Presentation on theme: "Postgraduate Diploma in Business & Finance"— Presentation transcript:
1Postgraduate Diploma in Business & Finance Resource Person: Mr. Sulaiman Nishtar ACA/ACMA/CGMA/ Partner Ernst & Young - Tax
2Introduction – 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 distributionIncreasing savings and capital formationChanneling investments and expenditure in economically desired directions
3Imposition of Income Tax Section 2 –ResidentsIncome 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 taxNon –residentsIncome 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 derivedfrom services rendered in Sri Lanka orfrom property in Sri Lanka, orfrom business transacted in Sri Lanka, whether directly or through an agentIt is possible to apply this template to exiting presentations.Have the latest presentation template openClick on the View tab and select NormalDelete all unwanted slidesClick on the Insert tab from the menu bar and select Slides from FilesClick on Browse. Navigate to the presentation you wish to update with the new template. Highlight the presentation and click OpenWait for the slides from the presentation to load and click on Insert All. Then click CloseCheck the inserted slides to ensure that the most appropriate master slide has been used on each slideTo change the master applied to a slide select the slide you wish to apply a different master to then click on the Format tab from the menu bar and select Slide DesignFrom the Used in This Presentation section choose the master you wish to apply to the slide and hover over it to reveal a drop-down arrow. Click on the arrow and select Apply to Selected SlidesIt is important to thoroughly check the presentation to ensure that no further formatting is needed.
4Determining 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 bedeemed to be resident in Sri Lanka.
5Determining 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.
6‘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.
7Sources on which Income Tax is Charged Section 3 –‘Profits and Income’ or ‘Profits’ or ‘Income’ Meansthe profits from any trade, business, profession or vocation for however short a period carried on or exercised;the profits from any employment;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;
8(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 ;
9in the case of a non governmental organisation, any sum received by such organisation by way of grant, donation or contribution or any other manner; andincome from any other source whatsoever, not including profits of a casual and non-recurring nature.
10Capital GainsNot 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 lawWhether 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.
11Profits 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 includesSystematically carried on trade or business activities.Adventures or concern in the nature of trade.
12Factors Indicative of a Trade The frequency of a transactionThe 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.Use of the assetIf the asset is purchased as an investment it may be capital nature
13Factors Indicative of a Trade MotiveIf the sole purpose of a transaction is to make profit then it will be considered to be a tradeWork on the assetWhat 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 marketableLength of period of ownershipA person who buys an asset and holds it for a long period before disposing it may indicate that it is an investment
14Calculating Income Tax –Trade or Business Taxable incomeAssessable incomeTotal statutory incomeAdjust according to section 25 and 26Profits and income as per accounts
15Ascertainment 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 himInformation technology equipments and calculating equipment including accessories and software, acquired by such person - 25% per annum on the cost of acquisitionSoftware developed in Sri Lanka - 100% on the cost of acquisition
16Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Any motor vehicle or furniture acquired – 20% per annumAny other machinery or equipment not referred aboveAcquired or assembled prior to April 1, ½% per annumAcquired or assembled on or after April 1, /3% per annumAny 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,
17Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Qualified Building:Constructed prior to April 1, 2011Constructed on or after April 1, % on the construction costAny unit of a condominium property acquired which is approved by the Urban Development Authority and constructed to be used as a commercial unitAny 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
18Ascertainment of Profits or Income – Allowable Expenses Under Section 25 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 acquisitionPlant 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
19Ascertainment of Profits or Income – Allowable Expenses Under Section 25 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 acquisitionPlant, 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
20Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Renewals and RepairsRenewal - 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 assetRepair - 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 ;
21Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Distinguishing Between Repairs & RenewalsRenewal is a reconstitution of the entirety. Of course entirety does not necessarily mean the whole but substantially the whole subject matter under discussionRepair would always involve renewal of a subordinate part and every repair is a replacementExample- If a roof is repaired by putting new tiles instead of old ones which is thrown away –repairIf the roof is replaced in entirety and is not repairing the old one -renewal
22Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Bad and Doubtful DebtsBad 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
23Interest paid or payable by such person Ascertainment of Profits or Income – Allowable Expenses Under Section 25InterestInterest paid or payable by such personExample- 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.
24Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Contribution to Pension or Provident FundsAny 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
25Ascertainment of Profits or Income – Allowable Expenses Under Section 25 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
26Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Research for Upgrading of Trade or BusinessFor any year of assessmentCommencing 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.
27Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Research for Upgrading of Trade or BusinessExample- 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.
28Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Expenses in Opening Up Land for Cultivation & Similar Expensesany expenses incurred by such person in–opening up any land for cultivation or for animalhusbandry;cultivating such land with plants of whatever description;the purchase of livestock or poultry to be reared on such land; orthe 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;
29Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Travelling Within Sri Lanka – Travelling of Persons in the Course of EmploymentThe 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-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
30Ascertainment of Profits or Income – Allowable Expenses Under Section 25 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;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;
31Ascertainment of Profits or Income – Allowable Expenses Under Section 25 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
32Ascertainment of Profits or Income – Allowable Expenses Under Section 25 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;
33Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Foreign TravellingAny 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–promotion of the export trade of any article or goods; orprovisions of any services for payment in foreign currency:
34Ascertainment of Profits or Income – Allowable Expenses Under Section 25 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-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 ; orsuch 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(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;
35Ascertainment of Profits or Income – Allowable Expenses Under Section 25 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 companiesExpenses is listing in the stock exchangeAny 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.
36Ascertainment of Profits or Income – Allowable Expenses Under Section 25 GratuityPayment 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;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;
37Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Expenses in Leasing of Commercial PremisesLump 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
38Ascertainment of Profits or Income – Allowable Expenses Under Section 25 TrainingExpenditure 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–directly relevant to the duties performed by such employee before the commencement of such training;essential for upgrading the skills or performance of such employee, in such trade or business; andnecessary for improving the efficiency and performance of such trade or business.“training” includes participation in any seminar or workshop;
39Ascertainment of Profits or Income – Allowable Expenses Under Section 25 Accreditation ExpensesThe accreditation expenses, where such person is a person carrying on any profession;This is where some recognition is granted by an institution
40Disallowable Expenses Under Section 26 Domestic or Private ExpensesDomestic 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 tradeany 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 residenceany expenditure or outgoing in relation to any asset provided by such person to any employee to be used in the residence of such employee;
41Disallowable Expenses Under Section 26 Property Provided to Employee Less than Market Valueany 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 employeeany 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;
42Disallowable Expenses Under Section 26 Entertainment Expensesentertainment 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 Expenditureany expenditure of a capital nature or any loss of capital incurred by such person;Improvementsthe cost of any improvements effected by such person;
43Disallowable Expenses Under Section 26 Amount recoverable under a contract of insuranceany 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
44Disallowable Expenses Under Section 26 Taxes Paidany amount paid or payable by such person by way of—income tax,any prescribed tax or levy;Economic Service Charge levied under Economic Service Charge Act, No. 13 of 2006;Value Added Tax on Financial ServicesSocial Responsibility Levy
45Disallowable Expenses Under Section 26 Annuity, Ground Rent or Royaltyany annuity, ground rent, or royalty paid by such personHowever under section 32(5) such expenses can be deducted from total statutory incomesums paid by such person for any year of assessment by way of annuity, ground rent, royalty or interest not deductible under section 25.
46Disallowable Expenses Under Section 26 Rental expenses in relation to residence provided to employeeIf the employees profits from employment does not exceed Rs. 600,000 per year – 1/2 of the expenditure disallowedIf 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;
47Disallowable Expenses Under Section 26 Hiring of vehicles and other assetsAs 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)
48Disallowable Expenses Under Section 26 Leasing Allowanceany 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 disallowedany information technology equipment and calculating equipment including accessories and computer software only 1/4 th of total lease rental will be allowed-
49Disallowable Expenses Under Section 26 Sums transferred to a reserve or provisionany sum transferred to any reserve or provision (other than any annual payment to an approved fund)
50Disallowable Expenses Under Section 26 Management FeesAny 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.
51Disallowable Expenses Under Section 26 Advertisingfor any year of assessment-commencing prior to April 1, 2011, one half; (50%) andcommencing 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 himOther 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;
52Disallowable Expenses Under Section 26 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 –the amount of such expenditure; orthe amount equal to ten per centum of such profitsor income.
53Disallowable Expenses Under Section 26 Thin Capitalization RuleIf 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 disallowedIf the company is not a manufacturer - Interest payable over four times the aggregate of the issued share capital and reserves will be disallowed
54Ascertainment of Profits or Income –Under Section 25 (3) Tax on gain or loss from sale of fixed assetsCapital gains are not a source of income chargeable with tax under section 3.Fixed assets used in a trade/business is a capital assetSection 25(3) deems the proceeds from the sale of a capital asset to be a trade receipt
55Ascertainment of Profits or Income – Under Section 25 (3) Tax on gain or loss from sale of fixed assetsDisposing a capital asset on which capital allowances have been granted in fullCost of the computer – Rs. 100,000/-Year of purchase – 2006/2007Capital allowances as at 2012/2013 – Fully claimedTax written down valueSales proceeds - Rs. 75,000Income tax will be charged on entire sales proceeds of Rs. 75,000/-
56Ascertainment of Profits or Income –Under Section 25 (3) Tax on gain or loss from sale of fixed assetsDisposing a capital asset on which capital allowances have not been granted in full. –gain on disposalCost of the computer – Rs. 100,000/-Year of purchase – 2011/2012Capital allowances as at 2012/2013 – Rs. 25,000/-Tax written down value - Rs. 75,000/-Sales proceeds - Rs. 80,000Income tax will be charged on - Rs. 5,000/-
57Ascertainment of Profits or Income –Under Section 25 (3) Tax on gain or loss from sale of fixed assetsDisposing a capital asset on which capital allowances have not been granted in full. –loss on disposalCost of the computer - Rs. 100,000/-Year of purchase /2012Capital allowances as at 2012/2013 -Rs. 25,000/-Tax written down value - Rs. 75,000/-Sales proceeds - Rs. 70,000Loss on disposal of Rs. 5,000/- will be treated as an expense
58Ascertainment of Profits or Income –Under Section 25 (3) Tax on gain or loss from sale of fixed assetsTax 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;
59Ascertainment of Profits or Income –Under Section 25 (3) Tax on gain or loss from sale of fixed assets“Proceeds” in relation to the disposal of any capital asset means—the sale price of such asset, where the disposal is by sale; orthe 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;
60Ascertainment of Profits or Income –Under Section 25 (3) Tax on gain or loss from sale of fixed assets“Disposal’, in relation to the disposal of any capital asset by any person includes–sale, exchange, or other transfer in any manner whatsoever of such asset by such person;discard of such asset by such person;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;
61Profits from Employment – Under Section 4 Profits from any employment include:(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,
62Profits from Employment – Under Section 4 Whether received or derived from the employer or others;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;(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
63Profits from Employment – Under Section 4 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.
64Profits from Employment – Under Section 4 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 monthandOver Rs. 15,000/- per month if the salary exceeds Rs. 150,000 per month shall be disregarded.
65Profits from Employment – Under Section 4 The values of certain benefits are provided in Gazette No: 1706/18 dated, Friday May 20, 2011Value 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.
66Profits from Employment – Under Section 4 Value of benefits from any residence provided by the EmployerOf any place of residence provided by the employer in the respective situations should be ascertained as follows;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.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.
67Profits from Employment – Under Section 4 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.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.
68Profits from Employment – Under Section 4 Value of Transport Facilities provided by the EmployerThe 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 –provided by the employer with the driver and fuel on such employer’s account, shall be deemed to be Rupees Fifty Thousand per month;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;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;provided by the employer without the driver and fuel, shall be deemed to be Rupees Fifteen Thousand per month.
69Profits from Employment – Under Section 4 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, –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;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.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.provided by the employer without the driver and fuel, shall be deemed to be Rupees Ten Thousand per month.
70Profits from Employment – Under Section 4 The value of the benefit to an employee from the (fully or partly) private use of any motor bicycle –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);provided by the employer without fuel, shall be deemed to be Rupees Three Thousand per month, (irrespective of its engine capacity);
71Profits from Employment – Under Section 4 The value of the benefit from private use of –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);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
72Profits from Employment – Under Section 4 Other Benefits provided by the Employer
73Profits from Rent – Under Section 6 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.
74Ascertainment 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.
75Statutory Income of a Child The statutory income of a child is aggregated with that of his parent in the following circumstances:The parent must be a resident individualIf the marriage subsists, it is aggregated with that of the fatherIf the marriage does not subsists, it is aggregated with that of the parent who maintains the child and with whom he lives
76Statutory Income of a Child A child is defined as:under 18 yearsincludes an adopted child under the Adoption of Children Ordinance or in accordance with the law of the country of which he is a citizenBut does not include:a child adopted under any other lawa married childan illegitimate child
77Ascertainment of Assessable Income Section 32 provides the deductions which are permissible from the statutory income in arriving at the assessable income.Examples-Persons other than companies can deduct the following in arriving at the assessable income.Interest from which income tax has been deductedDividend from which income tax has been deducted
78Ascertainment of Assessable Income LossesThe 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
79Ascertainment 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-An allowance of Rs. 500,000/- is given for individuals or charitable institutions who or which is resident in Sri LankaA 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;
80Ascertainment of Taxable Income 25% of the investment ifInvestment is not less than Rs. 50millionin fixed assetsInvestment made after April 1, 2011 but before April 1, 2015In 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
81Tax Credits The following credits can be taken Income tax paid during the year of assessment under self assessmentWithholding tax deducted on interest incomeNotional tax credit for income on government securitiesEconomic Service Charge
82Exemptions 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 companyany resident individualany 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
83Rate 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. 500,000/- of the taxable income 12%On the next Rs. 500,000/- of the taxable income 16%On the next Rs. 1,000,000 of the taxable income 20%On the Balance of the taxable income 24%
84Rate of Income Tax - Companies Income tax is charged at a rate of 28%The following concessionary rates are applicableA company of which the taxable income does not exceed Rs. 5,000,000/- 12%(subject to restrictions)Engaged in agriculture, manufacture of animal feed, promotion of tourism, or construction work -12% (subject to restrictions)An undertaking undertaking referred to in section 16 – 10%A company the turnover of which is less than Rs. 500 million -10% (subject to restrictions)
85Payment of TaxTax 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 BasisFor the year of assessment 2012/2013 quarterly installments should be paid as follows1/4 of 2011/2012 tax liability – August 151/4 of 2011/2012 tax liability –November 151/4 of 2011/2012 tax liability –February 151/4 of 2011/2012 tax liability – May 15Final tax liability based on 2012/2013 – September 30
86Payment of Tax Current Year Basis For the year of assessment 2012/2013 quarterly installments should be paid as follows1/4 of 2012/2013 estimated tax liability -August 151/4 of 2012/2013 estimated tax liability -November 151/4 of 2012/2013 estimated tax liability -February 151/4 of 2012/2013 tax liability -May 15
87Penalty 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
88Return FilingReturns 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 RevenueAn 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 ReturnPenalty for not filing return –Rs. 50,000/-
89AssessmentsIf 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 raisedTherefore if the assessor does not accept the Return filed by the company an assessment can be raisedIf the assessor does not accept the return reasons for not accepting the return should be given prior to raising the assessment
90Assessments – 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 returnIf return is not filed before November assessments cannot be raised 4 years from the due date of filing the return
91AppealIf is disagreement with the assessment the company can appeal against the assessmentStage 1 – Appeals to Commissioner GeneralStage 2- Appeals to the Tax Appeal commissionStage 3- Appeals to the Court of Appeal
92Definitions Authorized Representative- by a person to act on his behalf for the purpose of this Act,and who is –in any case –a member of the Institute of Chartered Accountants of Sri Lanka;an accountant approved by the Commissioner-General;an Attorney-at-Law;an employee regularly employed by that person, ora member of the Sri Lanka Institute of Taxation established under the Sri Lanka Institute of Taxation Act, No. 21 of 2000;in the case of an individual, a relative;in the case of a company, a director or the secretary of that company;in the case of a partnership, a partner of that partnership;in the case of a body of persons, a member of such body;or
93Definitionsfrom 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–being and individual registered as an auditor under the Companies (Auditors) Regulations, is approved by the Commissioner-General; oris an individual approved by the Commissioner-General under regulations made in that behalf;
94Definitions 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/-
95Value Added Tax VAT is Charged Importation of goods into Sri Lanka by any person.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 VATThere should be a taxable activity carried out in Sri LankaThere should be a taxable supply of goods or servicesThe supply must be made by a registered person
96Taxable Activityany 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;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;anything done in connection with the commencement or cessation of any activity or provision of facilities referred to in (a) or (b);the hiring, or leasing of any movable property or the renting or leasing of immovable property or the administration of any property;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;
97Supply of Goods or Services 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 servicesmeans any supply which is not a supply of goods but includes any loss incurred in a taxable activity for which an indemnity is due;
98Goods 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
99Taxable Period “Taxable Period” means; 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 22where 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 BoardA period of 3 months on any person other than the above
100Wholesale 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, 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.
101Time of SupplyTime of supply is deemed to have taken place at the time of the occurrence of any one of the following whichever, occurs earlier: -the issue of an invoice by the suppliera payment including any advance payment received by the supplier; ora payment is due to the supplier in respect of such supply; orthe delivery of the goods have been effected or the service is performed.
102Value of SupplyThe value of a taxable supply of goods or services, shall be such amount where the supply is-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;not for a consideration in money or not wholly in consideration of money, be the open market value of such supply.
103Value of Supply - Imports The value of goods imported, shall be the aggregate of –the value of the goods determined for the purpose of custom duty increased by ten per centum ; andthe 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.
104Zero Rates (0%) Supplies Rates of TaxStandard rate of 12%0%ExemptZero Rates (0%) Suppliesno tax shall be charged in respect of such supply;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.
105Zero Rates (0%) Supplies – The Following Supplies are Zero Rated Supply of –goods shall be zero rated where the supplier of such goods has exported such goods; andservices shall be zero rated where the supply of such services are directly connected with –any movable or immovable property outside Sri Lanka;the repair of any foreign ship, aircraft or any merchant ship registered in Sri Lanka, or the refurbishment of marine cargo containersany goods imported into Sri Lanka for the purpose of re- export under entre-port trade
106Zero Rates (0%) Supplies – The Following Supplies are Zero Rated a copyright, patent, license, trade mark or similar intellectual property right, to the extent that such right is for use outside Sri Lanka;the international transportation (including trans- shipment) of goods or passengers as are specified by the Commissioner-General by Notification published in the Gazette;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;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;
107Zero Rates (0%) Supplies – The Following Supplies are Zero Rated 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.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
108Exempt SuppliesNo 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
109Calculation of VAT Output 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 –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;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
110Definitions“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;
111Nation Building TaxTurnover tax was abolished and in place NBT is charged.NBT is charged onevery 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, orcarries on the business of wholesale and retail trade
112Rate 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 - NilThe balance liable turnover from the wholesale or retail sale of any article -2%
113Stamp DutyThe Stamp Duty (Special Provisions) Act, No 12 of 2006 imposes Stamp Duty on specified instruments. Specified instruments meanAn affidavitA policy of insuranceA warrant to act as Notary PublicA 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 vocationA 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
114Stamp DutyShare certificate on new or additional issue or on transfer or assignmenton a bond, mortgage for any definite and certain sum of money and affecting any propertyA promissory noteA lease or hire of any propertyA receipt or discharge given for any money or other propertyAny other instrument which the Minister may in the interest of the economic progress of Sri Lanka specify by Order published in the Gazette