Handout 2 - CA Sri Lanka

Report
POST GRADUATE DIPLOMA IN
BUSINESS & FINANCE
Taxable profit computation and assessable profit
computation
STATUTORY ALLOWANCE

Statutory allowance for resident individuals and
non resident citizens, is Rs. 500,000
-
This limit is not applicable to non resident non
citizens.
-
An individual should have an assessable income
in excess of Rs. 500,000 to be charged for income
tax
QUALIFYING PAYMENTS
A.
Donations to the government
Donations to following organizations or persons are considered as qualifying payments.

The government of Sri Lanka

A local authority


Any higher educational institute established or deemed to be established under the
Universities Act, No. 16 of 1978
The Buddhist and Pali University or any higher educational institute established by
or under the Buddhist and Pali University Act. No 74 of 1981

A fund established by the government of Sri Lanka.

A fund established by a local authority and approved by the Minister.

A fund established by a Provincial council and approved by the Minister.


The Sevana fund created and administered by the National Housing Development
Authority established by the National Housing Development Authority Act
The Api Wenuwen Api fund established by Api Wenuwen Api Fund Act, No 6 of 2008
Any amount can be claimed and, and unclaimed amounts carried forward
QUALIFYING PAYMENTS
B.

C.
Premium paid for Special Health Insurance
Any accrued premium paid for special health insurance policy to cover
any incurable decease is deemed to be a qualifying payment. There
is no limit for this claim.
Expenditure on government development plan
Any expenditure or investment made on a project included in the
development plan of the government is considered a qualifying
payment, subject to
Prior written approval from the minister
In accordance with such terms and conditions as specified by
the minister having regard to the development priorities of the
government.
The maximum deduction from the assessable income would be Rs.25,000
in a year of assessment. Any unclaimed balances can be carried
forward to be set off in the next year and so on.

QUALIFYING PAYMENTS
D.
Donations to approved charities.
Any donation to an approved charity (approved by the minister
and published in the gazette)established to provide
institutionalized care for sick and needy is deductible as a
qualifying payment.
E.
Premium paid on Life and Medical insurance
Life insurance policies not being pure endowment policy, with
premium payable annually over a period of not less than 3 years.
 Medical insurance other than (B) above.
 Payment should be with in Sri Lanka.
Maximum deductible in a year of assessment for D & E
Rs. 75,000 or
1/3 rd of assessable income, whichever is lower

No carry forward of unclaimed donations or premiums
QUALIFYING PAYMENTS
F.
Expenditure on Film production
Any expenditure incurred on films produced after 01.04.2007
Rs. 25,000,000 or on films produced after 01.04.2008 Rs.
35,000,000 can be claimed as qualifying payments. Any
unclaimed amounts can be carried forward into the future.
G.
50% of the Investments in venture capital companies which
enjoy a tax holiday.
- 1/3 rd of the investment or assessable income, whichever is
lower.
H.
Investment s in BOI approved companies under section 31 (2),
prior to 01.04.2000 – unclaimed balances. 1/3rd of assessable
income
I.
Expenditure on construction of cinema and equipping a cinema.
Up to a maximum of Rs. 25 million, unclaimed amounts can be
carried forward.
QUALIFYING PAYMENTS
J. Upgrading and refurbishing of a cinema.
Up to a maximum of Rs. 10 million can be claimed, unclaimed
balances can be carried forward.
K. Investment made in any undertaking for the construction
and sale of houses for the lower income families.
Should be approved by the Urban Development Authority or
National Housing Authority.
Floor area of each house should not exceed 500sqft.
No limit to the claim and the unclaimed balances can be
carried forward to be set off in the next year and so on.
L. Expenditure on house constructed or purchased before
01.04.2011.
The unclaimed brought forward balance can be set off subject to a
limit of
Rs. 100,000 or
1/3 of assessable income whichever is lower.
QUALIFYING PAYMENTS
M.
Expenditure on community development project in an
economically marginalized village as identified and
published in the gazette by the commissioner general.
- Subject to maximum of Rs. 1 million – no carry forward
N.
Investment not less than Rs. 50,000,000 in fixed assets in
the expansion of certain undertakings. (sec 16(c))
- Subject to a limit of 25% of the payment, Excess can be carried forward.
O.
Investment in manufacturing business made after
01.04.2012
- 25% of the total payments, excess can be carried forward
P.
Allowance on employment income, other than payments
under section 4(1)(d).
Rs. 100,000 or excess employment income over Rs. 500,000 –
whichever is lower
QUALIFYING PAYMENTS
Order of priority
- First claim the statutory allowance.
- Next the qualifying payments not eligible for carry forward
- Finally qualifying payments which are eligible to be carried
forward
Changes for 2015/16 in the recent budget
 Individual engaged in a profession is allowed a qualifying
payment of Rs. 600,000 p.a. as capital repayment of a loan
obtained from a bank or financial institution, to construct a
house or purchase of house or a unit of a residential
apartment complex for own use.
 For other changes please refer the relevant publications
ASCERTAINMENT OF ASSESSABLE INCOME

Deductible losses on trade, business,
profession or Vocation

Interest

Annuities

Royalties

Ground rent paid
DEDUCTIBLE LOSSES ON TRADE, BUSINESS,
PROFESSION OR VOCATION (SCHEDULE 8)
Losses on trade, business, profession or vocation can be deducted on the
following basis.
Total losses incurred during the year
Unclaimed losses brought forward from prior years (if any)
Rs.
XXX
XXX
A. Total Losses
XXX
B. 35% of statutory income
XXX
Deductible loss lower of A and B
XXX
Balance losses not deducted can be carried forward.
- Other condition is, Profits of such trade should be taxable
under the act.
- Trading losses can’t be claimed from employment income.
EXAMPLE
Mr. Perera had an employment income of Rs.
550,000(PAYE Rs. 2,500 deducted by the employer)
rent income of Rs. 230,000 and net dividend income of
Rs. 90,000 for the financial year 2013/14.
In addition he was a partner at a private Montessori
school , which had tax adjusted trading profit of Rs.
2,000,0000 of which he is entitle to a 50% share. The
partnership has paid tax at the rate of 8%.
Mr. Perera also had brought forward trading losses
from previous years amounting to Rs. 1,256,500.00
He has paid Rs. 84,000 as Life insurance premiums and
donated Rs. 50,000 to an approved charity during the
year.
Calculate the income tax payable by Mr. Perera
ANNUITIES
To deduct from statutory income, an annuity payment
should have the following characteristics.
1.
It must be made with reference to the year though it
may be paid in periodic installments.
2.
Not be a receipt or accrual of a capital nature to the
payee.
3.
Be made under a legal obligation.
4.
Be either recurrent or capable of recurrence.
5.
Be pure income or profit of the payee.
Ex. J.M. Rajaratnam V CIR
CIT v Cowasjee Nilgiriya
CIR v D.B.J. De Silva
GROUND RENT AND ROYALTIES
Ground Rent
These payments are created when free hold piece of
land or a building is sold on a long lease.
Royalties
A royalty is a usage based payments made by one
party (the licensee) to another (the licensor) for
the right to ongoing use of an asset, including an
intellectual property. Royalties are generally
agreed as a percentage of gross or net revenues
derived from the use of an asset or fixed price per
unit sold of an item.
INTEREST
Following conditions should be satisfied in order to claim
Interest as a deduction from statutory income.
1.
Loan proceed should have been utilized for the
construction of any building or for the purchase of any
site for the construction of any building.
2.
The above condition in (i) should for the purpose of trade,
business, profession or vocation.
3.
Paid to a bank licensed under the Banking Act or
approved finance company or any other person recognized
by the commissioner general.
4.
Recipient of such interest should declare such interest as
income.
*** Any excess annuity, royalty, ground rent or
interest paid over the statutory income for a year of
assessment shall be treated as a trading loss which
can be claimed in the succeeding years of
assessment.
EXAMPLE
Dr. Ben had employment income of Rs. 640,000( PAYE Rs. 2,000
deducted) and rent income of Rs. 1,200,000 for the financial year
2013/14. In addition he had profit from distribution business of Rs.
600,000, net dividend received from ABC Ltd, Rs. 180,000 and
professional income from private medical practice of Rs. 480,000 for
the same year.
He had brought forward unclaimed losses from the distribution business
of Rs. 1,300,000
During year he has made the following payments.
Donation to Api Wenuwen Api fund Rs. 50,000
Donation to an approved charity Rs. 50,000
Premium on special insurance policy to cover incurable deceases Rs.
100,000
General life and medical insurance premium of Rs. 60,000
Rs. 5,000 per month paid to his spouse under a duly executed deed of
separation.
Calculate Dr. Ben’s gross tax and the final tax payable.
ASCERTAINMENT OF STATUTORY INCOME
As per the main income tax computation we have
identified the following sources of income, in
order to calculate the statutory income.
1. Income from employment
2. Income from trade, business, profession or
vocation
3. Net annual value and rent income
4. Dividends
5. Interest
6. Annuities, Royalties etc
7. Income from any other source
INCOME FROM ANY OTHER SOURCE
This is effectively “catching all close”. That is
income which do not fall into any other category
will be charged under this. However profits of a
casual and non recurring nature should not be
included.
Cases
Wickramasingha v CIT
CIR v C.S.A. Namasivayam Chettiar
ANNUITIES, ROYALTIES ETC
Annuities
 In order to be added to the statutory income, an
annuity payment should have the following
characteristics.
1.
It must be made with reference to the year though it
may be paid in periodic installments.
2.
Not be a receipt or accrual of a capital nature to the
payee.
3.
Be made under a legal obligation.
4.
Be either recurrent or capable of recurrence.
5.
Be pure income or profit of the payee.
Ex. J.M. Rajaratnam V CIR
CIT v Cowasjee Nilgiriya
CIR v D.B.J. De Silva
ANNUITIES CONT…
Person paying such annuity shall deduct 10%
from the annuity paid if the payment is in excess
of Rs. 50,000 per month or Rs. 500,000 per year.
(other than for annuities paid to a person aged 60
years or over)
 If the annuity is paid to a non resident person
20% withholding tax, shall be deducted.
 Withholding certificate shall be issued to the
recipient and he can claim the tax deducted as a
tax credit.

ROYALTIES
A royalty is a usage based payments made by one party
(the licensee) to another (the licensor) for the right to
ongoing use of an asset, including an intellectual
property. Royalties are generally agreed as a
percentage of gross or net revenues derived from the
use of an asset or fixed price per unit sold of an item.
- Person paying such Royalty shall deduct 10% from
the Royalty paid if the payment is in excess of Rs.
50,000 per month or Rs. 500,000 per year. (other than
for exempt royalties)
- If the royalty is paid to a person outside Sri Lanka
person 20% withholding tax, shall be deducted.
- Withholding certificate shall be issued to the recipient
and he can claim the tax deducted as a tax credit.
EXEMPT ROYALTIES
Royalty received in foreign currency from outside
Sri Lanka.
 Receipt of royalty by a non resident person from
BOI company where the agreement was entered
before 01.04.2004

****Other sources of income such as
discounts or premiums will also be taxable
as separate sources of income.
INTEREST INCOME
Interest income could arise for the investments including the
following
1.
Deposits with banks or financial institutions
2.
Debt securities
3.
Loans
Computation of interest income should be on
1.
Accruals basis.
2.
Receipt basis if there is a condition to say that no interest
will be payable before the maturity.
3.
Irrecoverable interest should be excluded.
Banks and financial institutions will deduct withholding tax at
the rate of 10%, 2.5% or 0% depending on the disclosed
income of the recipient of interest.
Interest income which was subjected to WHT will not form part
of the assessable income in the hands of the recipient if the
recipient is an individual.
INTEREST CONT…
The person who deducts the withholding tax should issue a
certificate of tax deduction, where the recipient can claim tax
credit.
Exempt Interest
A.
Interest on special account, with the approval of Central Bank
opened with funds obtained by exchange of foreign currency held
outside Sri Lanka.
B.
Interest on FCBU accounts
C.
Interest on foreign currency account
D.
Interest to senior citizens over the age of 60 years up to Rs. 500,000
is exempt from tax, if those deposits are held in the state banks.
E.
Interest from Reconstruction Bond.
F.
Interest from Sri Lanka nation building bond.
G.
Interest from Motherland developments bonds.
H.
Interest from Investment made outside Sri Lanka.
I.
Interest to person outside Sri Lanka from loan granted to a person
in Sri Lanka.
J.
Interest on Treasury bond investment External Rupee account.
DIVIDEND INCOME
Dividends may be paid in the following forms
- Money or an order to pay money
- Shares in any other company
- Debentures in that company or any other company
- Script dividend
CIT v Marcan Markar
Dividends are subjected to 10% WHT unless the dividend is paid out of
dividends received form another company.
Exemptions
 Dividends paid to certain identified shareholders will be tax
free.
 Dividends of certain BOI company which enjoy tax holidays
may also be exempt from tax.
 Dividends from unit trusts or mutual funds are also exempt.
 Foreign dividends received will also be exempt.
DIVIDENDS TAXABLE AT REDUCED RATES
1.
2.
3.
4.
5.
6.
7.
Dividend paid not in the form of money or of an order to
pay money – 10%
Dividend paid out of Income exempt from tax or not
chargeable with tax – 10% WHT deemed to be the final
Dividends received from another company without the
deduction of tax – 10%
Dividends by company engaged in non traditional exports
– 10% WHT deducted will be final
Dividends paid by companies engaged in Agriculture,
Manufacture of animal feed, promotion of tourism,
Construction work. – 10%
Dividends received from out side Sri Lanka – not
remitted through a bank , - 10% subject to provisions in
DTA
10% credit available to individual for receipt of dividends
in the form of shares or debentures

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