Understanding Sri Lanka's Inland Revenue Act No. 24 of 2017
This content delves into the key aspects of the Inland Revenue Act No. 24 of 2017 in Sri Lanka, covering chargeability of income tax, imposition of income tax, definitions, sources of income, assessable income for residents and non-residents, income tax payable, and income tax base. It provides valuable insights into the taxation system applicable to individuals and entities in Sri Lanka.
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Advanced Taxation Advanced Taxation BUSINESS INCOME BUSINESS INCOME AND AND CORPORATE TAXATION CORPORATE TAXATION By By Mahesh Mahesh Ranawaka Ranawaka Arachchi Arachchi Deputy Commissioner Deputy Commissioner - -IRD IRD
Inland Revenue Act No. 24 of 2017 chargeability chargeability of Income tax of Income tax Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Imposition of Income Tax Chargeability -[Charging Provision (Sec. 2(1)] Income tax shall be payable for Each year of assessment By a person who has taxable income for that year; or a person who receives a final withholding payment during that year
Inland Revenue Act No. 24 of 2017 Definition Person means an individual or entity and includes a body of persons corporate or un-incorporate, an executor, non- governmental organization and charitable institution.
Inland Revenue Act No. 24 of 2017 Source of Income Employment income ( Sec. 5) Business income (Sec. 6) Investment income ( Sec 7) Other income (Sec 8)
Inland Revenue Act No. 24 of 2017 Assessable Income (sec.4) For a resident person The income from employment, business, investment or other source wherever the source arises For a non-resident person The income from the employment, business, investment or other source to the extent that the income arises in or is derived from a source in Sri Lanka
Income Tax Payable Sec.2(2) Tax on taxable income xxx Tax on final withholding payment xxx Total Income Tax payable xxxx
Income Tax Base (Sec. 3 to 19) Assessable income from Employment xxxx Assessable income from Business xxxx Assessable income from Investment xxxx Assessable income from Other sources xxxx xxxx Less: Qualifying payments and reliefs Sec. 52 (xxx) Taxable income (Sec. 03) xxxxx
Tax Calculation (Sec.2(3)) Taxable income @ tax rates as per First Schedule xxxx Less: Any foreign tax credit (Sec . 80) (xxx) Any other tax credit allowed under the Act Tax payable (xxx) xxxx
Tax on Final Withholding Payments [Sec.2(4)] Final withholding payments @ tax rates as per First Schedule xxxx Final withholding payments (Sec. 88) Relieve a withholdee s tax liability [Sec 88(2)] - Tax withheld from a final withholding payment by withholding agent - Liability of the withholder if no deduction is made [Sec 88(3)] - Liability of the withholdee if no deduction is made by the withholder [Sec 86(4)]
Inland Revenue Act No. 24 of 2017 business business Income Income Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Introduction Business has been defined to include: A trade, profession, vocation or isolated arrangement with a business character however short the duration of the arrangement; and A past, present or prospective business. Sri Lanka Inland Revenue -2018 12
Inland Revenue Act No. 24 of 2017 Trade Factors to be considered reference to trade 1. What is sold Eg. Purchase of commercial quantities of product that cannot be used personally. 2. Length of ownership If asset is held for a short period of time, it suggests trade rather than an investment. 3. Repetition Repetition of transactions suggest a trade. 4. Supplementary work Trade often process of works turn assets into saleable products. 5. Motivation activity Trade require assets or conclude contracts with the intention of a making a profit. 6. Motivation for sale Trades typically sell assets for the same reason they acquire, them, in order to make a profit. 13 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Changes in the Year of Assessment Section 20 Accounting Period:- For year of Assessment Change in Accounting Period:- With approval of the CGIR if think fit If fails to comply with a term and condition attached to approval, may revoke an approval 14 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Method of Accounting Section 21 Inclusion and deduction shall be made according to general accepted accounting principle. Individual shall account for income tax purpose on cash basis in calculating individual s income from an employment or investment. Individual or entity conducting business shall account for income tax basis an accrual basis. Other sources shall account either a cash or accrual basis whichever properly computes the person s income. 15 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Method of Accounting cont With approval of the CGIR method of accounting can be changed if CGIR shall be satisfied that the new method is necessary to properly compute the person s income. Where method of accounting changes, adjustment shall be made in the year of assessment following the changes so that no item is omitted or taken into account more than once. 16 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Cash Basis Accounting Section 22 Under the cash basis accounting- a. Derives an amount when payment is received by or made available, and a. Incurs an expense or other amount when it is paid. 17 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Accrual basis Accounting Section 23 Under the accrued basis accounting:- a. Derives an amount when it is receivable by the person, and a. Incurs an expense or other amount when it is payable. 18 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Accrual basis Accounting cont An amount shall be receivable by, When the person become entitled to received it, even if the time for discharge of the entitlement is postponed or the entitlement is payable by instalments. 19 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Accrual basis Accounting cont An amount shall be treated as payable- a. When all the event that determine liability have occurred b. The amount of the liability can be determined with reasonable accuracy c. But not before economic performance with respect to the amount occurs. 20 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Accrual basis Accounting cont Economic performance occurs:- a. With respect to the acquisition of services or assets, at the time the services or assets are provided; b. With respect to the use of an asset, at the time the asset is used; and c. In any other case, at the time the person makes payment in full satisfaction of the liability. 21 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Accrual basis Accounting cont Economic performance occurs:- a. With respect to the acquisition of services or assets, at the time the services or assets are provided; b. With respect to the use of an asset, at the time the asset is used; and c. In any other case, at the time the person makes payment in full satisfaction of the liability. 22 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Business Income The following amounts shall be included in calculating the gains and profits of a person from conducting a business . a. Service fees; b. Consideration received in respect of trading stock; c. Gains from the realization of capital assets and liabilities of the business as calculated d. Amounts required to be included by the 2nd or 4th Schedule on the realization of the person s depreciable assets of the business; 23 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Business Income The following amounts shall be included in calculating the gains and profits of a person from conducting a business . a. Service fees; Service fee means a payment to the extent to which, based on market values, it is reasonably attributable to a business of a person, but excludes services rendered by interest, rent or a royalty. Section 195 24 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Business Income b. Consideration received in respect of trading stock; Trading stock means assets owned by a person that are sold or intended to be sold in the ordinary course of a business of the person, work in progress on such assets, inventories of materials to be incorporated into such assets and consumable stores; Section 195 25 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Business Income c. Gains from the realization of capital assets and liabilities of the business as calculated Capital asset (a) means each of the following assets: (i) land or buildings; (ii) a membership interest in a company, partnership or trust; (iii) a security or other financial asset; (iv) an option, right or other interest in an asset referred to in the foregoing paragraphs; but (b) excludes trading stock or a depreciable asset; Section 195 26 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Business Income d. Amounts required to be included by the 2nd or 4th Schedule realization of the person s depreciable assets of the business; on the Depreciable asset a. means an asset to the extent to which it is employed in the production of income from a business and which is likely to lose value because of wear and tear, or the passing of time; but a. excludes goodwill, an interest in land, a membership interest in an entity and trading stock; 27 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Business Income Contd. e. Amounts derived as consideration for accepting a restriction on the capacity to conduct the business; f. Gifts received by the person in respect of the business; g. Amounts derived that are effectively connected with the business and that would otherwise be included in calculating the person's income from an investment; and h. Other amounts required to be included under this Act. Sri Lanka Inland Revenue -2018 28
Inland Revenue Act No. 24 of 2017 Business Income Contd. The following amounts should be excluded when calculating a person s gains and profits from business. a. Exempt amounts and final withholding payments; and a. Amounts that are included in calculating the person's income from an employment. Sri Lanka Inland Revenue -2018 29
Inland Revenue Act No. 24 of 2017 Deductions Deductions will be discussed relevant to the all source of income, generally deduction of the Act falls in to three main categories General deductions (Section 10) Main deduction (Section 11) Specific deductions (Section 12-19) Sri Lanka Inland Revenue -2018 30
Inland Revenue Act No. 24 of 2017 General Deductions Section 10 1. (a) No deduction shall be made in calculating a person s income from employment [Sec.10(1)(a)] (b) Certain specific deductions are not allowable in calculating a person s income [Sec.10(1)(b)] 2. A deduction for a payment shall not be allowed until the tax, if required, withheld has been paid to the Commissioner General. Sri Lanka Inland Revenue -2018 31
Inland Revenue Act No. 24 of 2017 General Deductions Cont 3. No deduction shall be allowed except as expressly permitted by the Act. 4. Where more than one deduction applies, the most specific deduction shall be applied even if that results in the denial(Rejection) of a deduction. Sri Lanka Inland Revenue -2018 32
Inland Revenue Act No. 24 of 2017 General Deductions - Section10 The following expenses shall not be deducted in computing a person s income [S.10(1)(b)] [specific deductions ] Domestic expenses -Section.197. Sri Lanka Inland Revenue -2018 33
Inland Revenue Act No. 24 of 2017 Domestic expenses - Section 197 (1) Where an individual incurs expenditure in respect of himself, the expenditure shall be domestic expenditure to the extent that it is incurred- In maintaining the individual, including in providing shelter as well as meals, refreshment, entertainment or other leisure activities; In the individual commuting (travelling) from home; In acquiring clothing, including shoes, for the individual, other than clothing that is not suitable for wearing outside of work; Sri Lanka Inland Revenue -2018 34
Inland Revenue Act No. 24 of 2017 Domestic expenses cont In paying any personal debts, including credit card debts, of the individual. In educating the individual, other than education that is directly relevant to a business conducted by the individual and that does not lead to a degree or diploma; or Sri Lanka Inland Revenue -2018 35
Inland Revenue Act No. 24 of 2017 Domestic expenses - (2) Where another person incurs expenditure in making a payment to or providing any other benefit for an individual the expenditure shall be domestic expenditure except to the the extent that- The payment or benefit shall be included in calculating the income of individual; The individual provides consideration of an equal market value for the payment or benefit; The amount of expenditure is so small as to make it unreasonable or administratively impracticable to account for it; Sri Lanka Inland Revenue -2018 36
Inland Revenue Act No. 24 of 2017 Domestic expenses (3)Expenditure referred to in subsection 1 and 2 include interest incurred with respect to money borrowed that is used in a manner referred to in those subsection. Sri Lanka Inland Revenue -2018 37
Inland Revenue Act No. 24 of 2017 General Deductions Tax payable under this Act or other taxes and levies specified by the Commissioner General of Inland Revenue (CGIR). Interest, penalties and fines payable in relation to breach of any written law. Expenditure in deriving exempt amounts or final WHT payments Sri Lanka Inland Revenue -2018 38
Inland Revenue Act No. 24 of 2017 General Deductions Cont Retirement contributions, unless those are included in calculating the income of an employee or consist of a contribution by an employer to approved funds by the CGIR (pension, provident or savings funds or provident or savings society) Dividends of a Company An amount transferred to a reserve or provision for expenditure or losses not yet incurred, but expected to be incurred in a future year of assessment Sri Lanka Inland Revenue -2018 39
Inland Revenue Act No. 24 of 2017 General Deductions Outlays or expenses for entertainment entertainment means the provision to any person of food, beverages, tobacco, accommodation, amusement(Enjoyment), recreation or hospitality of any kind . Section195 Amounts incurred on lotteries, betting or gambling, other than amounts incurred from conducting a business of lotteries, betting or gambling Sri Lanka Inland Revenue -2018 40
Inland Revenue Act No. 24 of 2017 Main Deduction -Section11 In calculating income from business or investment, the following are deductible (a) Expenses to the extent they are incurred during the year; and (b) Incurred in the production of income. No deduction shall be allowed for an expense of capital nature. Expenses of a capital nature includes an expenses that secures a benefit capable of lasting longer than 12 months Sri Lanka Inland Revenue -2018 41
Inland Revenue Act No. 24 of 2017 Specific Deduction 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 Sri Lanka Inland Revenue -2018 42
Inland Revenue Act No. 24 of 2017 Interest Expenses Section 12 The interest incurred by a person during the year under debt obligation of the person shell be deemed to be incurred in the production of income to the extend that- a) The borrowed money was used to acquire an asset that is used during the year in the production of income; or b) The debt obligation was incurred in the production of income Sri Lanka Inland Revenue -2018 43
Inland Revenue Act No. 24 of 2017 Allowance for Trading Stock Section 13 Trading stock means assets owned by a person that are sold or intended to be sold in the ordinary course of a business of the person, work in progress on such assets, inventories of materials to be incorporated into such assets and consumable stores The definition of capital asset" and depreciable asset" excludes Trading stock. However it depends on facts of the case. Calculation of trading stock as sub section 2 of section 13 Section195 Sri Lanka Inland Revenue -2018 44
Inland Revenue Act No. 24 of 2017 Allowance for Trading Stock The allowance shall be calculated as Opening value of trading stock of the business for the Y/A = ****** Plus: Expenses incurred during the on trading stock of the business = **** ****** Less: Closing value of trading stock of the business for the year. = ( ***) Allowance for trading stock = ****** Sri Lanka Inland Revenue -2018 45
Inland Revenue Act No. 24 of 2017 Allowance for Trading Stock Closing valve of trading stock shall be lower of a. The cost of the trading stock at the end of the year b. The market value of the trading stock at the end of the year According to this comparison, cost of the trading stock shall be reset Sri Lanka Inland Revenue -2018 46
Inland Revenue Act No. 24 of 2017 Example - Allowance for Trading Stock ABC and company Sri Lanka Inland Revenue -2018 47
Inland Revenue Act No. 24 of 2017 Repairs and Improvements Section 14 Expenses for the repair or improvement of depreciable assets shall be deducted irrespective of whether they are of a capital nature or not 48
Inland Revenue Act No. 24 of 2017 Definition Depreciable asset a. means an asset to the extent to which it is employed in the production of income from a business and which is likely to lose value because of wear and tear, or the passing of time; but a. excludes goodwill, an interest in land, a membership interest in an entity and trading stock; Section 195 49 Sri Lanka Inland Revenue -2018
Inland Revenue Act No. 24 of 2017 Limitation for Deduction Assets categorized under Buildings, structures and similar depreciable assets (Class 4) - 5% for all other cases of the WDV of the asset at the end of previous year. - 20% Excess expense for which a deduction is not allowed shall be added to the depreciation basis of the asset. 50 Sri Lanka Inland Revenue -2018
