a provincial law".

The Chief Collector has submitted in response that the defendant fell within the first part of the definition of "employer" as a "person who pays or is liable to pay any salary or wages". It submits further that nothing in the remaining paragraphs of the definition takes the defendant outside this first element that it is a "person" who pays salary or wages.

The plaintiff submits that the exclusionary words in s 299c(b) which the defendant has relied on (viz "except in relation to the imposition of a penalty, also ... includes ... a provincial government") must be read in the context of and subject to the introductory words of par (b): "in the case of a partnership". It is submitted by the plaintiff that the effect of the exclusionary words in par (b) is to exclude a provincial government from liability to penalty only in those situations where the provincial government pays salary or wages in partnership with another person.

The plaintiff advanced the following policy considerations as relevant in support of the construction he has submitted should be upheld. If the defendant was not regarded as an "employer", it would follow that:

(a) Not only provincial governments, but also the following classes of employers, would be exempted from penalty:

· The State;

· Any authority of the State or a public authority constituted by or under an Act;

· A local government body, or a local level government body whatever name known established by a provincial law.

(b) Many large tax paying entities, such as the Postal and Telecommunication Corporation and the Papua New Guinea Banking Corporation, would be able to avoid their statutory obligations as group employers without being liable to pecuniary penalties.

(c) Almost all public sector employers in Papua New Guinea would be exempt from penalty for failure to pay income tax deducted from their employee’s salary or wages to the Chief Collector of Taxes; and

(d) The Chief Collector would be unable to exercise significant coercive powers that would otherwise be available to him and in consequence thereof his capacity to properly and efficiently administer the taxation laws of the Independent State of Papua New Guinea would be seriously jeopardised.

I accept the plaintiffs submission that as the defendant is a "person" as defined by s 4(1) of the Act, it falls within the first element of the definition of "employer" as a "person who pays or is liable to pay any salary or wages". This then makes the defendant an "employer" for all purposes of the Act. If the definition of "employer" simply stopped there, the defendant could not escape liability, as it is clearly a "person" as defined who pays salaries and wages to employees. It would follow that as a sole employer the defendant would be liable to pecuniary penalty for non-compliance with the provisions of s 299g(4)(f)(i) and (ii) of the Act.

The plaintiff submits however that the effect of the exclusionary words in par (b) of the definition of "employer", is to exclude the group of public legal persons, including the defendant provincial government, from liability to penalty only in those situations where the provincial government pays salary or wages in partnership with another person. Two inconsistencies flow from this position. First, if the defendant and the other public legal persons are liable to pecuniary penalty in their operations as sole employers, how or why should they be any less liable as a partner in a partnership. One would have thought that the penalty provision would be more applicable to the partnership or joint venture situation where a more commercial operation and relationship exists under a separate corporate personality. Secondly, if, as the plaintiff submits the exclusionary words should be read subject to the introductory words of par (b) — "in the case of a partnership", which would include "each partner" as an employer for the purposes of the Act, it does not follow as to why the public legal partner should be exempt from the imposition of pecuniary penalty.

The plaintiff has not been able to show why this group of public legal "persons" should be exempt from the imposition of penalty only when they are in partnership with another person. It does not stand to reason, in my view, if as a sole employer it is liable to imposition of penalty, that it should be less liable when in partnership with another person.

In the end result I prefer the construction contended for by the defendant, that the defendant and the other group of public legal persons included in the exclusionary clause are not liable to penalty. They are "employers" as persons who pay wages and salaries "except in relation to the imposition of a penalty".

I do not understand that the effect of this construction is to exempt public sector employers from penalty for failure to pay income tax deducted from their employees salary or wages to the Chief Collector of Taxes. This is not a penalty for failure to pay income tax. It is a penalty for failure to return the Statement of Earnings of employees and a Reconciliation Statement.

I am of the opinion that the following public policy considerations support the construction in favour of the defendant. I believe the rationale for this clear exemption from imposition of penalty, of this group of public legal "persons" including the State itself, is that, although they are "employers" who pay salaries and wages, they are, excluding the State, all public instrumentalities of the parent State, who all derive their revenue base from State grants from the same public source as the plaintiff. They and the plaintiff are funded by the State. It just does not stand to reason that the State or a Provincial Government should have to pay a penalty to another statutory instrument of the State. This is quite evident from the group of public authorities or the levels of governments exempted from penalty.

It would serve no purpose, in my view, to penalise these public State organs. If these organisations do not deduct taxes from employees salary or wages and do not pay them to the Chief Collector of Taxes, there are other sanctions and processes available for recovery at the same.

I would therefore uphold the defendant’s defence that it is not liable to penalty and so dismiss this suit. Costs follow the event in favour of the defendant.

Complaint dismissed

_______________

Lawyer for the plaintiff: D Cannings.
Lawyers for the defendant: Ikenas Lawyers.