Ascertainment of Profits or Income – Under Section 25

Report
Postgraduate Diploma in Business & Finance
Resource Person: Mr. Sulaiman Nishtar
ACA/ACMA/CGMA/ Partner Ernst & Young - Tax
Page 1
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:



Page 2
More equitable income distribution
Increasing savings and capital formation
Channeling investments and expenditure in economically desired
directions
Imposition of Income Tax

Section 2 –
Residents
Non –residents
Income tax is charged at specified rates Income tax is charged on profits and
for every year of assessment on profits income arising in or derived from Sri
and income of every person wherever
Lanka.
arising.
‘profits and income arising in or derived
Therefore, the global income received
from Sri Lanka’ includes all profits and
by a resident is charged with income
income derived
tax
•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
Page 3
Determining Residency
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.
Section
Page 4
Determining Residency
2) Individual –

Page 5
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.
‘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.
Page 6
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;
Page 7
(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 ;
Page 8
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.
Page 9
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.
Page 10
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


Page 11
Systematically carried on trade or business activities.
Adventures or concern in the nature of trade.
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
Page 12
Factors Indicative of a Trade
Motive
3)
If the sole purpose of a transaction is to make profit then it will be

considered to be a trade
Work on the asset
4)
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
Length of period of ownership
5)

A person who buys an asset and holds it for a long period before
disposing it may indicate that it is an investment
Page 13
Calculating Income Tax –Trade or Business
Profits and income as per accounts
Adjust according to section 25 and 26
Total statutory income
Assessable income
Taxable income
Page 14
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
Page 15
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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,
Page 16
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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
Page 17
Ascertainment 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 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
Page 18
Ascertainment 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 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
Page 19
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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 ;
Page 20
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
Distinguishing Between Repairs & Renewals
1.
2.
Renewal is a reconstitution of the entirety. Of course entirety
does not necessarily mean the whole but substantially the
whole subject matter under discussion
Repair would always involve renewal of a subordinate part
and every repair is a replacement
►
►
Page 21
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
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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
Page 22
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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.
Page 23
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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
Page 24
Ascertainment 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
Page 25
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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.
Page 26
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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.
Page 27
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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;
Page 28
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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 instancesI.
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
Page 29
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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;
Page 30
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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 nonbusiness 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
Page 31
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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.
►
Page 32
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;
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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:
Page 33
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
Foreign Travelling
Provided 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 thani.
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;
Page 34
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
Formation or Liquidation Expenses
In 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.
Page 35
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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;
Page 36
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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
Page 37
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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;
Page 38
Ascertainment of Profits or Income – Allowable
Expenses Under Section 25
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
Page 39
Disallowable Expenses Under Section 26
►
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;
Page 40
Disallowable Expenses Under Section 26
►
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;
Page 41
Disallowable Expenses Under Section 26
►
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;
Page 42
Disallowable Expenses Under Section 26
►
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
Page 43
Disallowable Expenses Under Section 26
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
Page 44
Disallowable Expenses Under Section 26
►
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.
Page 45
Disallowable Expenses Under Section 26
►
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;
Page 46
Disallowable Expenses Under Section 26
► 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)
Page 47
Disallowable Expenses Under Section 26
Leasing Allowance
any motor vehicle, furniture, plant, machinery or equipment– only 1/5
I.
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-
Page 48
Disallowable Expenses Under Section 26
►
Sums transferred to a reserve or provision
any sum transferred to any reserve or provision (other than
any annual payment to an approved fund)
Page 49
Disallowable Expenses Under Section 26
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.
Page 50
Disallowable Expenses Under Section 26
Advertising
for 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;
Page 51
Disallowable Expenses Under Section 26
Head Office Expenditure
Any 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.
Page 52
Disallowable Expenses Under Section 26
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
Page 53
Ascertainment of Profits or Income –Under
Section 25 (3)
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
Page 54
Ascertainment of Profits or Income – Under
Section 25 (3)
Tax on gain or loss from sale of fixed assets
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
a)
Sales proceeds
►
Page 55
- 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)
Tax on gain or loss from sale of fixed assets
b)
Disposing a capital asset on which capital allowances have not been
granted in full. –gain on disposal
Cost of the computer
Year of purchase
Capital allowances as at 2012/2013
Tax written down value
– Rs. 100,000/– 2011/2012
– Rs. 25,000/- Rs. 75,000/-
Sales proceeds
Income tax will be charged on
- Rs. 80,000
- Rs. 5,000/-
Page 56
Ascertainment of Profits or Income –Under
Section 25 (3)
Tax on gain or loss from sale of fixed assets
c)
Disposing a capital asset on which capital allowances have not been
granted in full. –loss on disposal
Cost of the computer
Year of purchase
Capital allowances as at 2012/2013
Tax written down value
Sales proceeds
►
Page 57
- Rs. 100,000/- 2011/2012
-Rs. 25,000/- Rs. 75,000/- Rs. 70,000
Loss on disposal of Rs. 5,000/- will be treated as an expense
Ascertainment of Profits or Income –Under
Section 25 (3)
Tax on gain or loss from sale of fixed assets
►
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;
Page 58
Ascertainment 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—
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;
Page 59
Ascertainment 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–
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;
Page 60
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,
Page 61
Profits from Employment – Under Section 4
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
Page 62
Profits from Employment – Under Section 4
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.
Page 63
Profits 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 month
and
► Over Rs. 15,000/- per month if the salary exceeds Rs.
150,000 per month shall be disregarded.
►
Page 64
Profits from Employment – Under Section 4
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.
Page 65
Profits from Employment – Under Section 4
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.
Page 66
Profits from Employment – Under Section 4
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.
Page 67
Profits from Employment – Under Section 4
3)
a.
Value of Transport Facilities provided by the Employer
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.
Page 68
Profits from Employment – Under Section 4
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.
ii.
iii.
iv.
Page 69
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.
Profits from Employment – Under Section 4
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);
Page 70
Profits from Employment – Under Section 4
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
Page 71
Profits from Employment – Under Section 4
4)
Other Benefits provided
by the Employer
Page 72
Profits 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.
Page 73
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 74
Statutory Income of a Child
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
Page 75
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 76
Ascertainment of Assessable Income
►
Section 32 provides the deductions which are permissible
from the statutory income in arriving at the assessable
income.
Examples1)
Persons other than companies can deduct the following
in arriving at the assessable income.
Page 77
►
Interest from which income tax has been deducted
►
Dividend from which income tax has been deducted
Ascertainment of Assessable Income
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
Page 78
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)
Examples1)
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;
Page 79
Ascertainment of Taxable Income
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
Page 80
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 81
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 82
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. 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%
Page 83
Rate of Income Tax - Companies
Income tax is charged at a rate of 28%
The following concessionary rates are applicable
1)
2)
3)
4)
A 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)
Page 84
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 85
Payment of Tax
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
Page 86
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 87
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 88
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 89
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 90
Appeal
►
If is disagreement with the assessment the company can
appeal against the assessment
►
►
►
Page 91
Stage 1 – Appeals to Commissioner General
Stage 2- Appeals to the Tax Appeal commission
Stage 3- Appeals to the Court of Appeal
Definitions
Authorized Representativeby 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
1.
Page 92
Definitions
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;
Page 93
Definitions
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/-
Page 94
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
1. There should be a taxable activity carried out in Sri Lanka
2. There should be a taxable supply of goods or services
3. The supply must be made by a registered person
Page 95
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 96
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 nontaxable 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 97
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 Person
Every 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 98
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 99
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 100
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 101
Value of Supply
The value of a taxable supply of goods or services, shall be
such amount where the supply isa)
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 102
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 103
Rates of Tax
1.
2.
3.
Standard rate of 12%
0%
Exempt
Zero Rates (0%) Supplies
a)
b)
no 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.
Page 104
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 reexport under entre-port trade
Page 105
Zero Rates (0%) Supplies –
The Following Supplies are Zero Rated
III.
IV.
V.
VI.
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;
Page 106
Zero Rates (0%) Supplies –
The Following Supplies are Zero Rated
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 107
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 108
Calculation of VAT
Output VAT
Less: Input VAT
VAT payable
= 5,000,000
= (1,000,000)
= 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 109
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 110
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 111
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 112
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 113
Stamp Duty
f)
g)
h)
i)
j)
k)
Share certificate on new or additional issue or on transfer
or assignment
on a bond, mortgage for any definite and certain sum of
money and affecting any property
A promissory note
A lease or hire of any property
A receipt or discharge given for any money or other
property
Any other instrument which the Minister may in the
interest of the economic progress of Sri Lanka specify by
Order published in the Gazette
Page 114

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