1. Fundamentals of TaxationBy
Mahesh Ranawaka Arachchi
Deputy Commissioner of IRD
MBA(Taxation)PIM, B.B.Mgt.(Acc.) Sp.,
CTA,ATII,FPFA,NCBS

2. Introduction to Taxation

3. Function and purpose of taxation
Primary function of the Taxation
Raising funds for public expenditure

4. Function and purpose of taxation
Economic and Social function of Sri Lanka
Economic factors of Taxation
Set local and foreign investment direction
Protect local industries from foreign completion
Social Factors of Taxation
Discourage activates which are undesirable by the society
Encourage activities which are desirable by the society
Reduce income disparity between rich and poor

5. Principles of Taxation
Equity
Tax burden should be equal among persons in similar circumstances.
- Benefit Principle
- Ability to pay
Horizontal equity
Vertical equity
Certainty
Time of payment ,
Manner of payment and
Amount to be paid
should be clear and plain to contributor and every other person.

6. Principles of Taxation
Convenience and voluntary compliance Tax should be implemented conveniently to tax payer that will encourage for voluntary compliance. Economy Collect taxes with minimum collection cost. If tax system complicated, need to incur relatively higher collection cost for administration of the tax system. Progressivity Tax burden should be proportionate to taxpayer's income level and ability to pay. higher income groups should pay proportionately more than the lower income groups.

7. Principles of Taxation
Efficiency Tax collection is efficient when the cost of collection the tax is lower compared with collected tax revenue. Adequacy Tax collection should be sufficient to cover expected portion of public expenditure. Broad base Tax system should wide enough to include various sections in the society and population whereby minimizing individual tax burden. Simplicity An average taxpayer should be able to understand about the tax system

8. Who bear the TAX Tax will be affected on two ways. Direct affect :-
To pay the taxes if there is a liability to pay tax. Tax bear by the payee. It’s cant be transferred to other
Indirect affect :-
To compliance under special regulation available in the Tax law. Tax bear by the other person It’s can be transfer to other

9. Tax Authorities in Sri Lanka
There are basically four tax authorities In Sri Lanka
Inland Revenue Department
Sri Lanka Custom
Excise Department
Provincial counsel – Revenue Department

10. Department of Inland Revenue
Taxes administrated by IRD
Income Tax (IT)
Value Added Tax (VAT)
- Value Added Tax on Financial Services (VATFS)
Nation Building Tax (NBT)
- Nation Building Tax on Financial Services (NBTFS)
Economics Service Charge (ESC)
Betting & Gamming Levy
Stamp Duty

11. Sri Lanka Custom
Sri Lanka Custom is responsible for collection of taxes on imports and exports.
Sri Lanka custom is playing major role in controlling and monitoring import and exports of restricted and prohibited goods of environment, health, social and security concerned.

12. Department of Excise
Department of Excise is entrusted with efficient and effective administration of the Liquor and Tobacco industry in Sri Lanka.

13. Provincial Department of Revenue
This is established to collect the certain revenue within the respective province.
Taxes collected,
Stamp Duty
Mineral Tax
Drug & Chemical Tax
Lottery Tax
Prize Competition Tax
Betting Tax

14. Major taxes in Sri Lanka
Income Tax (IT)
Value Added Tax (VAT)
Nation Building Tax (NBT)
Economics Service Charge (ESC)
Import Duties
Stamp Duty
Excise Duties

15. Components of law applicable to Income Tax
Inland Revenue Act No. 24 of 2017
Components of law applicable to Income Tax

16. Components of law Inland Revenue Act No. 24 of 2017
Gazette Notification
Case law
Rulings
Notices published in new papers

17. Chargeability of Income Tax
Inland Revenue Act No. 24 of 2017
Chargeability of Income Tax

18. Inland Revenue Act No. 24 of 2017
Section 2
The amount of tax payable is - Tax payable on the taxable income - Tax payable on final withholding payments

19. Charging Section States,
Inland Revenue Act No. 24 of 2017
Charging Section States,
Who should pay income tax
On what , a person should pay income tax
For which period
How a person should calculate their income tax liability

20. Inland Revenue Act No. 24 of 2017
Definition
“Person” means an individual or entity and includes a body of persons corporate or un-incorporate, an executor, non- governmental organization and charitable institution. “Entity” means a company , partnership, trust, but excludes an individual.

21. Source of Income Employment income ( Sec. 5) Business income (Sec. 6)
Inland Revenue Act No. 24 of 2017
Source of Income
Employment income ( Sec. 5)
Business income (Sec. 6)
Investment income ( Sec 7)
Other income (Sec 8)

22. Assessable Income (sec.4)
Inland Revenue Act No. 24 of 2017
For a resident person The income from employment, business, investment or other source “wherever the source arises” For a non-resident person The income from the employment, business, investment or other source to the extent that the “income arises in or is derived from a source in Sri Lanka”

23. Income Tax Base (Sec. 69) Residency of the Individual Qualitative test
Does he reside in Sri Lanka
Quantitative test
Physically present in Sri Lanka more that 183 day or more, in any 12 month period
Residual test
Is an employee or an official of the government of Sri Lanka and his spouse is posted abroad during the year.

24. Income Tax Base (Sec. 69) Residency of the Company
It is incorporated or formed under the laws of Sri Lanka
It is registered or the principal office is in Sri Lanka; or
At any time during the year the management and control of the affairs of the company are exercised in Sri Lanka.

25. Calculation of Tax payable
Inland Revenue Act No. 24 of 2017
Calculation of Tax payable

26. Income Tax Payable Sec.2(2)
Inland Revenue Act No. 24 of 2017
Tax on taxable income xxx Tax on final withholding payment xxx Total Income Tax payable xxxx

27. Income Tax Base (Sec. 3 to 19)
Inland Revenue Act No. 24 of 2017
Income Tax Base (Sec. 3 to 19)
Assessable income from “Employment” xxxx
Assessable income from “Business” xxxx
Assessable income from “Investment” xxxx
Assessable income from “Other sources” xxxx
xxxx
Less: Qualifying payments and reliefs (Sec. 52 ) (xxx)
Taxable income (Sec. 03) xxxx

28. Tax Calculation (Sec.2(3))
Inland Revenue Act No. 24 of 2017
Tax Calculation (Sec.2(3))
Taxable tax rates (as per First Schedule) xxxx Less: Any foreign tax credit (Sec . 80) (xxx) Any other tax credit allowed under the Act (xxx) Balance Tax Balance payable xxxx

29. Calculation of Assessable Income from Employment
Inland Revenue Act No. 24 of 2017
Calculation of Assessable Income from Employment
Income from employment xxxx
Less : Exempt amounts xxx
: Final withholding payments xxx (xxx)
Liable Income from employment xxxx
Less : Allowable deductions (xx)
Assessable Income from business xxxx

30. Calculation of Assessable Income from Business
Inland Revenue Act No. 24 of 2017
Calculation of Assessable Income from Business
Income from business xxxx
Less : Exempt amounts xxx
: Final withholding payments xxx (xxx)
Liable Income from business xxxx
Less : Allowable deductions (xx)
Assessable Income from business xxxx

31. Calculation Of Assessable Income Of Investment
Inland Revenue Act No. 24 of 2017
Calculation Of Assessable Income Of Investment
Income from Investment xxxx
Less : Exempt amounts xxx
: Final withholding payments xxx
: Amounts included in employment or business xxx (xxx)
Liable income from Investment xxxx
Less : Allowable deductions (xxx)
Assessable Income of Investment xxxx

32. Calculation of assessable income of other source
Inland Revenue Act No. 24 of 2017
Calculation of assessable income of other source
Income from other source xxxx
Less : Exempt amounts xxx
: Final withholding payments xxx
: Amounts included in emp., busi. or Inv. xxx (xxx)
Liable income from other source xxxx
Less : Allowable deductions (xxx)
Assessable Income of other source xxxx

33. INLAND REVENUE ACT No. 24 of 2017
Exempted Income
INLAND REVENUE ACT No. 24 of 2017

34. Amount exempt – Section 9 and Third Schedule
Inland Revenue Act No. 24 of 2017
Amount exempt – Section 9 and Third Schedule
The following shall be exempt amounts: (h) Gain made on realization of an asset consisting of shares quoted in any stock exchange licensed by the SEC (j) Any prize received by a person as an award made by the President of the Republic of Sri Lanka or by the Government in recognition of an invention created, or any research undertaken, by such person;

35. Amount exempt – Section 9 and Third Schedule
Inland Revenue Act No. 24 of 2017
Amount exempt – Section 9 and Third Schedule
(k) Any sum received by a person from the President’s Fund or National Defense Fund (n) Any winning from a lottery, the gross amount of which does not exceed Rs. 500,000. (s) Any amount derived by a person from the sale of any gem on which tax has been deducted under subsection (2) of section 84.

36. Final withholding payments – Section 88
Inland Revenue Act No. 24 of 2017
Dividend paid by resident companies to resident persons
Interest paid to a resident individual (other than such amount of interest paid to a senior citizen falling within the relief threshold in paragraph 2 (d) of the Fifth Schedule to this Act) or to charitable institutions
Receipts by winning lotteries, rewards, betting or gambling (other than business receipts of betting and gaming)
Payments to Non resident persons (other than payments derived through Sri Lankan PE)

37. Deduction Under Section 52 Qualifying Payments
Inland Revenue Act No. 24 of 2017
Donation to Approved Charity – Money
Individual -1/3 of Taxable Income or 75,000 which ever is lower
Entity - 1/5 of Taxable Income or 500,000 which ever is lower
Donation to Government or Government institution
Money or otherwise
Profit remitted to the President Fund

38. Deduction Under Section 52 Reliefs
Inland Revenue Act No. 24 of 2017
Tax free allowance to individual – Rs. 500,000
Tax free allowance to individual who has employment income – Rs. 700,000
25% of rent income, from investment assets – Individual
Interest income up to Rs. 1,500,000 for Senior citizen
To resident individual or partner , Up to Rs. 15,000,000 Earning foreign currency by providing service in or out side Sri Lanka

39. Tax Rates for Individual
Inland Revenue Act No. 24 of 2017
Taxable income tax – - 0 to 600,000 – 4% - 600,001 to 1,200,000 – 8% - 1,200,001 to 1,800,000 – 12% - 1,800,001 to 2,400,000 – 16% - 2,400,001 to 3,000,000 – 20% - 3,000,001 or more – 24%

40. Specific Tax Rates Taxable income of Company tax at 28%
Inland Revenue Act No. 24 of 2017
Taxable income of Company tax at 28%
Small and Medium Enterprises – 14%
“Small and Medium Enterprise” means a person who satisfies the following conditions:
(a) the person who conducts business solely in Sri Lanka other than an individual who is engaged in providing professional services individually or in partnership being an individual who is professionally qualified;
(b) the person does not have an associate that is an entity; and
(c) the person’s annual gross turnover is less than Rs. 500,000,000;
Section 195

41. Tax Rates for Company
Inland Revenue Act No. 24 of 2017
Predominantly conducting a business of exporting goods and services – %
Predominantly conducting an agricultural business – 14%
Predominantly providing educational services – 14%
Predominantly engaged in an undertaking for the promotion of tourism %
Predominantly providing information technology services-14%.
A business consisting of betting and gaming, liquor and tobacco (excluding such income which is merely incidental to another business) – %

42. Tax Rates for Company “Predominantly”
Inland Revenue Act No. 24 of 2017
“Predominantly”
means 80% or more calculated based on gross income.
Schedule 5

43. Tax Rates for Company
Inland Revenue Act No. 24 of 2017
Company’s taxable income includes gains from the realization of investment assets
those gains shall be taxed at rate of 10%

44. Example :
Inland Revenue Act No. 24 of 2017
Assessable income for Employment – Rs. 2,000,000 Assessable income for Business – Rs. 4,000,000 Assessable income for Investment – Rs. 3,000,000 Assessable income for Other – Rs. 500,000 Donation to Government – Rs. 600,000 Self Assessment Payment – Rs. 1,000,000 WHT on Service fee – Rs. 600,000 Calculate the Tax liability of the Mr. Ruwan for Year of Assessment 2018/19

46. Mahesh Ranawaka Arachchi
Deputy Commissioner of IRD
MBA(Taxation)PIM, B.B.Mgt.(Acc.) Sp.,
CTA,ATII,FPFA,NCBS
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