01-Introduction to Taxation 05.02.2024.pdf

Introduction to Taxation Saman Dissanayake [MBA(Taxation), MBus(Acc.), MA(Econ), BA(Econ), FCPM, FTII, CIFPA(UK), CPFA, CTA,] Commissioner – Change Management Unit Department of Inland Revenue Sri Lanka...

Introduction to Taxation Saman Dissanayake [MBA(Taxation), MBus(Acc.), MA(Econ), BA(Econ), FCPM, FTII, CIFPA(UK), CPFA, CTA,] Commissioner – Change Management Unit Department of Inland Revenue Sri Lanka 05th February 2024 Outline Taxation and its Objectives Principles of Taxation & Tax Authorities in Sri Lanka Six Forces Model in Taxation (6T Concept) Tax policies under ‘Yahapalana Govt’ and ‘Saubagye Dekma’ with Economic impact on Tax Revenue New Tax changes as a solution for Economic Crisis Charging of Income Tax in Sri Lanka D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 2 Lanka Why Taxation ? Raising Government Revenue. Removal of Inequalities in Income and Wealth. Redistribution of Income. Ensuring Economic Stability. Capital Accumulation. Creation of Employment Opportunities. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 3 Lanka What is taxation ? Tax is nothing else other than LAW (legal collection of Government) Tax is a Social Responsibility of a citizen. Tax is Personal obligation of a citizen. Tax is a One of the two certain happening of the life (One is tax and other one is the death) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 4 Lanka What is taxation cont. A tax is a compulsory payment or contribution made by the citizen of a country to the government for the benefit of the country. The Government collects revenue in the form of taxes, charges or borrowings. In taxation, taxes are imposed in two forms as Direct tax and Indirect tax. A direct tax is levied directly on personal or corporate income. Whereas an indirect tax is levied on the price of a good or service. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 5 Lanka  Types of Taxes Direct Taxes Income tax (IT) Capital Gain Tax (CGT) Wealth tax Indirect Taxes Value Added Tax (VAT) Nation Building Tax (NBT) Social Security Contribution Levy (SSCL) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 6 Lanka Direct Taxes Vs Indirect Taxes D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 7 Lanka Functions/Objectives of taxation Primary function of taxation Raising funds for public expenditure is the primary function of taxation. Public expenditure: In Sri Lanka there are number of services provided by the State at free of charge or at subsidized rates for its citizens. Security, law and order provided by armed forces and police Free education provided by government schools and universities Free medical services provided by government hospitals Maintenance of road network Supply of electricity/water at subsidized rates D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 8 Lanka Functions/Objectives of taxation cont. Economic functions of taxation Set local and foreign investment direction The State could encourage or discourage private sector investments by using taxation tools such as rates and incentives. Protect local industries from foreign competition Vital local industries could be protected from foreign competition via tools such as import taxes. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 9 Lanka Functions/Objectives of taxation cont. Social functions of taxation Discourage activities which are undesirable by the society - Tax tools could be used to curb undesirable activities such as consumption of liquor & tobacco or gaming & gambling. Encourage activities which are desirable by the society – Desirable activities such as savings, retirement investments, innovation, research & development, etc. could be encouraged via taxation system. Reduce income disparity between rich and poor - Income inequality in the society could be reduced via taxation system using progressive tax rates, D.M.G.S.K.Dissanayake, rebates, etc. CIR, Department of Inland Revenue Sri 2/5/2024 10 Lanka Principles of Taxation. Equity Certainty Convenience & voluntary compliance Economy Progressivity Efficiency Adequacy Broader Base Simplicity D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 11 Lanka Principles of taxation cont. Equity: Tax burden should be equal among persons in similar economic circumstances. As Adam Smith put it forward “the subjects of every state to contribute towards the support of the government as nearly as possible in proportion to their respective abilities”. The following are the two equity principles: i. Benefit principle ii. Ability to pay principle The benefit principle arises from the need that the greatest beneficiaries should make the greatest tax contribution. Accordingly ability to pay principle can be categorized in to two scenarios. i.e., horizontal equity and vertical equity. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 12 Lanka Principles of taxation cont. Equity: Horizontal equity implies that we give the same treatment to people in an identical situation. For example, if two people earn Rs. 1 million per month, they should pay the same amount of tax. Vertical equity means the people with higher income should pay more taxes. Vertical equity seeks to tax in a progressive way (i.e., people with higher ability to pay should pay more tax to the Government). D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 13 Lanka Principles of taxation cont. Certainty: Tax should be certain as uncertainty will leads to tax evasion. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the taxpayer and to every other person. A successful function of an economy requires that the people, especially the business class, must be certain about the sum of tax that they have to pay on their income from work or investments. Convenience and voluntary compliance: Tax should be implemented conveniently to taxpayers while encouraging voluntary compliance. For example, income tax is collected on instalment basis. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 14 Lanka Principles of taxation cont. Economy: The Government should collect taxes with a minimum collection cost. If the tax system is complicated, elaborated administrative machinery should be employed to collect taxes and consequently collection costs will be relatively larger. In order to achieve “economy” in the tax collection, the taxes should be as simple as possible. Progressivity: Tax burden should be proportionate to taxpayer’s income level and ability to pay. This links with the concept of vertical equity and ability to pay principle. The ultimate expectation of this principle is to ensure that people with higher income pay more taxes than people with lower income. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 15 Lanka Principles of taxation cont. Efficiency: A tax is said to be efficient when the cost of collecting 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 be wide enough to include various sectors in the society and population whereby minimizing individual tax burden. Simplicity: An average taxpayer should be able to understand the imposition, assessment and payment of tax. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 16 Lanka Tax Authorities in Sri Lanka Tax authorities In Sri Lanka,  Inland Revenue Department (Commissioner General of Inland Revenue - CGIR)  Sri Lanka Custom (Director General of Custom - DGC)  Excise Department (Commissioner General of Excise - CGE)  Provincial Tax Authorities (Provincial Revenue Commissioners) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 17 Lanka Tax Authorities in Sri Lanka cont. Inland Revenue Department (IRD) IRD has been designated as the Administrative Authority for various taxes imposed via Parliamentary Acts. The role of DIR is captured in the Mission Statement of the Department: “To collect taxes in-terms of relevant tax and other related laws, by encouraging voluntary compliance while deterring tax evasion and tax avoidance, and to enhance public confidence in the tax system administered by the Department of Inland Revenue by administering relevant tax and other related laws in a fair, friendly and expeditious manner and thereby facilitate a beneficial tax culture”. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 18 Lanka Taxes Administrated by IRD Tax Enactments Income Tax (IT) Inland Revenue Act, No. 24 of 2017 as amended by Act, No.10 of 2021, 45 of 2022, 04 of 2023 & 14 of 2023 Value Added Tax (VAT) Value Added Tax Act, No.14 of 2002 as amended by Act, including VAT on Financial No.07 of 2003, 13 of 2004, 06 of 2005, 08 of 2006, 14 of Services (VAT on FS) 2007, 15 of 2008, 15 of 2009, 09 of 2011, 07 of 2012, 17 of 2013, 07 of 2014, 11 of 2015, 20 of 2016, 25 of 2018, 19 of 2019, 09 of 2021, 13 of 2022, 44 of 2022 & 32 of 2023 Social Security Social Security Contribution Levy Act, No.25 of 2022 & Social Contribution Levy (SSCL) Security Contribution Levy (Amendment) Act No.15 of 2023 Betting and Gaming Levy Betting and Gaming Levy Act, No.40 of 1988 as amended by Act, No. 14 of 2015 Source: Author D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 19 Lanka Taxes Administrated by IRD Tax Enactments Stamp Duty Stamp Duty Act, No. 43 of 1982 and the Stamp Duty (Special Provisions) Act, No. 12 of 2006 as amended by Act, No. 10 of 2008 and 13 of 2011 Share Transaction Levy Finance Act, No. 5 of 2005 and Finance Act. No. 13 of 2007 Migrating Tax Finance Act, No. 10 of 2015 Tax on Voluntary Disclosure Finance Act, No. 18 of 2021 Surcharge Tax Surcharge Tax Act, No.14 of 2022 Remittance Fee Foreign Exchange Act, No. 12 of 2017 Casino License Fee Casino Business (Regulation) Act, No.17 of 2010 Source: Author D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 20 Lanka Taxes Administrated by IRD Some taxes administered by the IRD and abolished recent History Nation Building Tax (NBT) - NBT removed with effect from 01st December 2019. Debt Repayment Levy (DRL) - DRL removed with effect from 01st December 2019. Economic Service Charge (ESC) - ESC removed with effect from 01st December 2020. Construction Industry Guarantee Fund Levy (CIGFL) - CIGFL removed with effect from 01st January 2016. Source: Annual Performance Report 2022 – IRD Sri Lanka D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 21 Lanka Tax authorities in Sri Lanka cont. Provincial Departments of Revenue Provincial Councils were established under the 13th amendment to the Constitution and Provincial Departments of Revenue entrusted with certain revenue collection within respective provinces Currently following taxes and charges are collected by Provincial Departments of Revenue under Provincial Statues: Stamp Duty Mineral Tax Drug & Chemical Tax Lottery Tax Prize Competition Tax Betting Tax D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 22 Lanka Tax authorities in Sri Lanka cont. Department of Customs Sri Lanka Customs is responsible for collection of taxes on imports and exports. Furthermore, the Department of Customs is playing a major role in controlling and monitoring ‘Imports and Exports’ of restricted and prohibited goods of environmental, health, social and security concerned. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 23 Lanka Tax authorities in Sri Lanka cont. Department of Excise Department of Excise is entrusted with efficient and effective administration of the ‘Liquor and Tobacco industry’ in Sri Lanka through the collection of revenue and prevention of illicit manufacture and sale of such products, for development and welfare of the society, and the enforcement of the Poisons, Opium and Dangerous Drugs Ordinance for the social protection of Sri Lanka. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 24 Lanka Six Forces Module in Taxation. Six Forces Module in Taxation Tax Informant D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 25 Lanka Six Forces Model in Taxation cont. Tax Legislator designs tax laws complying with tax policy in order to maximize the government tax revenue. Tax Administrator implements the tax laws to collect taxes by improving tax compliance. Taxpayer works on minimization of tax cost/burden. Tax Agent consult to taxpayer to plan and pay proper tax by using loopholes of the tax law. Tax Adjudicator/Judiciary interprets tax laws where tax ambiguities between Tax Administrator and Taxpayer on letter of law/Questions of law. Tax Informant Provide information to tax authorities to increase the tax revenue. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 26 Lanka Components of Tax Law Figure 02: Components of Tax Law Source: Author D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 27 Lanka Imposition of Taxes Legal Frame Work for Taxation in Sri Lanka. Tax Acts and Amendments passed at the parliament. Gazette Notifications. Relevant Case Laws. Relevant Tax Rulings. Paper/Web Notices. www.ird.gov.lk D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 28 Lanka  Recent Tax Policies in Sri Lanka D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 29 Lanka  Tax policy under ‘Yahapalana Government’ D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 30 Lanka Taxes under ‘Yahapalana Govt’ The policy of the “Yahapalana govt.” was to change Indirect tax to Direct Tax Ratio from 80:20 to 60:40 while increasing indirect tax revenue. Actions Taken: Increase VAT Rate from 11% to 15% Reduced General VAT liable threshold from 3.75Mn to 3Mn Reduced VAT liable threshold of Wholesale and Retail sector from 100Mn to 12.5Mn Introduced high compliance base income tax system by introducing Inland Revenue Act No.24 of 2017 Introduced number of temporary New Taxes. (i.e. Super gain Tax) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 31 Lanka  Taxes under ‘Yahapalana Govt.’ cont. Important changes for Income Tax under IR Act No.24 of 2017 Four Income sources with more practical approach parallel with Accounting Concept of “Final Withholding Payment” PAYE on Employment Income on Mandatory Basis with Refunds WHT covering vast area of economy and responsibility with both Withholding Agent and Withholdee “Self Estimated Tax” mechanism for high Revenue Compliance Comparatively Less Exemptions and Concessions Proper system for Individual Income Tax (IIT) WHT & Partnership Income Tax (PIT) for Partnerships Three tire Corporate Income Tax (CIT) rate mechanism (14%, 28% & 40%) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 32 Lanka Taxes under ‘Yahapalana Govt.’ cont. Withholding Tax Rates up to 31.12.2019 Employment Income - PAYE Tables from 01 to 07 Interest or discount paid to a person - 5% (Interest paid to a Senior Citizen on the amount exceeds Rs. 1,500,000/=). Rent paid to a resident person - 10% All other cases - 14% Allocations being any partner’s relevant share of any partnership income of the partnership - 8%. The rate of tax to be withheld from payments to Sale of Gem which Section 84 (2) applies - 2.5%. Payment is made to a Non-Resident person the tax rate specified in IR Act or in the relevant Double Taxation Avoidance Agreement. (If the rate mentioned here is greater than the rate specified in the agreement, a confirmation should be obtained from the International Tax Branch of the 2/5/2024 DepartmentCIR, D.M.G.S.K.Dissanayake, ofDepartment Inland ofRevenue. - Sri Inland Revenue 2.5%.) 33 Lanka  Tax policy under ‘Saubhagye Dekma’ D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 34 Lanka Taxes under ‘Saubhagye Dekma’. ‘Saubhagye Dekma’ or “Vistas of Prosperity and Splendor” is the Macroeconomic policy framework of Government of Sri Lanka (GOSL) introduced in 2019. Government vision is Small and Medium-sized Enterprises (SMEs) and Micro Enterprises (MEs) in SL are the driven wheel of the economy. Policy document is the “2020-2025 Long Term Development Plan”. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 35 Lanka Taxes under ‘‘Saubhagye Dekma’ cont. Macroeconomic targets of Sri Lanka 2020-2025. Achieve an average rate of economic growth of 6.5% or higher. Per capita income exceeding USD 6500. Maintain Budget deficit at less than 4% of GDP. The rate of annual inflation not exceeding 5%. Maintain the rate of unemployment at less than 4%. A single digit rate of interest (i.e. less than 10%). To maintain the exchange value of the rupee at a stable level. Source: Vistas of Prosperity and Splendor - 2019 D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 36 Lanka Taxes under ‘Saubhagye Dekma’ cont. First waive - “Emergency Relief Plan” The Second waive - “Budget 2021” Actions Taken: Abolished NBT from 01st December 2019 (Revenue Loss around 3Bn) Abolished ESC from 01st January 2020 (Revenue Loss around 15Bn) Abolished DRL from 01st December 2019 (Revenue Loss around 3Bn) Reduced VAT Rate from 15% to 8% from 01st December 2019 Increased VAT liable threshold from 3.75Mn/12.5Mn to 75Mn from 01st January 2020 (Other than VAT on Financial Services) Introduced Tax concessions and Relief under Inland Revenue Act No.24 of 2017 from 01st January 2020 Tax Amnesty for undisclosed income D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 37 Lanka Taxes under ‘Saubhagye Dekma’ cont. Changes made to Income Tax under Emergency Relief Plan & Budget 2021 brought with IR (Amendment) Act No.10 of 2021. Remove mandatory PAYE and introduce APIT on voluntary basis Remove mandatory WHT and introduce AIT on voluntary basis Granted number of Exemptions and Concessions focusing investment especially FDI Concessions on IIT (Tax free 3Mn & Expenditure Relief 1.2Mn with 3Mn Tax Slabs taxing at 6%, 12% & 18%) Concessions on Taxation of Retirement Benefits (Tax free 10Mn with 10Mn Tax Slab taxing at 6% and Balance at 12%) No WHT for Partnership Income & liable only for PIT @ 6% (Tax free 1Mn). Four tire CIT rates for entities (14%, 18%, 24% & 40%) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 38 Lanka Taxes under ‘Saubhagye Dekma’ cont. Changes made to Income Tax under Emergency Relief Plan & Budget 2021 brought with IR (Amendment) Act No.10 of 2021. Remove mandatory PAYE and introduce APIT on voluntary basis Remove mandatory WHT and introduce AIT on voluntary basis Granted number of Exemptions and Concessions focusing investment especially FDI Concessions on IIT (Tax free 3Mn & Expenditure Relief 1.2Mn with 3Mn Tax Slabs taxing at 6%, 12% & 18%) No WHT for Partnership Income & liable only for PIT @ 6% (Tax free 1Mn). Four tire CIT rates for entities (14%, 18%, 24% & 40%) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 39 Lanka Taxes under ‘Saubhagye Dekma’ cont. Tax Rate applied for Value Added Tax on Financial Service (VAT on FS) has been increased from 15% to 18% from 01st January 2022 as per the provisions of Value Added Tax (Amendment) Act, No.13 of 2022 Surcharge tax of 25% charged on individuals, partnerships and companies with a taxable income over Rs.2Bn for the Y/A 2020/2021 under the Surcharge Tax Act, No. 14 of 2022. Proposed to impose Special Goods and Service Tax (SGST) & Social Security Contribution Levy (SSCL) from 01st January 2022. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 40 Lanka Concessions for WHT from 01.04.2020 D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 41 Lanka  Final Withholding Payments from 01.01.2020 (Sec.88) Amounts paid as winning from lottery, reward, betting or gambling -14%. Sale price payable to the seller of any gem sold at an auction conducted by the National Gem & Jewellery Authority - 2.5% Any payment which has a source in Sri Lanka and is due and payable to any non-resident person as, Interest (Excluding exempt Interest) - 5% Any other payment [excluding the payments under section 85(2)and exempt gains & Profits] - 14% D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 42 Lanka WHT for YY/A 2020/2021 & 2021/2022 APIT on Optional basis for Resident employees APIT on Mandatory basis for Non-Resident employees AIT on Optional basis Winnings from lottery, reward, betting or gambling -14% Sale of at gem auction conducted by the National Gem & Jewellery Authority - 2.5%. Any payment which has a source in Sri Lanka and is due and payable to any non-resident person as, Interest (Excluding exempt Interest) - 5% Any payment with respect to land, sea, air transport or telecommunication service - 2% Any other payment - 14% D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 43 Lanka  Reduced Tax 1. Tax Free Rates allowance (6%, 12% & 18%) Income Tax Not 500,000 with 3,000,000 It is 3M. slabs 2.Special Reliefs Concessions & for expenses Reliefs applicable for Individuals from 01.01.2020. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 44 Lanka  Personal Relief for Individuals YY/A 2020/2021 & 2021/2022. Individual who is resident in Sri Lanka for a year of assessment, subtract the aggregate reliefs of Rs.3,000,000/=. Individual who is not resident in Sri Lanka but for a year of assessment is a citizen of Sri Lanka, subtract the relief of Rs.3,000,000/=. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 45 Lanka Special Relief for Expenditure. Special Relief up to Rs.1,200,000 on following specific expenditure. Health expenditure including the contributions to medical insurance. Education expenditure incurred locally for such individual or on behalf of his children. Interest paid on housing loans. Contribution made to an approved pension scheme. Expenditure incurred for the purchase of equity or securities. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 46 Lanka Qualifying Payments. Donations to the Approved Charitable Institution Donations to the Government or Government Institution. Profit remitted to President Fund. An amount equal to 25 percent of the total rental income for the year of assessment, being a relief for the repair, maintenance, and depreciation relating to the investment asset. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 47 Lanka  Income Tax Rates for Individuals for YY/A 2020/2021 & 2021/2022 The Progressive Tax Rates Taxation of Retirement benefits structure for Resident and Non from Employment Income Resident Individuals. First Rs.10,000,000 - Exempt Taxable Income Rate Second Rs.10,000,000 - 6% First Rs.3,000,000/= 6% On Balance - 12% Next Rs.3,000,000/= 12% On Balance 18% Capital Gain Tax – 10%. Business consisting of betting and gaming and manufacturing or import of any liquor or tobacco products - 40%. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 48 Lanka  Yes, No 8% to WHT Tax Tax Reduction ? Free 6% 1M Income Tax Concessions & Reliefs applicable for Partnerships from 01.01.2020. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 49 Lanka  Income Tax for Partnership Y/A 2020/2021 & 2021/2022 Applicable exemption and relief can be claimed. Capital gains from the realization of investment assets - 10%. Relief for Partnerships for taxable/divisible profit Rs.1,000,000 Balance part of partnership’s taxable income taxed at the rate of 6%. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 50 Lanka  Not 28% But 24% or 18% or Income Tax Exempt Concessions & Reliefs Applicable for Companies from 01.01.2020. Company D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 51 Lanka Taxable Income of a Company. Taxable income of a Company for a year of assessment shall be equal to the total of the Company’s Assessable Income for the year from each, Business Investment & Other Sources D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 52 Lanka Assessable Income of a Company. Gain and Profit from Business. Investment Income. Income from any Other source. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 53 Lanka  Income Tax Rates for Companies for Y/A 2020/2021 & 2021/2022 On gains and profits from following specific businesses -14% Gains and profits from the business of a Small and Medium Enterprise, excluding such gains and profits from a business of betting and gaming or from the sale of liquor (in the case of liquor, other than those gains and profits from a business which is merely incidental to another business) - 14% Gains and profits from conducting a business of sale of goods or merchandise including export of goods, where the payment for such sale or export is received in foreign currency and remitted through a bank to Sri Lanka - 14% Gains and profits of a specified undertaking - 14% Gains and profits from providing educational services - 14% Gains and profits of an undertaking for the promotion of tourism - 14% Gains and profits from providing construction services - 14% Gains and profits from agro processing - 14% D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 54 Lanka  Income Tax Rates for Companies for Y/A 2020/2021 & 2021/2022 On gains and profits from following specific businesses -14% Gains and profits from providing health care services - 14% Gains and profits from dividends received from a resident company - 14% Gains and profits derived by any export company which is registered with the Board of Investments of Sri Lanka established by the Board of Investment of Sri Lanka Law, No.4 of 1978 from the consideration received in respect of health protective equipment and similar products supplied to the Ministry of Health, Department of Health Services, Sri Lanka Army, Sri Lanka Navy, Sri Lanka Air force, Sri Lanka Police andD.M.G.S.K.Dissanayake, 2/5/2024 COVID Center - 14% CIR, Department of Inland Revenue Sri 55 Lanka  Income Tax Rates for Companies for Y/A 2020/2021 & 2021/2022 cont. On gains and profits of Manufacturing Business - 18% On gains and profits from conducting business of betting and gaming - 40% On gains and profits from business of manufacture and sale or import and sale of any liquor or tobacco products - 40% On taxable income of a company - 24%. Capital gains from the realization of investment assets - 10%. Non-Resident person who has remitted profits - 14%. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 56 Lanka  Income Tax Rates for Other Entities Type of Entity Up to From 31.12.2019 01.01.2020 Taxable income of a Trust 24% 18% Taxable income of a Unit trust or Mutual fund 24% 24% Taxable income of a Charitable Institution 14% 14% Taxable income of a Non-Governmental 28% 24% Organization Taxable income of an Employees Trust Fund, 14% 14% an approved provident or pension fund, or an approved termination fund D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 57 Lanka  Income Tax Rates for Other Entities Y/A 2020/2021 & 2021/2022 Taxable income of a Trust - 18% (up to 31.12.2019 - 24%) Taxable income of a Unit trust or Mutual fund - 24% (up to 31.12.2019 - 24%) Taxable income of a Charitable Institution - 14% (up to 31.12.2019 - 14%) Taxable income of a Non-Governmental Organization - 24% (up to 31.12.2019 - 28%) Taxable income of an Employees Trust Fund, an approved provident or pension fund, or an approved termination fund - 14% (up to 31.12.2019 - 14%) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 58 Lanka  Remittance Tax Rates (Schedule - 01) The rate of tax payable by a non-resident person who has remitted profits under Section 62 shall be 14%. “Remitted profits” means amounts remitted or retained abroad out of the profits and income of the non-resident person that are subject to income tax in Sri Lanka, and any amount received outside Sri Lanka by or on behalf of the non-resident person from conducting business in Sri Lanka that is subject to income tax in Sri Lanka, excluding dividends paid by a resident company to the non- resident person. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 59 Lanka Economic Impact on Tax Revenue. Tax Revenue as a % of GDP - 2012-2021. Year Tax revenue as a % of GDP Tax revenue as a % of GDP 16 2012 12.2 14.1 13.8 13.5 14 13.3 2013 12.0 12.2 12.7 12 12 11.6 2014 11.6 2015 13.3 10 9.1 8.6 2016 14.1 8 7.3 2017 13.8 6 2018 13.5 4 2019 12.7 2 2020 9.1 0 2021 8.6 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2022 7.3 Tax revenue as a % of GDP Source: World Bank Reports 2012 - 2021 D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 60 Lanka  Tax policy changes with Economic crisis D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 61 Lanka Recent Changes for Income Tax Income Tax :- Tax Rate Changes, Reduce Tax Free amounts & Slabs, Reintroduce WHT on mandatory basis and Cancel the Tax Exemptions and Concessions from 01st October 2022. Individual Income Tax (IIT) Corporate Income Tax (CIT) Tax Free Amount - 1.2Mn Tax Rates 30% & 40% Slabs – 0.5Mn & Tax Rates 6% to 36% Withholding Tax (WHT) Dividends - 15% Interest - 05% Rent - 10% (If exceeds Rs.100,000/- per month) Services - 05% (If exceeds Rs.100,000/- per month) Other - 14% D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 62 Lanka Recent Changes for Income Tax cont. Individual Income Tax From 01.04.2018 to 31.12.2019 Existing Provisions Proposed Provisions from From 01.01.2020 01.01.2023 Tax Free Allowance Tax Free Allowance Tax Free Allowance Rs.500,000/- Rs.3,000,000/- Rs.1,200,000/- Relief for Employment Relief for Employment Relief for Employment Rs.700,000/= NIL NIL Relief for Expenditure Relief for Expenditure Relief for Expenditure NIL Rs.1,200,000/- NIL Tax on Taxable Income First Rs.600,000/- 4% First 6% First Rs.500,000/- 6% Second Rs.600,000/- 8% Rs.3,000,000/- Second Rs.500,000/- 12% Third Rs.600,000/- 12% Third Rs.500,000/- 18% Fourth Rs.600,000/- 16% Second 12% Fourth Rs.500,000/- 24% Fifth Rs.600,000/- 20% Rs.3,000,000/- Fifth Rs.500,000/- 30% On Balance Taxable 24% On Balance 18% On Balance Taxable 36% Income Taxable Income Income Capital Gain Tax 10% Capital Gain Tax 10% Capital Gain Tax 10% D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 63 Lanka Recent Changes for Income Tax cont. Partnership Income Tax From 01.04.2018 Existing Proposed Rates to 31.12.2019 Provisions effective from From 01.01.2020 01.10.2022 Tax on Divisible Profit or 8% 6% 6% Taxable Income (WHT) (Partnership (Partnership Income Tax - PIT) Income Tax - PIT) Capital Gain Tax for Partnerships 10% 10% 10% D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 64 Lanka Recent Changes for Income Tax cont. Corporate Income Tax From Existing Provisions Proposed Rates 01.04.2018 to From 01.01.2020 effective from 31.12.2019 01.10.2022 Concessionary Rate for Companies 14% 14% 30% Manufacturing Companies 28% 18% 30% Standard Rate for Companies 28% 24% 30% Highest Rate for Companies 40% 40% 40% Capital Gain Tax for Companies 10% 10% 30% D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 65 Lanka Recent Changes for Income Tax cont. Corporate Income Tax – Other Entities Type of Entity Up to From From 31.12.2019 01.01.2020 to 01.10.2022 30.09.2022 Taxable income of a Trust 24% 18% 30% Taxable income of a Unit Trust or Mutual Fund 24% 24% 30% Taxable income of a Charitable Institution 14% 14% 14% Taxable income of a Non-Governmental 28% 24% 30% Organization Taxable income of an Employees Trust Fund, an 14% 14% 14% Approved Provident or Pension Fund, or an Approved Termination Fund D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 66 Lanka  Recent Changes for Income Tax cont. Withholding Tax from 01.01.2023 Type of Payment WHT Rate Payment to Non-Resident person with respect to Land, Sea, Air Transport or Telecommunication Service 2% Sale price of Gems sold at gem auction conducted by National Gem and Jewelry Authority 2.5% Service fee payments exceeds Rs.100,000/- per calendar month to a Resident Individual who is not an 5% employee of the payer with respect to following, a) for teaching, lecturing, examining, invigilating or supervising an examination; b) as a commission or brokerage to a resident insurance, sales or canvassing agent; or c) for services provided by such individual in the capacity of independent service provider such as doctor, engineer, accountant, lawyer, software developer, researcher, academic or any individual service provider as may be prescribed by regulation Interest or discount paid 5% Rent payments to a Resident Person exceeds Rs.100,000/- per calendar month 10% Rent payments to a Non-Resident Person 14% Charge, Natural Resource payment or Premium 14% Royalty 14% Service fee or an Insurance premium payments to Non-Resident Person 14% Winning from Lottery, Betting & Gambling (Final Withholding Tax) 14% Dividend2/5/2024 (Final Withholding Tax) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 15%67 Lanka Taxable Supply for VAT Taxable Supply Zero Rate – 0% Exempt Supply Standard Rate - 15% Excluded Supply D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 68 Lanka Recent Changes in VAT VAT Tax Rate increased from 8% to 12% from 01st June 2022 Tax Rate increased from 12% to 15% from 01st September 2022 Tax Rate increased from 15% to 18% from 01st January 2024 Reduced VAT liable threshold from Rs.75Mn to Rs.20Mn from 01st October 2022 Proposed to Reduce VAT liable threshold from Rs.20Mn to Rs.15Mn from 01st January 2023 Cancelled some of the Tax Exemptions and Concessions from 01st October 2022 (i.e make condominium property liable for VAT and Remove 0% from tourism Sector) and number of the Tax Exemptions from 01st January 2024 2/5/2024 SAMAN DISSANAYAKE - VALUE ADDED TAX. 69 Recent changes in VAT cont. Recent changes in VAT Standard Rate VAT Rate from 01.01.2024 - 18% Recent changes in VAT on FS Rate Up to 31.12.2021 – 15% From 01.01.2022 – 18% 2/5/2024 SAMAN DISSANAYAKE - VALUE ADDED TAX. 70  Recent changes in VAT cont. Recent changes in VAT registration thresholds From 01.01.2013 - Rs.3Mn per Quarter (For Wholesale & Retail Trading Activity 500Mn per Quarter) From 01.01.2014 - Rs.3Mn per Quarter (For Wholesale & Retail Trading Activity 250Mn per Quarter) From 01.01.2015 - Rs.3.75Mn per Quarter (For Wholesale & Retail Trading Activity 100Mn per Quarter) From 01.04.2016 - Rs.3Mn per Quarter (For Wholesale & Retail Trading Activity 100Mn per Quarter) From 01.11.2016 - Rs.3Mn per Quarter (For Wholesale & Retail Trading Activity 12.5Mn per Quarter) From 01.01.2020 - Rs.75Mn per Quarter (For Wholesale & Retail Trading Activity 75Mn per Quarter) From 01.01.2023 - Rs.20Mn per Quarter (For Wholesale & Retail Trading Activity 20Mn per Quarter) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 71 Lanka Recent Tax Changes for other taxes. Social Security Contribution Levy (SSCL) Introduced from 01st October 2022 Telecommunication Levy Tax Rate Changed from 11.25% to 15% from 01st June 2022 Betting & Gaming Levy Proposed to Change tax Rates (10% to 15%) & Reduce the liable thresholds. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 72 Lanka Social Security Contribution Levy (SSCL) According to the provisions of Social Security Contribution Levy Act No.25 of 2022, Social Security Contribution Levy (SSCL) charged from 01st October 2022 on persons listed below. Importers, who imports any article, Manufactures, who carries on the business of manufacture of any article, Service providers, who carries on the business of providing a service of any description, Wholesalers and retailers including distributors, carries on the business of wholesale or retail sale of any article including importation and sale of such article other than a sale by the manufacturer of goods. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 73 Lanka Liable Turnover for SSCL (Schedule 2) Description Liable Turnover Importers, who imports any article 100% of the Import value Manufactures, who carries on the business of 85% of the Turnover manufacture of any article Service providers, who carries on the business of providing a service of any description Supply of Financial services 100% of the Value Addition attributable to Financial Services Real Estate and Improvements 100% of the Turnover Other Services 100% of the Turnover Wholesalers and retailers Wholesale or retail sale including importation and sale other than Distributor 50% of the Turnover Distributor 25% of the Turnover D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 74 Lanka Charging of SSCL Liable Turnover Standard Rate – 2.5% Importers @ 2.5% on Import Value Service Providers @ 2.5% on Turnover Exempted Manufactures @ 2.5% on 85% of the Turnover Articles & Services Wholesalers @ 2.5% on 50% of the Turnover Retailers @ 2.5% on 50% of the Turnover Distributors @ 2.5% on 25% of the Turnover Excluded Turnover D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 75 Lanka Calculation of SSCL Payable amount If SSCL is not charged from Option 1 Option 2 Customer Price/Turnover 100 97.5 SSCL Payable 100 x 2.5% = 2.5 97.5 x 2.5% = 2.44 VAT Payable 100 x 15% = 15 99.94 x 15% = 14.99 If SSCL is charged from Option 1 Option 2 Customer Price 100 100 SSCL 2.5 2.56 ? Turnover 102.5 102.56 SSCL Payable 102.5 x 2.5% = 2.56 102.56 x 2.5% = 2.564 VAT Payable 102.5 x 15% = 15.37 102.564 x 15% = 15.385 D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 76 Lanka Macro Fiscal Framework goals of the ‘Budget 2023’ Government revenue increase to 15% of GDP and primary surplus increase to 2% of GDP by 2025 Public sector debt to be reduced to 100% of GDP in the medium term Inflation to be brought back to mid-single digit level in the medium term Economic growth to increase to 5% in the medium term D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 77 Lanka Main Tax Changes in 2023 It is recommended to conduct cash transactions exceeding Rs.500,000/- through the banking system as mandatory rule from 08th May 2023 Non-compliance with this requirement will result in the disallowance of such expenses for the purpose of determining taxable income of such person. Issuing of Taxpayer Identification Number (TIN) for all individuals who are more than 18 years in Sri Lanka by 01st January 2024 has already been started. Should have active income tax files for all income tax liable individuals by 01 st April 2024 D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 78 Lanka Imposition of Taxes Inland Revenue Act, No.24 of 2017 [Income Tax (IT) Law] together with proposed changes in Inland Revenue (Amendment) Act, No.10 of 2021, Inland Revenue (Amendment) Act, No.45 of 2022, Inland Revenue (Amendment) Act, No.04 of 2023 and Inland Revenue (Amendment) Act, No.14 of 2023 Value Added Tax Act, No.14 of 2002 [VAT Law] together with changes proposed in its amendments up to Value Added Tax (Amendment) Act, No.32 of 2023 Social Security Contribution Levy Act, No.25 of 2022 [SSCL Law] & Social Security Contribution Levy (Amendment) Act, No.15 of 2023 Applicability of other statutes D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 79 Lanka  Charging of Income Tax D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 80 Lanka Charging of Income Tax (Sec.02) Section:2(1) Income tax shall be payable for each year of assessment by, a) A person who has taxable income for that year: or b) A person who receives a final withholding payment during that year. Section:2(2) The amount of income tax payable by a person for any year of assessment shall be the total of the amounts payable under subsection (1). D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 81 Lanka Charging of Income Tax cont. Section:2(3) The income tax payable by a person under paragraph (a) of subsection (1) shall be calculated by, a) applying the relevant rates of income tax set out in the First Schedule to this Act to that person’s taxable income; b) deducting any foreign tax credit claimed by and allowed to the person for the year under Section 80. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 82 Lanka Charging of Income Tax cont. Year of assessment - Section:20(1) The ”Year of assessment’’ means the period of twelve months commencing on the first day of April of any year and ending on the thirty first day of March in the immediately succeeding year. Person - Section:195 “Person” means an individual or entity and includes a body of persons corporate or unincorporated, an executor, non-governmental organization and charitable institution. Entity - Section:195 "Entity" means a company, partnership or trust, but excludes an individual. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 Lanka 83  Charging of Income Tax cont. Company - Section:195 (a) means a corporation, unincorporated association or other body of persons; (b) includes – (i) a friendly society, building society, pension fund, provident fund, retirement fund, superannuation fund or similar fund or society; and (ii) a government excluding the Sri Lankan government, a political sub-division of a government, or a public international organization; but (c) excludes a partnership or trust and (d) the following shall be deemed to be a company:- (i) a partnership in which at least twenty of the partners have limited liability for the debts of the partnership; and (ii) a unit trust or mutual fund to which Section 59 applies; D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 Lanka 84  Charging of Income Tax cont. Partnership - Section:195 “Partnership” means an association of two or more individuals or corporations carrying on business jointly for the purpose of making profit, irrespective of whether the association is recorded in writing. Trust - Section:195 “Trust” means an arrangement under which a trustee holds assets. Body - Section:195 “Body” means a company, partnership, trust or other body of persons whether formed in Sri Lanka or elsewhere. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 Lanka 85 Taxable Income. (Sec.03) Section:3(1) Taxable income of a person for a year of assessment shall be equal to the total of the person’s Assessable Income for the year from each, Employment Business Investment & Other Sources D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 86 Lanka  Methods of Accounting in Taxation. Section 21 of IR Act provides relevant type of accounting method applicable for each source. Employment Cash basis Business Accrual Basis Investment Cash basis Accrual Basis Other Income Cash basis Accrual Basis D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 87 Lanka Methods of Accounting in Taxation. Accepted accounting principles i.e. Sri Lanka Financial Reporting Standards (SLFRS) considered as correct for tax purpose with relevant tax adjustments. Section 120(2) of IR Act No.24 of 2017 has provided mandatory legal requirement for tax agents to act as approved accountant on preparation of income from business or investment to attest the accuracy and completeness of accounts prepared for tax purposes. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 88 Lanka Applicable accounting standard. Sri Lanka Financial Reporting Standard (SLFRS/LKAS) Full SLFRS SLFRS for SMEs SLFRS for Smaller Entities D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 89 Lanka Assessable Income (Sec.04) Assessable Income of a person for a year of assessment from Employment, Business, Investment & Other Sources shall be equal to, (a) In the case of Resident Person - wherever the source arises; (b) In the case of Non - resident person - income arises in or derived from a source in Sri Lanka. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 90 Lanka Residence of an Individual (Sec. 69) Section:69(1) An individual shall be a resident in Sri Lanka for a year of assessment if the individual – (a) Resides in Sri Lanka; (b) Is present in Sri Lanka aggregate to one hundred and eighty three (183) days or more in any twelve month period. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 91 Lanka Residence of an Individual cont. Section:69(1) (c) Is an employee or an official of the Government of Sri Lanka and his spouse is posted abroad during the year; or (d) Is an individual who is employed on a Sri Lanka ship, within the meaning of the Merchant Shipping Act, during the period the individual is so employed. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 92 Lanka Residence of a Partnership (Section 69) Section:69(2) A partnership shall be resident in Sri Lanka for a year of assessment if – (a) it was formed in Sri Lanka; or (b) at any time during the year the management and control of the affairs of the partnership are exercised in Sri Lanka. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 93 Lanka Residence of a Trust (Section 69) Section:69(3) A trust shall be resident in Sri Lanka for a year of assessment if – (a) It was established in Sri Lanka; (b) At any time during the year a trustee of the trust is resident in Sri Lanka; or (c) At any time during the year a person resident in Sri Lanka directs or may direct senior managerial decisions of the trust, whether the direction is made alone or jointly with other persons or directly or through one or more interposed entities. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 94 Lanka Residence of a Company (Section 69) Section:69(4) A company shall be resident in Sri Lanka for a year of assessment if – (a) It is incorporated or formed under the laws of Sri Lanka; (b) It is registered or the principal office is in Sri Lanka; or (c) At any time during the year the management and control of the affairs of the company are exercised in Sri Lanka. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 95 Lanka Residence of a Company (Section - 69) Types of Companies for tax purposes Resident Company It is incorporated or formed under the laws of Sri Lanka Its Registered or Principal office is in Sri Lanka or Its Control and Management exercised in Sri Lanka Non-Resident Company Its Registered or Principal office outside Sri Lanka or Its Control and Management exercised outside Sri Lanka D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 96 Lanka Submission of Returns and Self Estimated Tax Payments dates & Codes (2023/2024) Tax Installment Due Date Payment Period Code Statement of APIT 30th April 2024 Statement of WHT/AIT 30th April 2024 Statement of SET 15th August 2023 First Installment 15th August 2023 23241 Second Installment 15th November 2023 23242 Third Installment 15th February 2024 23243 Fourth Installment 15th May 2024 23244 Final Payment 30th September 2024 23240 D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 97 Final Return Submission 30 November 2024 th Lanka Process of Income Tax Computation. Income from Four Sources (Sections from 5 to 8) Exempt Amounts (Sec.9) , Less Final withholding payments (Sec.88), Tax losses (Sec.19) Assessable income (Section.4) Less Qualifying payments and Reliefs (Section.52) Taxable income (Section.3) Apply Tax Rates IIT, PIT, CIT & CGT Rates (First Schedule) Tax liability Less Foreign Tax Credits (Section 80) & Other Tax Credits (Section 89 & 90) Balance Tax Payable/(Refund) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 98 Lanka  Taxation of Employment Income D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 99 Lanka Taxation of Employment Income Employment [Section 195(1)] Gains and Profits from Employment [Section 5(2)] Amounts excluded from Employment Income [Section 5(3)] Aggregate Reliefs [Section 52] Withholding by Employers [Section 83] Obligations of Employer [Section 86 & 87] Application of Tax Rates (First Schedule) Exemptions (Third Schedule) Taxation of Retirement Benefits (First Schedule) Other Related Provisions D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 100 Lanka  Taxation of Business Income D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 101 Lanka Deductions from Business Income (Sections from 10 to 19) Section 10 General deductions Section 11 Main deduction Sections from 12 to 19 Specific deductions D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 102 Lanka Specific Deductions (Sec.12 - 19) Interest Expenses (Section 12) Allowance for trading stocks (Section 13) Repairs and improvements (Section 14) R & D expenses and agricultural start up expenses (Section 15) Capital allowances and balancing allowances (Section 16) Losses on realization of business assets and liabilities (Section 17) Deductible amount of financial cost (Section 18) Business or investment losses (Section 19) Other applicable provisions D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 103 Lanka Taxation of Investment Income D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 104 Lanka Investment Income (Sec.07) Section:7(1) Investment Income of a person for a year of assessment shall be the person’s, Gains and Profits from that investment for the year. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 105 Lanka Investment Income cont. Section:7(2) In calculating gains and profits from investment following source included, Section:7(2)(a) Dividend and Interest, Discounts, Charges and Annuities, Natural resources payments, Rents, Premiums, Royalties. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 106 Lanka  Taxation of Dividend (Inland Revenue Act No. 24 of 2017). D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 107 Lanka Taxation of Dividend Dividend distributions prior to 31.03.2019 which using the profit earn up to 31.03.2018 (Y/A 2017/2018) are subject to WHT at the rate of 10%. Dividend distributions up to 31.12.2019 are subject to WHT at the rate of 14% (First Schedule) and Dividends paid by a resident company to a resident person considered as Final Withholding payment (Section 88). Gross Dividends are liable for WHT. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 108 Lanka Taxation of Dividend cont. No Withholding tax on Dividends from 01.01.2020. Gross Dividends received by shareholders from 01.01.2020 which WHT has not been deducted are liable for income tax at the applicable tax rates for shareholders. Individuals @ Progressive Rates of 6%, 12% or 18%. Partnerships @ 6%. Companies @ 14%. Exempt dividends are not liable for tax. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 109 Lanka Taxation of Dividend cont. Withholding tax on Dividends from 01.01.2023 is Final. Gross Dividends received by shareholders from 01.01.2023 subject to WHT at 15% and treated as Final Withholding payment Therefore, Net Dividend received by, Individuals - Not a part of Assessable Income Partnerships - Not a part of Assessable Income Companies - Not a part of Assessable Income Other Entities - Not a part of Assessable Income Exempt dividends are not liable for tax. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 110 Lanka  Taxation of Interest Income (Inland Revenue Act No. 24 of 2017). D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 111 Lanka Taxation of Interest cont. Interest on Deposit subject to WHT at 5% up to 31.12.2019 (Other than Senior Citizens). Interest on Government Securities not subject to WHT from 01.04.2018. Interest on Corporate Securities and Interest on Loans are subject to WHT up to 31.12.2019. Interest on Compensation not subject to WHT from 01.04.2018. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 112 Lanka Taxation of Interest cont. Interest on Deposit received by Individual and Charitable Institutions up to 31.12.2019 are subject to WHT at 5% considered as Final Withholding payment subject to WHT. Interest on Government Securities received by Individual and Charitable Institutions up to 31.12.2019 which are not subject to WHT considered as Final Withholding payment but not subject to WHT. Interest on Government Securities received by Individual and Charitable Institutions up to 31.12.2019 which are not subject to WHT are liable for income tax at the rate of 5%. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 113 Lanka Taxation of Interest cont. Interest received by Persons other than Individual and Charitable Institutions up to 31.12.2019 which are subject to WHT or Not subject to WHT not considered as Final Withholding payment. Interest received by Persons other than Individual and Charitable Institutions liable for income tax at the rate applicable for such persons. WHT paid amount can be claimed as Tax Credits. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 114 Lanka Taxation of Interest cont. Interest received by Any Persons from 01.01.2020 are Not subject to WHT. Gross Interest received by Resident Person from 01.01.2020 which WHT has not been deducted are liable for income tax at the following rates. Individuals @ Progressive Rates of 6%, 12% or 18%. Partnerships @ 6%. Companies @ 24%. Interest received by Non-Resident Person from 01.01.2020 are subject to WHT @ 5%. (If not Exempted). D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 115 Lanka Taxation of Interest cont. Interest received by Any Persons from 01.01.2023 are subject to WHT @ 5% Gross Interest received by Resident Person from 01.01.2023 which WHT has been deducted are liable for income tax at the following rates & WHT can be claimed as Tax Credit Individuals @ Progressive Rates of 6%, 12%, 18%, 24%,30% or 36% Partnerships @ 6% Companies @ 30% Other Entities @ Applicable Rate Interest received by Non-Resident Person from 01.01.2020 are subject to WHT @ 5%. (If not Exempted). D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 116 Lanka  Taxation of Natural Resource payments (Inland Revenue Act No. 24 of 2017). D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 117 Lanka Taxation of Natural Resource payments cont. Natural Resource payments received by Any Persons from 01.01.2023 are subject to WHT @ 14% Gross amount received by Resident Person from 01.01.2023 which WHT has been deducted are liable for income tax at the following rates & WHT can be claimed as Tax Credit Individuals @ Progressive Rates of 6%, 12%, 18%, 24%,30% or 36% Partnerships @ 6% Companies @ 30% Other Entities @ Applicable Rate D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 118 Lanka  Taxation of Rent Income (Inland Revenue Act No. 24 of 2017). D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 119 Lanka Taxation of Rent Income. Assessable income from Rent is the Net Rent. Net Rent can be calculated after deducting actual expenses from the gross rent. Regarding Individuals, Assessable Net Rent can be calculated, after deducting actual expenses from the gross rent or deducting 25% as Qualifying payment. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 120 Lanka  Taxation of Rent Income cont. Gross Rent paid by any person is subject to WHT at 10% up to 31.12.2019 and No WHT on Rent from 01.01.2020. WHT on Rent up to 31.12.2019, not a Final Withholding payment. WHT paid amount up to 31.12.2019 can be claimed as Tax Credits. Gross Rent received by any Person from 01.01.2020 liable for income tax at the rate applicable for such persons. Individuals @ Progressive Rates of 6%, 12% or 18%. Partnerships @ 6%. Companies 2/5/2024 @ 24%. D.M.G.S.K.Dissanayake, CIR, Lanka Department of Inland Revenue Sri 121 Taxation of Rent Income cont. Rent payments more than Rs.100,000/- per month received by any Person from 01.01.2023 are subject to WHT @ 10% Gross amount received by Resident Person from 01.01.2023 which WHT has been deducted are liable for income tax at the following rates & WHT can be claimed as Tax Credit Individuals @ Progressive Rates of 6%, 12%, 18%, 24%,30% or 36% Partnerships @ 6% Companies @ 30% Other Entities @ Applicable Rate D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 122 Lanka  Taxation of Royalty Income (Inland Revenue Act No. 24 of 2017). D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 123 Lanka Taxation of Royalty Income Royalty received by Resident Persons from 01.01.2020 are Not subject to WHT. Gross Royalty amount received by Resident Persons from 01.01.2020 are liable for income tax at the following rates. Individuals @ Progressive Rates of 6%, 12% or 18%. Partnerships @ 6%. Companies @ 24%. Royalty received by Non-Resident Persons from 01.01.2020 are subject to WHT @ 14%. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 124 Lanka Taxation of Royalty Income Royalty received by Resident Persons from 01.01.2023 are subject to WHT @ 14%. Gross Royalty amount received by Resident Persons from 01.01.2023 are liable for income tax at the following rates. Individuals @ Progressive Rates of 6%, 12%, 18%, 24%,30% or 36% Partnerships @ 6% Companies @ 30% Other Entities @ Applicable Rate Royalty received by Non-Resident Persons from 01.01.2023 are subject to WHT @ 15% and Final D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 125 Lanka Taxation of Other Investment Income (Inland Revenue Act No. 24 of 2017). D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 126 Lanka  Investment Income cont. Section:7(2)(e) Winnings from lotteries, betting or gambling; Winnings less than Rs.500,000/= are Exempt from income tax. Winnings more than Rs.500,000/= are Liable for WHT at 14%. Winnings Liable for WHT is Final Withholding payments. Section:7(2)(f) Other Amounts required to be included under the Act. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 127 Lanka  Capital Gain Tax (CGT) D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 128 Lanka Taxation of Capital Gain Capital gain tax rate – 10 % From 01.10.2022 Capital gain tax rate for Companies – 30 % Capital gain tax rate for Others – 10 % Capital gain tax return – Submit within 30 Days (One month) from the realisation of an investment asset. Capital gain tax payment – Within 30 Days (One month) from the realisation of investment asset. Note: As per Section 19(5) a gain from the realization of an investment asset shall not be reduced by any loss on the disposal of another investment asset. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 129 Lanka  Remittance Tax Rates (Schedule - 01) The rate of tax payable by a non-resident person who has remitted profits under Section 62 shall be 14%. “Remitted profits” means amounts remitted or retained abroad out of the profits and income of the non-resident person that are subject to income tax in Sri Lanka, and any amount received outside Sri Lanka by or on behalf of the non-resident person from conducting business in Sri Lanka that is subject to income tax in Sri Lanka, excluding dividends paid by a resident company to the non- resident person. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 130 Lanka WHT Credit Matching Mechanism under RAMIS Taxpayer/Withholdee WHT Agent Submitted Income Tax Return with WHT Submitted WHT Return with relevant certificates and claim credit in the schedule WHT schedules Matched 2/5/2024 Credit D.M.G.S.K.Dissanayake, Grantedof Inland Revenue Sri CIR, Department 131 Lanka General Deductions (Section 10) Section 10(2) A deduction for a payment shall not be allowed until the tax, if required, withheld has been paid to the Commissioner General. D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 132 Lanka  D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 133 Lanka  D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 134 Lanka  This material is developed solely for the use of students of the course highlighted herein and assessing their learning. Disseminating or sale of any part of this work (including in the world wide web) will destroy the integrity of the work and is not permitted. All recipients of this work are expected to abide by the instructions and to honor the intended pedagogical purpose of this material. All rights reserved. No part of this publication reproduced, stored in a retrieval system, or transmitted, in any forms or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission from the author. Copyright © 2024 Saman Dissanayake, [email protected] | +94 714234753/+940762931191 D.M.G.S.K.Dissanayake, CIR, Department of Inland Revenue Sri 2/5/2024 135 Lanka