Page 1 Resource Person: Mr. Sulaiman Nishtar ACA/ACMA/CGMA/ Partner Ernst & Young - Tax Postgraduate Diploma in Business & Finance

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Resource Person: Mr. Sulaiman Nishtar ACA/ACMA/CGMA/ Partner Ernst & Young - Tax

Postgraduate Diploma in Business & Finance

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Introduction – Income Tax Law in Sri Lanka

Rationale for imposing tax – the primary purpose of income tax is to raise income for government expenditure and investment. Income tax is also used to achieve the following:

More equitable income distribution Increasing savings and capital formation Channeling investments and expenditure in economically desired

directions

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Imposition of Income Tax

Section 2 –

Residents

Income tax is charged at specified rates for every year of assessment on profits and income of every person wherever arising.

Therefore, the global income received by a resident is charged with income tax

Non –residents

Income tax is charged on profits and income arising in or derived from Sri Lanka.

‘profits and income arising in or derived from Sri Lanka’ includes all profits and income derived•from services rendered in Sri Lanka or •from property in Sri Lanka, or •from business transacted in Sri Lanka, whether directly or through an agent

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Determining Residency

Section 217 –

The interpretations section defines person to include

“a company or body of persons or any government”

Section 79 –

1) Company or body of persons- Has its registered or principal office in Sri Lanka, or where the control and management of its business are exercised in Sri Lanka, such company or body of persons shall be

deemed to be resident in Sri Lanka.

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Determining Residency

2) Individual – An individual who is physically present in Sri Lanka for 183 days or

more during any year of assessment, shall be deemed to be resident in Sri Lanka throughout that year of assessment.

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‘Profits and Income’

Section 217

‘Profits’ or ‘income’ is defined to mean the net profits or income from any source for any period calculated in accordance with the provisions of the Inland Revenue Act.

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Sources on which Income Tax is Charged

Section 3 –

‘Profits and Income’ or ‘Profits’ or ‘Income’ Means

(a) the profits from any trade, business, profession or vocation for however

short a period carried on or exercised;

(b) the profits from any employment;

(c) the net annual value of any land and improvements thereon occupied

by or on behalf of the owner, in so far as it is not so occupied for the

purposes of a trade, business, profession or vocation;

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(d) the net annual value of any land and improvements thereon used rent-free by the occupier, if such net annual value is not taken into account in ascertaining profits and income under paragraphs (a), (b) or (c) of this section, or where the rent paid for such land and improvements is less than the net annual value, the excess of such net annual value over the rent to be deemed in each case the income of the occupier;

(e) dividends, interest or discounts;

(f) charges or annuities;

(g) rents, royalties or premiums;

(h) winnings from a lottery, betting or gambling ;

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i) in the case of a non governmental organisation, any sum received by such organisation by way of grant, donation or contribution or any other manner; and

j) income from any other source whatsoever, not including profits of a casual and non-recurring nature.

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Capital Gains Not specifically identified as a source of income under

section 3 . Therefore, capital gains are not charged with income tax.

What is a capital gain? ► There is no definition for a capital gain provided in the law► Whether capital gain or not depend on the facts of each case.

As capital gains are not subject to income tax it is important to distinguish between capital receipts and trade receipts.

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Profits from Trade, Business, Profession or Vocation

‘Business’ is defined to include an agricultural undertaking, the racing of horses, the letting or leasing of any premises, including any land by a company.

‘Trade’ includes every trade and manufacture and every adventure and concern in the nature of trade.

The definition of trade includes Systematically carried on trade or business activities. Adventures or concern in the nature of trade.

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Factors Indicative of a Trade

1) The frequency of a transaction

The more frequently one enters into the same type of

transaction, the more likely that he is carrying out trade.

For example having regular transactions of the similar nature throughout

the year could amount to a trading compared with just 2 transactions.

2) Use of the asset

If the asset is purchased as an investment it may be capital

nature

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Factors Indicative of a Trade

3) Motive

If the sole purpose of a transaction is to make profit then it will be

considered to be a trade

4) Work on the asset

What happens to an asset pending re-sale maybe a relevant

factor. There maybe modifications to the asset by way of

processing or manufacturing to make it more readily marketable

5) Length of period of ownership

A person who buys an asset and holds it for a long period before

disposing it may indicate that it is an investment

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Calculating Income Tax –Trade or Business

Taxable income

Assessable income

Total statutory income

Adjust according to section 25 and 26

Profits and income as per accounts

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Ascertainment of Profits or Income – Allowable Expenses Under Section 25

There shall be deducted for the purpose of ascertaining the profits or

income of any person from any source, all outgoings and expenses

incurred by such person in the, production thereof, including;

An allowance for depreciation by wear and tear of the following assets

acquired, constructed or assembled and arising out of their use by such

person in any trade, business, profession or vocation carried on by him

I. Information technology equipments and calculating equipment including

accessories and software, acquired by such person - 25% per annum on the

cost of acquisition

Software developed in Sri Lanka - 100% on the cost of acquisition

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II. Any motor vehicle or furniture acquired – 20% per annum

III. Any other machinery or equipment not referred above

A. Acquired or assembled prior to April 1, 2011 - 12 ½% per annum

B. Acquired or assembled on or after April 1, 2011 - 33 1/3% per

annum

IV. Any bridge, railway track, reservoir, electricity or water distribution

line and toll roads constructed by such person or acquired from a

person who has constructed such assets – 6 2/3% per annum, for

construction or cost of acquisition,


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Qualified Building:

1. Constructed prior to April 1, 2011

2. Constructed on or after April 1, 2011- 10% on the construction cost

Any unit of a condominium property acquired which is approved by the Urban

Development Authority and constructed to be used as a commercial unit

Any hotel building (including a hotel building complex)

Any industrial building (including any industrial building complex) acquired from a

person who has used such buildings in any trade or business – 6 2/3% per annum

“Qualified Building” - a building constructed to be used for the purpose of

a trade, business, profession or vocation, other than to be used as a

dwelling house by an executive officer employed in that trade, business,

profession or vocation


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Where for energy efficiency purposes, any high tech plant,

machinery or equipment is acquired on or after April 1, 2012 – 50%

on the cost of acquisition.

Where for energy efficiency purposes, any high tech plant, machinery

or equipment is acquired on or after April 1, 2013 and used in any

trade or business meets more than 30% of the total requirement of

the power generation of that trade or business out of alternative

energy sources – 100% on the cost of acquisition

Plant or machinery or equipment is acquired and used in any

business on or after April 1, 2013 for technology upgrading purposes

or introducing any new technology – 50% of the cost of acquisition


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Plant or machinery or equipment is acquired and used on or after April 1, 2013 in any stock broker company for the upgrading of information technology infrastructure to be in compliance with the requirements of the Colombo Stock Exchange licensed by the Securities and Exchange Commission in relation to the risk management system – 100% of the cost of acquisition

Plant, machinery or equipment acquired and used on or after April 1, 2013 in any trade or business and where atleast 60% of the turnover of such trade or business is from export -50% on the cost of acquisition


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Renewals and Repairs

Renewal - Any sum expended for the renewal of any capital asset employed for producing such profits or income, if no allowance for the depreciation is deductible in respect of that asset

Repair - Any sum expended by such person for the repair (not renewal) of any plant, machinery, fixtures, building, implement, utensil or article employed for producing such profits and income :

► Provided that, in the case of a company carrying on the business of letting premises, the sum deductible under this paragraph shall, in so far as such sum relates to the repairs of such premises, not exceed twenty five per centum of the gross rent receivable by such company for such premises ;


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Distinguishing Between Repairs & Renewals

1. Renewal is a reconstitution of the entirety. Of course entirety does not necessarily mean the whole but substantially the whole subject matter under discussion

2. Repair would always involve renewal of a subordinate part and every repair is a replacement

► Example- If a roof is repaired by putting new tiles instead of old ones which is thrown away –repair

► If the roof is replaced in entirety and is not repairing the old one -renewal


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Bad and Doubtful Debts► Bad Debts – bad debts incurred in any trade, business, profession or

vocation or employment which have become bad debts during the period for which profits and income are ascertained.

► Doubtful Debts -sum as the Commissioner-General considers reasonable for doubtful debts to the extent that they are estimated to

have become bad during the period.

Recovery of bad or doubtful debt -all sums recovered during that period on account of the amounts previously written off or allowed in respect of bad or doubtful debts shall, be treated as receipts of that period of that trade, business, profession, vocation or employment


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Interest

Interest paid or payable by such person

► Example- interest paid on bank loans obtained for the production of that specific income from trade, business, profession or vocation. If it does not related to the business it would not be allowed.

► Eg: loan obtained to build Managing Directors house would not be allowed.


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Contribution to Pension or Provident Funds

Any payment by such person to any pension, provident, savings, widows’ and orphans’ pension, or other society or fund is DISALLOWED. Unless,

► it is a contribution by an employer to a pension, provident or savings fund or to a provident or savings society, which is approved by the Commissioner-General subject to such conditions as he may specified by him;

Example –contributions to EPF and ETF


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Provincial Rates

Tax payable under any Statute enacted by a Provincial Council which such person is liable to pay for the period for which the profits and income are being ascertained in respect of any trade, business, profession or vocation carried on or exercised by him is deductible in full.

Example- Rates paid to municipal council


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Research for Upgrading of Trade or Business

For any year of assessment

I. Commencing on or after April 1, 2011, an amount equal to two hundred per centum of the expenditure, including capital expenditure, incurred by such person in carrying on any scientific, industrial, agricultural or any other research for the upgrading of any trade or business carried on by such person;

► A 300% deduction is available if the research is carried out through any institution in Sri Lanka.


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Research for Upgrading of Trade or Business

Example- A biscuit company carries out research for a new type of biscuit,

which could include salary of researchers, the raw materials necessary and

any lab equipment necessary for such research.


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Expenses in Opening Up Land for Cultivation & Similar Expenses

i. any expenses incurred by such person in–

ii. opening up any land for cultivation or for animal

husbandry;

iii. cultivating such land with plants of whatever description;

iv. the purchase of livestock or poultry to be reared on such land; or

v. the construction of tanks or ponds or the clearing or preparation of any inland

waters for the rearing of fish and the purchase of fish to be reared in such

tank, pond or inland waters, as the case may be;


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Travelling Within Sri Lanka – Travelling of Persons in the Course of Employment► The actual expenses incurred by such person or any other person in

his employment in traveling within Sri Lanka in connection with the trade, business, profession or vocation of the first-mentioned person.

However the above deduction is not available in the following instances-

I. In respect of expenses incurred in relation to a vehicle used partly for

the purposes of his trade, business, profession or vocation and partly

for the domestic or private purposes of an executive officer being

employed by him or a non executive director of such organisation,

unless the value of the benefit, has been included in the

remuneration of such officer, for the purposes of deduction of PAYE


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ii. in respect of expenses incurred in relation to a vehicle, where more than one

vehicle is provided to any employee of such person or to any non-executive

director or to any other individual who is not an employee but rendering services

in the trade, business profession or vocation carried on by such person, if such

vehicle is not the first vehicle provided to such employee or non-executive

director or such other individual, as the case may be;

iii. in respect of expenses incurred in relation to a vehicle where such vehicle is

provided to any other person who is not an employee of such person and who

does not render any services to the trade, business, profession or vocation

carried on by such person;


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iv. In respect of expenses incurred in relation to the reimbursement of

any expenditure on a vehicle belonging to an employee of such

person who has been allowed by the employer to claim such

expenses, unless the value of benefit of using such vehicle for non-

business purposes by such employee as determined by the

Commissioner-General, has been included for PAYE , or in the

opinion of the Commissioner-General such amount that is

reimbursed represents only expenses on allowable traveling

expenses in relation to the trade, business, profession or vocation

carried on by such employer ; and


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v. In respect of any expenses incurred by such person by reason of any traveling done by any other person in his employment between the residence of such other person and his place of employment or vice versa.

► However section 25(1)(m) specifically allows the expenditure incurred by such person in operating a motor coach used for transporting employees of such person to and from their place of work;


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Foreign Travelling

Any expenditure incurred in travelling outside Sri Lanka in connection

with any trade, business CANNOT be deducted unless expenses

incurred in travelling outside Sri Lanka, solely in connection with the–

i. promotion of the export trade of any article or goods; or

ii. provisions of any services for payment in foreign currency:


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Foreign TravellingProvided that for any year of assessment commencing on or after April 1, 2011

(A) such part of expenditure incurred in travelling outside Sri Lanka in the production of profits or income from any trade or business carried on or exercised in Sri Lanka by any person, other than-

i. such expenses incurred solely in connection with the promotion of export trade of any article or goods or the provision of any services for payment in foreign currency ; or

ii. such expenditure incurred in carrying out an approved program in connection with the business of any undertaking of operating any tourist hotel which is approved by the Ceylon Tourist Board; or

i.

(B) an amount equal to 2% of the profits and income of such trade or business in the immediately preceding year of assessment;”;

whichever is lower, shall be deductible in ascertaining the profits and income from such trade or business for that year of assessment;


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Formation or Liquidation ExpensesIn the case of a company, expenditure incurred in the formation or liquidation of that company;

Example- Amounts paid to the registrar of companies

Expenses is listing in the stock exchange

► Any expenditure incurred in any year of assessment in quoting any shares of

a company in any official list of any stock exchange licensed by the Securities

and Exchange Commission of Sri Lanka,

► However the aggregate of such expenditure incurred in that year if

assessment and in any previous year of assessment cannot exceed 1%of the

value of the Initial Public Offering of Such company.


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Gratuity

I. Payment of gratuity to employees -The expenditure incurred in the

payment of gratuity to an employee on the termination of

employment, due to cessation of the trade, business, profession or

vocation carried on;

II. Payment of gratuity to a fund- Any annual payment made by such

person to any fund, approved for the purposes of this paragraph by

the Commissioner-General and maintained for the purposes of

payment under the Payment of Gratuity Act, No.12 of 1983, of

gratuities to employees on the termination of their services;


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Expenses in Leasing of Commercial Premises

► Lump sum payment not being an advance payment made to any other person

in connection with the letting or lease, of any commercial premises, as bears

to the total lump sum payment the same proportion as the number of months

in the year for which lease rent is payable bears to the total number of months

comprised in the lease;

Example- any key money paid for renting office premises could be divided

by the number of months rent and claimed each year.

► However rent of, or expenses in connection with, any premises or part of a

premises not occupied or used for the purposes of producing such profits and

income is disallowed


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Training

Expenditure incurred by any person in the training, in any recognized institution of

any employee employed in any trade or business carried on, if it is proved to the

satisfaction of the commissioner-general that such training is–

I. directly relevant to the duties performed by such employee before the

commencement of such training;

II. essential for upgrading the skills or performance of such employee, in such

trade or business; and

III. necessary for improving the efficiency and performance of such trade or

business.

“training” includes participation in any seminar or workshop;


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Accreditation Expenses

The accreditation expenses, where such person is a person

carrying on any profession;

► This is where some recognition is granted by an institution


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► Domestic or Private Expenses

Domestic or private expenses, including the cost of travelling between

the residence of such person and his place of business or employment;

► Disbursements not related to trade

any disbursements or expenses of such person, not being money

expended for the purpose of producing such profits or income;

► Expenses on asset provided to employee to be used in

residence

any expenditure or outgoing in relation to any asset provided by such

person to any employee to be used in the residence of such employee;

Disallowable Expenses Under Section 26

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► Property Provided to Employee Less than Market

Value

any expenditure or outgoing in relation to any movable or immovable

property given by such person to any employee at a price, less than

market value at the time of giving such property;

► Bad debt of loan given to employee

any expenditure or outgoing in relation to any loan, other advance or

credit granted to any employee which is subsequently written off as a

bad debt by such person;


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► Entertainment Expenses

entertainment expenses incurred by such person or his employee or on

his behalf in connection with any trade, business, profession or vocation

carried on or exercised by him;

entertainment allowances paid by such person to his executive officer;

► Capital Expenditure

any expenditure of a capital nature or any loss of capital incurred by

such person;

► Improvements

the cost of any improvements effected by such person;


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► Amount recoverable under a contract of insurance

any sum recoverable under a contract of insurance or

indemnity, if the amount received under such contract is not

treated as a receipt from such trade, business, profession or

vocation under section 89 of the Inland Revenue Act


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Taxes Paid

any amount paid or payable by such person by way of—

(i) income tax,

(ii) any prescribed tax or levy;

(iii) Economic Service Charge levied under Economic Service Charge Act, No. 13 of 2006;

(iv) Value Added Tax on Financial Services

(v) Social Responsibility Levy


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► Annuity, Ground Rent or Royalty

any annuity, ground rent, or royalty paid by such person

However under section 32(5) such expenses can be

deducted from total statutory income

sums paid by such person for any year of assessment by

way of annuity, ground rent, royalty or interest not deductible

under section 25.


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► Rental expenses in relation to residence provided to

employee

If the employees profits from employment does not exceed Rs. 600,000

per year – 1/2 of the expenditure disallowed

If the employees profits from employment exceed Rs. 600,000 per year –

¾ disallowed

“expenditure” shall include rent, lease rent, rates, repairs and

maintenance or other expenses directly and specifically related to such

place of residence borne by the employer;


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► Hiring of vehicles and other assets

As per section 26(2) – rental payments for hire of vehicles,

plant, machinery, fixtures, or equipment will be disallowed.

(unless if it’s a motor cycle used for such purpose of an

officer who is not an executive officer in the employment or a

motor coach for transporting employees)


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Leasing Allowance

I. any motor vehicle, furniture, plant, machinery or equipment– only

1/5 the of total lease rental will be allowed.

Example - Total lease value is Rs. 1,000,000/-. Lease rental paid for

the period is Rs. 300,000/-. Can claim only Rs. 200,000/-. Rs.

100,000/- will be disallowed

II. any information technology equipment and calculating equipment

including accessories and computer software only 1/4 th of total

lease rental will be allowed-


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► Sums transferred to a reserve or provision

any sum transferred to any reserve or provision (other than

any annual payment to an approved fund)


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Management Fees

Any sum paid or payable as consideration for the management of any

trade, business, profession or vocation carried on or exercised by him,

as exceeds–

► two million rupees or one per centum of the turnover of such trade,

business, profession or vocation during the period for which profits

and income are being ascertained, whichever is lower or;

► such amount as may be determined by the Commissioner-General

having regard to all the circumstances of the case, as being

reasonable and commercially justifiable as such consideration,

whichever is higher.


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Advertisingfor any year of assessment-

► commencing prior to April 1, 2011, one half; (50%) and

► commencing on or after April 1, 2011, one fourth, (25%)

of such person’s cost of advertisement in connection with any trade, business,

profession or vocation carried on or exercised by him

Other than the cost of advertisement outside Sri Lanka incurred solely in

connection with the export trade of any article or goods or the provisions

of any services for payment in foreign currency;


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Head Office ExpenditureAny expenditure incurred in any trade or business carried on in Sri Lanka by any non

resident company being expenditure in the nature of head office expenditure, incurred in

any period by reference to the profits and income of which the statutory income from such

trade or business is computed.

However section 27 provides that where any non resident company carrying on in Sri

Lanka any trade or business incurs any expenditure in the nature of head office

expenditure, there shall be deducted from the profits and income of such company for such

year of assessment from such trade or business, a sum equal to the lesser of –

I. the amount of such expenditure; or

II. the amount equal to ten per centum of such profits

III. or income.


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Thin Capitalization Rule

► If a loan is obtained from a company within a group thin

capitalization rules will apply.

► If the company is a manufacturer- Interest payable over

thrice the aggregate of the issued share capital and

reserves will be disallowed

► If the company is not a manufacturer - Interest payable

over four times the aggregate of the issued share capital

and reserves will be disallowed


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Tax on gain or loss from sale of fixed assets

► Capital gains are not a source of income chargeable with tax under section 3.

► Fixed assets used in a trade/business is a capital asset

► Section 25(3) deems the proceeds from the sale of a capital asset to be a trade receipt

Ascertainment of Profits or Income –Under Section 25 (3)

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a) Disposing a capital asset on which capital allowances have been granted in full

Cost of the computer – Rs. 100,000/-

Year of purchase – 2006/2007

Capital allowances as at 2012/2013 – Fully claimed

Tax written down value - 0

Sales proceeds - Rs. 75,000

► Income tax will be charged on entire sales proceeds of Rs. 75,000/-

Ascertainment of Profits or Income – Under Section 25 (3)

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b) Disposing a capital asset on which capital allowances have not been granted in full. –gain on disposal

Cost of the computer – Rs. 100,000/-

Year of purchase – 2011/2012

Capital allowances as at 2012/2013 – Rs. 25,000/-

Tax written down value - Rs. 75,000/-


Income tax will be charged on - Rs. 5,000/-


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c) Disposing a capital asset on which capital allowances have not been granted in full. –loss on disposal

Cost of the computer - Rs. 100,000/-

Year of purchase - 2011/2012

Capital allowances as at 2012/2013 -Rs. 25,000/-

Tax written down value - Rs. 75,000/-


► Loss on disposal of Rs. 5,000/- will be treated as an expense


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► Tax will not be charged as mentioned before if, the full

proceeds of disposal are used by such person, within one

year of the disposal for the replacement of such capital

asset to be used by him for producing income in any

trade, business, profession or vocation carried on or

exercised by him;


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“Proceeds” in relation to the disposal of any capital asset means—

i. the sale price of such asset, where the disposal is by sale; or

ii. the market value of such asset at the time of disposal, where the

disposal is otherwise than by sale,

after deducting from such sale price or market value, as the case may

be, the amount of value added tax chargeable under the Value Added

Tax Act, No. 14 of 2002, on the disposal of such capital asset, if such tax

is included in such sale price or market value, as the case may be;


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“Disposal’, in relation to the disposal of any capital asset by any person includes–

i. sale, exchange, or other transfer in any manner whatsoever of such

asset by such person;

ii. discard of such asset by such person;

iii. cessation of the use of such asset by such person in any

undertaking carried on by him in ascertaining the profits and income

of which, an allowance for depreciation could be deducted;


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Profits from Employment – Under Section 4

Profits from any employment include:

a) (i) Any wages, salary, allowance, leave pay, fee, pension,

commission, bonus, gratuity, perquisite or other payment in money

which an employee receives in the course of his employment

(ii) The value of any benefits to the employee or to his spouse, child

or parent, including the value of any holiday warrant or passage;

(iii) Any payment to any other person for the benefit of the employee

or of his spouse, child or parent,

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Whether received or derived from the employer or others;

b) The value of any conveyance granted free of any charge by an employer to

any employee, or any sum so granted for the purchase of any conveyance;

c) (i) any retiring gratuity or any sum received in commutation of pension;

(ii) any sum paid from a provident fund approved by the Commissioner –

General to any employee at the time of his retirement from such fund, other

than such part of that sum as represents his contributions to that fund, where

such retirement took place prior to April 1, 2011;

(iii) Any sum received as compensation for loss of any office or employment

(iv) Any sum paid from the Employees Trust Fund


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d) The rental value of any place of residence provided rent

free by the employer or where a place of residence is

provided by an employer at a rent less than the rental

value, the excess of the rental value over such rent.


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For any year of assessment, any excess of the rental value –

► Over Rs. 10,000/- per month if the salary is less than Rs. 150,000/- per month

and► Over Rs. 15,000/- per month if the salary exceeds Rs.

150,000 per month shall be disregarded.


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The values of certain benefits are provided in Gazette No: 1706/18 dated, Friday May 20, 2011

1) Value of Company shares awarded by Employer

‘‘Value’’ of any benefit accruing to any employee of an employer, from the allotment

of any share or awarding an option to acquire any share, to such employee or his

nominee, by or on behalf of such employer, means : the excess, if any, of the

market value of such share at the time of its allotment (made directly or on

exercising an option), or of proceeds from the sale of option, over the price

charged by the employer for such allotment or award, as the case may be.


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2) Value of benefits from any residence provided by the Employer

a) Of any place of residence provided by the employer in the respective

situations should be ascertained as follows;

I. Where such place of residence is situated in an unrated area, the

rental value shall be 10% of the gross remuneration or Rs. 3,000 per

month; whichever is low.

II. Where such place is an Estate Bungalow, the rental value shall be

7.5% of the gross remuneration or Rs. 2,000 per month; whichever is

low.


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b) If the place of residence is furnished, 2.5% of the gross remuneration

or Rs. 1,500 per month, whichever is low, should be added to the

benefit determined as above.

c) In any case, where the employer reimburses any expense connected

with a house or apartment occupied by the employee, the value of

such benefit shall be the actual expense reimbursed by the employer.


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3) Value of Transport Facilities provided by the Employer

a. The value of the benefit to an employee from the (fully or partly) private use of any motor vehicle, of which the engine capacity is 1500cc or more –

i. provided by the employer with the driver and fuel on such employer’s account, shall be deemed to be Rupees Fifty Thousand per month;

ii. provided by the employer with fuel on such employer’s account, but without the driver, shall be deemed to be Rupees Thirty Five Thousand per month;

iii. provided by the employer with the driver on such employer’s account, but without fuel, shall be deemed to be Rupees Thirty Thousand per month;

iv. provided by the employer without the driver and fuel, shall be deemed to be Rupees Fifteen Thousand per month.


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b) The value of the benefit to an employee from the (fully or partly) private use of any motor vehicle, of which the engine capacity is below 1500cc, –

i. provided by the employer with the driver and fuel on such employer’s account, shall be deemed to be Rupees Thirty Five Thousand per month;

ii. provided by the employer with fuel on such employer’s account, but without the driver, shall be deemed to be Rupees Twenty Five Thousand per month.

iii. provided by the employer with the driver on such employer’s account, but without fuel, shall be deemed to be Rupees Twenty Thousand per month.

iv. provided by the employer without the driver and fuel, shall be deemed to be Rupees Ten Thousand per month.


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c) The value of the benefit to an employee from the (fully or partly) private

use of any motor bicycle –

i. provided by the employer with fuel on such employer’s account, shall

be deemed to be Rupees Five Thousand per month, (irrespective of

its engine capacity);

ii. provided by the employer without fuel, shall be deemed to be Rupees

Three Thousand per month, (irrespective of its engine capacity);


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d) The value of the benefit from private use of –

i. any motor vehicle provided by the employer where accurate record of

such usage is maintained by such employer, shall be deemed to be

Fifteen Rupees per kilometer, (irrespective of the engine capacity of the

vehicle);

ii. any motor bicycle provided by the employer where accurate record of

such usage is maintained by such employer, shall be deemed to be Three

Rupees per kilometer


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4) Other Benefits provided by the Employer


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► The profits or income arising from rents of land and

improvements thereon, shall be the gross rent which is

receivable and can be recovered after deducting

therefrom rates borne by the owner and where the owner

undertakes to bear the cost of repairs, twenty – five per

centum of the balance.

Profits from Rent – Under Section 6

Page 74

Ascertainment of Total Statutory Income

► The total statutory income of a person for any year of

assessment shall be the aggregate of his statutory income

for that year of assessment from every source of his

profits or income in respect of which tax is charged.

Page 75

The statutory income of a child is aggregated with that of his

parent in the following circumstances:

a) The parent must be a resident individual

b) If the marriage subsists, it is aggregated with that of the

father

c) If the marriage does not subsists, it is aggregated with that

of the parent who maintains the child and with whom he

lives

Statutory Income of a Child

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Statutory Income of a Child

A child is defined as:– under 18 years– includes an adopted child under the Adoption of Children

Ordinance or in accordance with the law of the country of which he is a citizen

But does not include:– a child adopted under any other law– a married child– an illegitimate child

Page 77

Ascertainment of Assessable Income

► Section 32 provides the deductions which are permissible from the statutory income in arriving at the assessable income.

Examples-

1) Persons other than companies can deduct the following

in arriving at the assessable income.

► Interest from which income tax has been deducted

► Dividend from which income tax has been deducted

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2) Losses

The amount of a loss, incurred in any trade, business,

profession or vocation which if it had been a profit would

have been assessable under this Act, including any such

loss brought forward from a previous year which had not

been deducted under this section previously,

► Up to a maximum limit of 35% of the excess of the total

statutory income for that year

Ascertainment of Assessable Income

Page 79

Ascertainment of Taxable Income

► Section 33 and 34 provides the deductions which are permissible from the assessable income in arriving at the taxable income. (Refer Annexure 1 – Qualifying Payments)

Examples-

1) An allowance of Rs. 500,000/- is given for individuals or charitable

institutions who or which is resident in Sri Lanka

2) A donation made by any person in money to an approved charity

being a charity which is established for the provision of

institutionalized care for the sick or the needy;

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3) 25% of the investment if

Investment is not less than Rs. 50millionin fixed assets

Investment made after April 1, 2011 but before April 1,

2015

In the expansion of any undertaking (which would

qualify for a tax exemption under section 16C or 17A)

and commences to carry on business on or after April

1, 2011

Ascertainment of Taxable Income

Page 81

Tax Credits

The following credits can be taken

1. Income tax paid during the year of assessment under

self assessment

2. Withholding tax deducted on interest income

3. Notional tax credit for income on government securities

4. Economic Service Charge

Page 82

Exemptions Provided Under the Inland Revenue Act

Exemption for foreign currency income under section 13 (ddd) –

The profits and income earned in foreign currency; ► by any resident company► any resident individual► any partnership in Sri Lanka,

from any service rendered in or outside Sri Lanka to any person or

partnership outside Sri Lanka, other than any commission, discount or

similar receipt for any such service rendered in Sri Lanka, if such profits

and income (less such amount, if any, expended outside Sri Lanka as is

considered by the Commissioner-General to be reasonable expenses)

are remitted to Sri Lanka through a bank

Page 83

Rate of Income Tax Individuals

► On the first Rs. 500,000/- of the taxable income 4%

► On the next Rs. 500,000/- of the taxable income 8%



► On the next Rs. 1,000,000 of the taxable income 20%

► On the Balance of the taxable income 24%

Page 84

Rate of Income Tax - Companies

Income tax is charged at a rate of 28%

The following concessionary rates are applicable

1) A company of which the taxable income does not exceed Rs. 5,000,000/- 12%(subject to restrictions)

2) Engaged in agriculture, manufacture of animal feed, promotion of tourism, or construction work -12% (subject to restrictions)

3) An undertaking undertaking referred to in section 16 – 10%

4) A company the turnover of which is less than Rs. 500 million -10% (subject to restrictions)

Page 85

Payment of Tax

► Tax is paid on a self assessment basis. Tax can be paid quarterly either on a prior year basis or a current year basis.

Prior Year Basis

For the year of assessment 2012/2013 quarterly installments should be paid as follows

1/4 of 2011/2012 tax liability – August 15 1/4 of 2011/2012 tax liability –November 15 1/4 of 2011/2012 tax liability –February 15 1/4 of 2011/2012 tax liability – May 15

Final tax liability based on 2012/2013 – September 30

Page 86

Current Year Basis

For the year of assessment 2012/2013 quarterly installments

should be paid as follows

► 1/4 of 2012/2013 estimated tax liability -August 15

► 1/4 of 2012/2013 estimated tax liability -November 15

► 1/4 of 2012/2013 estimated tax liability -February 15

► 1/4 of 2012/2013 tax liability -May 15

Payment of Tax

Page 87

Penalty for not Paying Tax on a Self Assessment Basis

► 10% of the tax in default immediately . 2% for every

month in which the tax is in default up to a maximum of

50% of the total tax in default

Page 88

Return Filing

► Returns should be filed on or before November 30 of the year immediately succeeding the end of the relevant year of assessment.

► The Return is issued by the Department of Inland Revenue

► An individual who has no other income (other than dividend or interest chargeable with withholding tax) and PAYE has been deducted by the employer need not file a Return

Penalty for not filing return –Rs. 50,000/-

Page 89

Assessments

► If in the opinion of the assessor a person who is liable for

income tax has not paid or has paid less than the amount

which he ought to pay – an assessment can be raised

► Therefore if the assessor does not accept the Return filed

by the company an assessment can be raised

► If the assessor does not accept the return reasons for not

accepting the return should be given prior to raising the

assessment

Page 90

Assessments – Time Bar for Assessment

► If return is filed duly (on or before November 30) –

assessments cannot be raised 2 years from the due date

of filing the return

► If return is not filed before November 30 - assessments

cannot be raised 4 years from the due date of filing the

return

Page 91

Appeal

► If is disagreement with the assessment the company can appeal against the assessment

► Stage 1 – Appeals to Commissioner General► Stage 2- Appeals to the Tax Appeal commission► Stage 3- Appeals to the Court of Appeal

Page 92

Definitions

1. Authorized Representative-

by a person to act on his behalf for the purpose of this Act,

and who is –

a) in any case –

i. a member of the Institute of Chartered Accountants of Sri Lanka;

ii. an accountant approved by the Commissioner-General;

iii. an Attorney-at-Law;

iv. an employee regularly employed by that person, or

v. a member of the Sri Lanka Institute of Taxation established under the Sri Lanka Institute of Taxation Act, No. 21 of 2000;

b) in the case of an individual, a relative;

c) in the case of a company, a director or the secretary of that company;

d) in the case of a partnership, a partner of that partnership;

e) in the case of a body of persons, a member of such body;

or

Page 93

2) from time to time to act on his behalf for the purpose of this Act in respect of matters relating to such year of assessment as is specified in the authorization, and who–

a) being and individual registered as an auditor under the

Companies (Auditors) Regulations, is approved by the

Commissioner-General; or

b) is an individual approved by the Commissioner-General under

regulations made in that behalf;

Definitions

Page 94

3. Executive Officer

Means a director of a company or corporation, or an employee in any trade, business, profession or vocation whose monthly emoluments (including all allowances) are not less than Rs. 20,000/-

Definitions

Page 95

Value Added Tax

VAT is Charged

1. Importation of goods into Sri Lanka by any person.

2. At the time of supply, on every taxable supply of goods and services, made in a taxable period, by a registered person in the course of carrying on a taxable activity in Sri Lanka.

Therefore the following conditions are necessary to be charged with VAT

3. There should be a taxable activity carried out in Sri Lanka

4. There should be a taxable supply of goods or services

5. The supply must be made by a registered person

Page 96

Taxable Activity

a) any activity carried on as a business, trade, profession or vocation other than in

the course of employment or every adventure or concern in the nature of a trade;

b) the provision of facilities to its members or others for a consideration and the

payment of subscription in the case of a club, association or organization;

c) anything done in connection with the commencement or cessation of any activity

or provision of facilities referred to in (a) or (b);

d) the hiring, or leasing of any movable property or the renting or leasing of

immovable property or the administration of any property;

e) the exploitation of any intangible property such as patents, copyrights or other

similar assets where such asset is registered in Sri Lanka or the owner of such

asset is domiciled in Sri Lanka;

Page 97

Supply of Goods or Services

Supply of Goods► means the passing of exclusive ownership of goods to

another as the owner of such goods or under the authority of any written law and includes the sale of goods by public auction, the transfer of goods under a hire purchase agreement, the sale of goods in satisfaction of a debt and the transfer of goods from a taxable activity to a non-taxable activity ;

Supply of services► means any supply which is not a supply of goods but

includes any loss incurred in a taxable activity for which an indemnity is due;

Page 98

Goods or Services Supplied in Sri Lanka

Goods or services shall be deemed to be supplied in Sri Lanka where the supplier carries on or carries out a taxable activity in Sri Lanka and the goods are in Sri Lanka at the time of supply or the services are performed in Sri Lanka by the supplier or his agent.

Registered PersonEvery person who carries on a taxable activity is required to register if taxable supplies exceed Rs. 3 million per quarter or Rs. 12 million per annum

Page 99

Taxable Period

“Taxable Period” means;

a) a period of one month - - where any person makes zero rated supplies;- where any person has commenced a business or started

a project and undertakes to comply with the requirements of subsection (7) of section 22

- where any person registered with Textile Quota Board or Export Development Board as the case may be, who makes supplies to an exporter registered with Textile Quota Board or Export Development Board

A period of 3 months on any person other than the above

Page 100

Wholesale and Retail Trade

VAT

In a ground breaking change to the VAT law business involved in large scale wholesale and retail trading is made liable to VAT with effect from January 1, 2013. This segment was excluded from VAT from the very inception of the VAT law and is now liable to VAT at 12% on the value of liable supplies. The liability is imposed on persons having quarterly turnover exceeding Rs. 500 million from wholesale and retail trade.

Page 101

Time of Supply

Time of supply is deemed to have taken place at the time of the occurrence of any one of the following whichever, occurs earlier: -

a) the issue of an invoice by the supplier

b) a payment including any advance payment received by the supplier; or

c) a payment is due to the supplier in respect of such supply; or

d) the delivery of the goods have been effected or the service is performed.

Page 102

Value of Supply

The value of a taxable supply of goods or services, shall be

such amount where the supply is-

a) for a consideration in money, be such consideration less

any tax chargeable under this Act which amount shall not

be less than the open market value;

b) not for a consideration in money or not wholly in

consideration of money, be the open market value of

such supply.

Page 103

Value of Supply - Imports

The value of goods imported, shall be the aggregate of –

a) the value of the goods determined for the purpose of

custom duty increased by ten per centum ; and

b) the amount of any custom duty payable in respect of

such goods with the addition of any surcharge, cess, any

Port and Airport Development Levy payable under the

Finance Act, No. 11 of 2002, and any excise duty payable

under the Excise (Special Provisions) Act, No. 13 of 1989

on such goods.

Page 104

Rates of Tax

1. Standard rate of 12%

2. 0%

3. Exempt

Zero Rates (0%) Supplies

a) no tax shall be charged in respect of such supply;

b) the supply shall in all other respects be treated as a taxable supply and accordingly the rate at which tax is charged on the supply shall be zero.

Page 105

Zero Rates (0%) Supplies – The Following Supplies are Zero Rated

Supply of –

a) goods shall be zero rated where the supplier of such goods has exported such goods; and

b) services shall be zero rated where the supply of such services are directly connected with –

any movable or immovable property outside Sri Lanka;

i. the repair of any foreign ship, aircraft or any merchant ship registered in Sri Lanka, or the refurbishment of marine cargo containers

ii. any goods imported into Sri Lanka for the purpose of re- export under entre-port trade

Page 106

III. a copyright, patent, license, trade mark or similar intellectual property right, to the extent that such right is for use outside Sri Lanka;

IV. the international transportation (including trans- shipment) of goods or passengers as are specified by the Commissioner-General by Notification published in the Gazette;

V. computer software development, in respect of software developed by the developer for use wholly outside Sri Lanka, and for which payment is received in foreign currency through a bank if, and only if, documentary evidence is produced to the satisfaction of the Commissioner – General of the supply of such services;

VI. client support services provided, on or after April 1, 2001 over the internet or the telephone by an enterprise set up exclusively for the provision of such services to one or more identified clients outside Sri Lanka, for which payment is received in foreign currency, through a bank;


Page 107

VI. the provision of services to overseas buyers by a garment buying office registered wit the Textile Quota Board established under the Textile Quota Board Act, No. 33 of 1996, where payment for such service is received in foreign currency, through a Bank in Sri Lanka insofar as such services are identified by the Commissioner-General as being services essential for facilitating the export of garments to such overseas buyers.

c) any other service, being a service not referred to in paragraph (b) , provided by any person in Sri Lanka to another person outside Sri Lanka to be consumed or utilized outside Sri Lanka shall be zero rated provided that payment for such service in full has been received in foreign currency from outside Sri Lanka through a bank in Sri Lanka


Page 108

Exempt Supplies

► No tax shall be charged on the supply of goods or

services and the importation of goods specified in the First

Schedule to this Act as such supplies and imports are not

taxable unless zero rated under section 7

Page 109

Calculation of VATOutput VAT = 5,000,000

Less: Input VAT = (1,000,000)

VAT payable = 4,000,000

“Output Tax” in relation to any registered person, means the tax chargeable in respect of the supply of goods or services made or deemed to be made by such person.

“Input Tax” in relation to a registered person, means –

a) the tax charged by another registered person on any goods or services to be used by such registered person in carrying out a taxable activity;

b) the tax paid by him or tax deferred under the proviso to subsection (3) of section 2, on the importation or purchase of goods or purchase of services which are used by such person for the purpose of making taxable supplies

Page 110

Definitions

“Person” includes a company, or body of persons

“Body of Persons” means any body corporate or unincorporate, Provincial Council, local authority, any fraternity, fellowship, association or society of persons, whether corporate or unincorporate, any partnership and includes any Government department or any undertaking of the Government of Sri Lanka or any Co-ownership of immovable property;

Page 111

Nation Building Tax

Turnover tax was abolished and in place NBT is charged.

NBT is charged on ► every person who imports of any article,► carries on the business of manufacture of any article,► carries on the business of providing a service of any

description, or ► carries on the business of wholesale and retail trade

Page 112

Rate of NBT

► On the liable turnover from supply of services - 2%

► One half of the liable turnover from the wholesale or retail sale of any article - Nil

► The balance liable turnover from the wholesale or retail sale of any article -2%

Page 113

Stamp Duty

The Stamp Duty (Special Provisions) Act, No 12 of 2006 imposes Stamp Duty on specified instruments. Specified instruments mean

(a) An affidavit

(b) A policy of insurance

(c) A warrant to act as Notary Public

(d) A license issued for a specified period under any written law for the time being in force, being a license which authorizes the holder thereof to carry on any trade, business, profession or vocation

(e) A claim, demand request made by a service provider from the holder of a credit card, for the payment of a stated sum of money, due in respect of a transaction entered into using such credit card

Page 114

f) Share certificate on new or additional issue or on transfer or assignment

g) on a bond, mortgage for any definite and certain sum of money and affecting any property

h) A promissory note

i) A lease or hire of any property

j) A receipt or discharge given for any money or other property

k) Any other instrument which the Minister may in the interest of the economic progress of Sri Lanka specify by Order published in the Gazette

Stamp Duty

Documents

Page 1 Resource Person: Mr. Sulaiman Nishtar ACA/ACMA/CGMA/ Partner Ernst & Young - Tax Postgraduate Diploma in Business & Finance