Sri Lanka's Inland Revenue Act No. 24 of 2017

Advanced Taxation

BUSINESS INCOME

AND

CORPORATE TAXATION

By

Mahesh Ranawaka Arachchi

Deputy Commissioner -IRD

chargeability

of Income tax

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Chargeability -

[

Charging Provision (Sec. 2(1)]

Income tax shall be payable for

•

Each “

year of assessmen

t

”

   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

“

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

•

Employment income ( Sec. 5)

•

Business income (Sec. 6)

•

Investment income ( Sec 7)

•

Other income (Sec 8)

Inland Revenue Act No. 24 of 2017

•

For a resident person

The income from employment, business, investment or

other source 

“wherever the source arises”

•

For a non-resident person

The income from the employment, business, investment or

other source to the extent that the “

income arises in or is

derived from a source in Sri Lanka

”

Inland Revenue Act No. 24 of 2017

•

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       

(xxx)

Tax payable

xxxx

•

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)]

business

Income

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

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

13

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

.

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Changes in the  Year of Assessment 

–

Section 20

14

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

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Method of Accounting – 

Section 21

15

•

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.

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Method of Accounting 

cont…

16

•

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

.

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Cash Basis Accounting – 

Section 22

17

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.

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Accrual basis Accounting – 

Section 23

18

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.

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Accrual basis Accounting 

cont…

19

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.

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Accrual basis Accounting 

cont…

20

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.

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Accrual basis Accounting 

cont…

21

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.

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Accrual basis Accounting 

cont…

22

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.

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

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 2

nd

  or 4

th

  Schedule on

the realization of the person’s depreciable assets of the business;

Inland Revenue Act No. 24 of 2017

23

Sri Lanka Inland Revenue -2018

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 

services rendered by

a business of a person, but excludes 

interest, rent 

or a 

royalty.

Section 195

Inland Revenue Act No. 24 of 2017

24

Sri Lanka Inland Revenue -2018

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

Inland Revenue Act No. 24 of 2017

25

Sri Lanka Inland Revenue -2018

Business Income

c. Gains from the 

realization of capital asset

s 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

Inland Revenue Act No. 24 of 2017

26

Sri Lanka Inland Revenue -2018

Business Income

d

. Amounts required to be included by the 2

nd

  or 4

th

  Schedule   

on the

realization of the person’s 

depreciable assets 

of the business;

“

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;

Inland Revenue Act No. 24 of 2017

27

Sri Lanka Inland Revenue -2018

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.

28

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

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.

29

Sri Lanka Inland Revenue -2018

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

)

30

Sri Lanka Inland Revenue -2018

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.

31

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

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 deductio

n.

32

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

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

.

33

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

34

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

35

Inland Revenue Act No. 24 of 2017

Domestic expenses 

cont…

Sri Lanka Inland Revenue -2018

•

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

36

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

37

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

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

38

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

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

39

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

General Deductions

40

Inland Revenue Act No. 24 of 2017

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•

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

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

41

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

Specific Deduction

42

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

•

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

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

43

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

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

Section195

•

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

44

Sri Lanka Inland Revenue -2018

Inland Revenue Act No. 24 of 2017

Allowance for Trading Stock

45

Sri Lanka Inland Revenue -2018

Inland Revenue Act No. 24 of 2017

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–

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

      =    

******

Allowance for Trading Stock

46

Sri Lanka Inland Revenue -2018

Inland Revenue Act No. 24 of 2017

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

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Sri Lanka Inland Revenue -2018

Inland Revenue Act No. 24 of 2017

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Example - 

Allowance for Trading Stock

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

Inland Revenue Act No. 24 of 2017

49

Sri Lanka Inland Revenue -2018

Inland Revenue Act No. 24 of 2017

50

Sri Lanka Inland Revenue -2018

Limitation for 

Deduction

 Assets categorized under

•

Buildings, structures and similar depreciable assets (Class 4)

-

 5%

•

for all other cases 

- 20%

of the WDV of the asset at the end of previous year.

Excess expense for which a deduction is not allowed shall be added

to the   depreciation basis of the asset.

Inland Revenue Act No. 24 of 2017

51

Sri Lanka Inland Revenue -2018

Example – Repair & Improvements

•

Company R runs a manufacturing business.

•

During the following years of assessments  it incurs expenditure as follows:

- 2018/2019 :  bought machine B for Rs. 2,000,000

- 2019/2020 :  repairs and improvements to 

machine B Rs. 400,000

•

- 

2020/2021 :  repairs and improvements to machine B Rs. 200,000

•

Since the 

machine B 

is under class 3 , the deduction for repairs and

improvements is limited to 20% of the depreciation basis of the machine B at

the end of the previous Y/A

52

Answer for Example 

– Repair & Improvements

Research and Development Expenses and

Agricultural Start up Expenses 

– Section 15

Research and Development expenses 

and 

Agricultural start

up  expenses

 meeting the requirements of 

subsection (1) of

section 11

 may be deducted 

irrespective of whether they are of

a capital nature or not.

53

Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

(a) opening up any land for cultivation or for animal husbandry;

(b) cultivating land referred to in paragraph (a) with plants;

(c) the purchase of livestock or poultry to be reared on land

referred to in paragraph (a); or

(d) maintaining 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;

54

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Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

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Inland Revenue Act No. 24 of 2017

Sri Lanka Inland Revenue -2018

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

if such person is the 

owner

 of the 

depreciable asset

; and



uses

 them at the 

end of 

a year of assessment 

in the

production of the person’s

 income from a 

business

;

56

Inland Revenue Act No. 24 of 2017

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Owned and Used - 

Temporary disuse

Example:

One of the printing machines of Company “A” is broken down and the Company has had

substantial problem of getting it repaired because they had to order parts from the

European manufacturer.

Hence the Company “A” had to wait 14 months. Despite the 14 months during which the

printing machine was not in use, Company A was actively pursuing its repair and did

succeed in having the machine put back into operation.

Company “A” may 

continue to claim capital allowances 

during the time it took to have

the printing machine repaired.

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Inland Revenue Act No. 24 of 2017

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Owned and Used

Example:

Company A runs a hotel. It commissioned Company Z to construct a new hotel in

Colombo. The contract price is Rs. 20,000,000 and the construction period is two and a half

years. Company A is required to pay the contract price in instalments as follows,

- deposit - 10%,

- after the foundations are laid - 20%

- after lock-up - 40% -

- on completion - 30%.

Is it eligible to claimed the Capital allowances

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Inland Revenue Act No. 24 of 2017

Capital Allowance

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- According to the 

straight line method

- According to the 

second, fourth

 or 

sixth 

schedules

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•

Capital allowance 

will not be granted 

for the year of disposal

•

Shall not be deferred 

to a later year of assessment

59

Inland Revenue Act No. 24 of 2017

No Capital Allowance 

Shall be granted in respect of a 

road vehicle 

other

than

- a commercial vehicle,

- a bus or minibus,

- a goods vehicle;

- or a heavy general purpose or specialised truck or trailer;

Definition of “

Commercial Vehicle

” mean,

- a road vehicle designed to carry loads of more than half a ton or more than 13

   passengers; or

- a vehicle used in a transportation or vehicle rental business.

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Capital Allowance

Inland Revenue Act No. 24 of 2017

Calculation of Capital Allowance

Formula for calculating capital allowance

A/B

A

 -

The depreciation basis of asset at the end of

the year of assessment

B

 -

Number of years (provided in the fourth schedule)

62

Inland Revenue Act No. 24 of 2017

Allowance Depreciation basis of

Depreciable Asset

•

T

he depreciation basis of the asset 

at the end of the previous year of

assessment 

and 

(could be the cost or WDV)

•

A

mounts added 

to the depreciation basis of the asset 

during the year

of assessment

 including the excess expense of repair and

improvements referred to in section 14 for which a deduction shall

not be allowed as a result of the limitation.

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Inland Revenue Act No. 24 of 2017

Example:

Company runs a manufacturing business.

During the following years of assessments  it incurs expenditure as follows:

- 2018/2019 :  bought machine B for Rs. 2,000,000

- 2019/2020 :  repairs and improvements to 

machine B Rs. 400,000

- 

2020/2021 :  repairs and improvements to machine B Rs. 200,000

Since the 

machine B 

is under class 3 , the deduction for repairs and improvements

is limited to 20% of the depreciation basis of the machine B at the end of the

previous Y/A

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Inland Revenue Act No. 24 of 2017

Example :Repair & Improvements and

     Capital Allowances

65

Inland Revenue Act No. 24 of 2017

An Assessable Charged is included or

Balancing Allowance is granted

Where a depreciable asset of a person is 

realised

, when

calculating the person’s income;

(a) an 

assessable charge 

is included (

profit

) or

(b) a 

balancing allowance 

is granted (

loss

)

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Inland Revenue Act No. 24 of 2017

An Assessable Charged is included

Example:

Company A runs a property rental business and owns a building of apartments for rental.

At the start of year 1, the balance in Company A's class 4 is Rs. 30,000,000, i.e. the balance

at the end of the previous year less the depreciation allowance granted for that year.

Company A is expecting to sell off a large number of the apartments in the building except

for a few select apartments. As a result, during year 1 it receives Rs. 50,000,000 as proceeds

from the sales.

Calculate the assessable charged or Balancing allowance for Y/A 2018/19

67

Inland Revenue Act No. 24 of 2017

Balancing Allowances (Loss)

Balancing allowances are –

made in respect of 

depreciable assets

  (a) (i) 

realised

 during a year of assessment; and

(ii) in respect of which 

capital allowances have

   been granted

 in that year or an earlier year; and

  (b) Calculated in accordance with the provisions of the 

second,

 fourth or sixth

 schedule to this act.

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Inland Revenue Act No. 24 of 2017

An Assessable Charged is included or

Balancing Allowance is granted

Example:

Company “R “sells office furniture at the price of Rs. 700,000 and at the time of disposal the

written down value of the asset is Rs. 1,000,000.

With respect to the office furniture, Company “R” will be granted a deduction in the amount

by which the written down value of the asset exceeds the proceeds of sale, i.e. Rs. 300,000.

Sale proceed 

= Rs. 700,000

WDV 

= Rs. 1,000,000

Balancing allowance (Loss) 

= Rs. 300,000

Rs. 300,000 is allowed as a deduction when calculating company R’s business income

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Inland Revenue Act No. 24 of 2017

Capital Allowance for Leasing Assets

Where an asset is leased under the finance lease, the lessor shall be

treated as transferring ownership of the asset to the lessee.

Accordingly, the lessee is entitled to deduct capital allowance in

relation to the assets obtained under finance leasing.

Substance Vs. From

- No. 10 of 2016 –

From

- 

No.24 of 2017 -

 Substance

70

Inland Revenue Act No. 24 of 2017

An Assessable Charged is included or

Balancing Allowance is granted

Example:

Company “R “sells office furniture at the price of Rs. 700,000 and at the time of disposal the

written down value of the asset is Rs. 1,000,000.

With respect to the office furniture, Company “R” will be granted a deduction in the amount

by which the written down value of the asset exceeds the proceeds of sale, i.e. Rs. 300,000.

Sale proceed 

= Rs. 700,000

WDV 

= Rs. 1,000,000

Balancing allowance (Loss) 

= Rs. 300,000

Rs. 300,000 is allowed as a deduction when calculating company R’s business income

71

Inland Revenue Act No. 24 of 2017

Investment incentive as Second

schedule

A person who invests in Sri Lanka (other than the

expansion of an existing business) during a year of

assessment shall be granted 

enhanced capital allowances

,

in addition to 

the capital allowances computed under the

Fourth Schedule

.

72

Enhanced Capital Allowance as Second schedule

73

Condition for claiming the Enhanced Capital

Allowance

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Temporary Concession as Sixth schedule

A person who invests in Sri Lanka (other than expansion of

existing business) on 

depreciable assets 

mentioned in the

following table during a year of assessment shall be granted

enhanced capital allowances 

computed in accordance with this

paragraph, 

in addition to the capital allowances 

computed

under the 

Forth 

Schedule.

75

Inland Revenue Act No. 24 of 2017

Enhanced Capital Allowance as Sixth schedule

76

Temporary Concession as Sixth schedule

Conditions

•

Claiming of capital allowances 

cannot be deferred

to a later year of assessment.

•

Deduction of capital allowances under this Schedule

shall 

expire three years 

after it becomes effective.

77

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In calculating the person’s income from business, 

loss from the realization of asset

and liabilities shall be deducted.

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

Capital assets 

of a business used in the production of income from business.

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

Debt obligation 

incurred in borrowing money – money used or asset purchased



Other liability 

- the liability was incurred in the production of income from the

business.

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Definition

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“

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

Deductible amount of Financial cost

– 

Section 18

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(a)

(i) a debt claim or debt obligation;

(ii) a derivative instrument;

(iii) a foreign currency instrument; and

(iv) any other instrument prescribed by regulations or, in the absence of

regulations, treated as a financial instrument by generally accepted

accounting principles; but

•

(b) except to the extent as may be prescribed by regulations, excludes a

membership interest in an entity.

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81

Definition

Limitation for Financial cost

Formula:

A x B

Where:

‘A’ 

-  total of the issued 

share capital 

and 

reserves

 of the

entity

‘B’ 

- (a) in the 

case of a manufacturing 

entity, the number 3;

   (b) in the case of an entity 

other than a manufacturing

entity,  the number 4.

82

Limitation for Financial cost

For Manufacturing Entities

Allowable Finance Cost attributable to financial instruments =

(Total Cost of Financial Instruments) X [(Total of the issued Share Capital and

reserves) X 3]

For Other Entities

Allowable Finance Cost attributable to financial instruments =

(Total Cost of Financial Instruments) X [(Total of the issued Share Capital and

reserves) X 4]

Limitation for Financial cost

Example:

Company B is a garment factory and incurs interest expense (for what) amounting to Rs.

4

,500,000 during the year of assessment 2018/2019. Balance Sheet of the company as at

31.03.2019 revealed as follows.

Stated Capital  

Rs. 6

,000,000

Revenue Reserves 

Rs. 4

,000,000

Long Term Loans 

Rs.4

0,000,000

Calculate the allowable interest expense according to thin capitalization rule.

Business or Investment Losses

– 

Section 19

In calculating the income of a person from a 

business 

following

shall be deducted:–

(a) an unrelieved loss of the person for the year from 

any other

business

; and

(b) an unrelieved loss of the person for any of the 

previous six

years of assessment 

from the business or any other

business.

85



 The person may 

choose the income 

calculation or calculations in which an

unrelieved loss or part of the loss is deducted.



 Notwithstanding the provisions of subsections (1) and (2), where a person makes

a loss and if the 

loss were a profit it would be taxed at a reduced rate

, the loss

shall be deducted only in calculating income taxed at the 

same reduced rate

,



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Business or Investment Losses

Conditions

Business Income

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Business or Investment Losses

– 

Section 19

“

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of a person for a year of assessment 

from a business or investment 

shall be

calculated as the 

excess of amounts deducted 

in accordance with this Act

(other than under this section or subsection (5) of section 25) in calculating

the person’s income from the business or investment over amounts included

in calculating that income; and

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the amount of a 

loss that has not been deducted 

in calculating a person’s

income under this section or subsection (5) of section 25.

88

Definition

Applicability of Specific Deductions

89

Reversal

Where a person 

deducts an expense 

in calculating the person’s income and the person 

later

recovers

 the expense, the person shall, at the time of recovery, 

include

 the amount recovered

in calculating the 

person’s income.

Disclaimer or Write off

The person may, at the time of disclaimer or write off, deduct the amount disclaimed or

written off in calculating the person’s income.

a person can disclaim the entitlement to receive an amount or write off a debt claim as bad

if  the person has taken reasonable steps in pursuing payment and the person reasonably

believes that the entitlement or debt claim will not be satisfied.

90

Reversal of amount including bad debts

Limitation for Financial cost

Example:

Company which has a book profit of Rs. 20,100,000 for the year ended

31.03.2019, has made following transactions.

- Made the provision for doubtful debts account for the year ended

  31.03.2019  Rs.2,200,000.

Out of which a sum of Rs. 800,000 represents specific provision and

the balance of Rs. 1,000,000 is general provision.

- It has written off a total sum of Rs. 800,000 out of the general provision

  made

To Trade debts of Rs. 500,000

To Staff loans of Rs. 300,000

Make the relevant tax adjustments for the year of assessment 2018/2019.

Calculation of Assessable Income from

Business

    Income from business 

xxxx

Less

: Exempt amounts

xxx

        : Final withholding payments

xxx

(xxx)

Liable Income from business

         xxxx

Less

 : Allowable deductions

(xx)

Assessable Income from business

xxxx

92

Business Income

93