Fundamentals of Taxation By Mahesh Ranawaka Arachchi Deputy

Fundamentals of Taxation By Mahesh Ranawaka Arachchi Deputy Commissioner of IRD MBA(Taxation)PIM, B. B. Mgt. (Acc. ) Sp. , CTA, ATII, FPFA, NCBS

Introduction to Taxation

Function and purpose of taxation Primary function of the Taxation Raising funds for public expenditure

Function and purpose of taxation Economic and Social function of Sri Lanka Economic factors of Taxation § Set local and foreign investment direction § Protect local industries from foreign completion Social Factors of Taxation § Discourage activates which are undesirable by the society § Encourage activities which are desirable by the society § Reduce income disparity between rich and poor

Principles of Taxation Equity Tax burden should be equal among persons in similar circumstances. - Benefit Principle - Ability to pay § Horizontal equity § Vertical equity Certainty Time of payment , Manner of payment and Amount to be paid should be clear and plain to contributor and every other person.

Principles of Taxation Convenience and voluntary compliance Tax should be implemented conveniently to tax payer that will encourage for voluntary compliance. Economy Collect taxes with minimum collection cost. If tax system complicated, need to incur relatively higher collection cost for administration of the tax system. Progressivity Tax burden should be proportionate to taxpayer's income level and ability to pay. higher income groups should pay proportionately more than the lower income groups.

Principles of Taxation Efficiency Tax collection is efficient when the cost of collection the 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 wide enough to include various sections in the society and population whereby minimizing individual tax burden. Simplicity An average taxpayer should be able to understand about the tax system

Who bear the TAX Tax will be affected on two ways. Direct affect : To pay the taxes if there is a liability to pay tax. Tax bear by the payee. It’s cant be transferred to other Indirect affect : To compliance under special regulation available in the Tax law. Tax bear by the other person It’s can be transfer to other

Tax Authorities in Sri Lanka There are basically four tax authorities In Sri Lanka § Inland Revenue Department § Sri Lanka Custom § Excise Department § Provincial counsel – Revenue Department

Department of Inland Revenue Taxes administrated by IRD § Income Tax (IT) § Value Added Tax (VAT) - Value Added Tax on Financial Services (VATFS) § Nation Building Tax (NBT) - Nation Building Tax on Financial Services (NBTFS) § Economics Service Charge (ESC) § Betting & Gamming Levy § Stamp Duty

Sri Lanka Custom is responsible for collection of taxes on imports and exports. Sri Lanka custom is playing major role in controlling and monitoring import and exports of restricted and prohibited goods of environment, health, social and security concerned.

Department of Excise is entrusted with efficient and effective administration of the Liquor and Tobacco industry in Sri Lanka.

Provincial Department of Revenue This is established to collect the certain revenue within the respective province. Taxes collected, § Stamp Duty § Mineral Tax § Drug & Chemical Tax § Lottery Tax § Prize Competition Tax § Betting Tax

Major taxes in Sri Lanka § Income Tax (IT) § Value Added Tax (VAT) § Nation Building Tax (NBT) § Economics Service Charge (ESC) § Import Duties § Stamp Duty § Excise Duties

Inland Revenue Act No. 24 of 2017 Components of law applicable to Income Tax

Components of law § Inland Revenue Act No. 24 of 2017 § Gazette Notification § Case law § Rulings § Notices published in new papers

Inland Revenue Act No. 24 of 2017 Chargeability of Income Tax

Inland Revenue Act No. 24 of 2017 Section 2 The amount of tax payable is - Tax payable on the taxable income - Tax payable on final withholding payments

Inland Revenue Act No. 24 of 2017 Charging Section States, § Who should pay income tax § On what , a person should pay income tax § For which period § How a person should calculate their income tax liability

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, nongovernmental organization and charitable institution. “Entity” means a company , partnership, trust, but excludes an individual.

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 Base (Sec. 69) Residency of the Individual § Qualitative test Does he reside in Sri Lanka § Quantitative test Physically present in Sri Lanka more that 183 day or more, in any 12 month period § Residual test Is an employee or an official of the government of Sri Lanka and his spouse is posted abroad during the year.

Income Tax Base (Sec. 69) Residency of the Company § It is incorporated or formed under the laws of Sri Lanka § It is registered or the principal office is in Sri Lanka; or § At any time during the year the management and control of the affairs of the company are exercised in Sri Lanka.

Inland Revenue Act No. 24 of 2017 Calculation of Tax payable

Inland Revenue Act No. 24 of 2017 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) Inland Revenue Act No. 24 of 2017 Assessable income from “Employment” xxxx Assessable income from “Business” xxxx Assessable income from “Investment” xxxx Assessable income from “Other sources” xxxx Less: Qualifying payments and reliefs (Sec. 52 ) Taxable income (Sec. 03) (xxx) xxxx

Tax Calculation (Sec. 2(3)) Inland Revenue Act No. 24 of 2017 Taxable income @ tax rates (as per First Schedule) xxxx Less: Any foreign tax credit (Sec. 80) Any other tax credit allowed under the Act Balance Tax Balance payable (xxx) xxxx

Inland Revenue Act No. 24 of 2017 Calculation of Assessable Income from Employment Income from employment Less : Exempt amounts xxxx : Final withholding paymentsxxx (xxx) Liable Income from employment xxxx Less : Allowable deductions (xx) Assessable Income from business xxxx

Inland Revenue Act No. 24 of 2017 Calculation of Assessable Income from Business Income from business Less : Exempt amounts xxxx : Final withholding paymentsxxx (xxx) Liable Income from business Less : Allowable deductions Assessable Income from business xxxx (xx) xxxx

Inland Revenue Act No. 24 of 2017 Calculation Of Assessable Income Of Investment Income from Investment xxxx Less : Exempt amounts xxx : Final withholding payments xxx : Amounts included in employment or business xxx (xxx) Liable income from Investment xxxx Less : Allowable deductions (xxx) Assessable Income of Investment xxxx

Inland Revenue Act No. 24 of 2017 Calculation of assessable income of other source Income from other source Less : Exempt amounts : Final withholding payments : Amounts included in emp. , busi. or Inv. Liable income from other source Less : Allowable deductions Assessable Income of other source xxxx xxx (xxx) xxxx

Exempted Income INLAND REVENUE ACT No. 24 of 2017

Amount exempt – Inland Revenue Act No. 24 of 2017 Section 9 and Third Schedule The following shall be exempt amounts: (h) Gain made on realization of an asset consisting of shares quoted in any stock exchange licensed by the SEC (j) Any prize received by a person as an award made by the President of the Republic of Sri Lanka or by the Government in recognition of an invention created, or any research undertaken, by such person;

Amount exempt – Inland Revenue Act No. 24 of 2017 Section 9 and Third Schedule (k) Any sum received by a person from the President’s Fund or National Defense Fund (n) Any winning from a lottery, the gross amount of which does not exceed Rs. 500, 000. (s) Any amount derived by a person from the sale of any gem on which tax has been deducted under subsection (2) of section 84.

Inland Revenue Act No. 24 of 2017 Final withholding payments – Section 88 § Dividend paid by resident companies to resident persons § Interest paid to a resident individual (other than such amount of interest paid to a senior citizen falling within the relief threshold in paragraph 2 (d) of the Fifth Schedule to this Act) or to charitable institutions § Receipts by winning lotteries, rewards, betting or gambling (other than business receipts of betting and gaming) § Payments to Non resident persons (other than payments derived through Sri Lankan PE)

Inland Revenue Act No. 24 of 2017 Deduction Under Section 52 Qualifying Payments § Donation to Approved Charity – Money Individual -1/3 of Taxable Income or 75, 000 which ever is lower Entity - 1/5 of Taxable Income or 500, 000 which ever is lower § Donation to Government or Government institution Money or otherwise § Profit remitted to the President Fund

Deduction Under Section 52 Inland Revenue Act No. 24 of 2017 Reliefs § Tax free allowance to individual – Rs. 500, 000 § Tax free allowance to individual who has employment income – Rs. 700, 000 § 25% of rent income, from investment assets – Individual § Interest income up to Rs. 1, 500, 000 for Senior citizen § To resident individual or partner , Up to Rs. 15, 000 Earning foreign currency by providing service in or out side Sri Lanka

Inland Revenue Act No. 24 of 2017 Tax Rates for Individual Taxable income tax – - 0 to 600, 000 - 600, 001 to 1, 200, 000 – 4% – 8% - 1, 200, 001 to 1, 800, 000 – 12% - 1, 800, 001 to 2, 400, 000 – 16% - 2, 400, 001 to 3, 000 – 20% - 3, 000, 001 or more – 24%

Specific Tax Rates Inland Revenue Act No. 24 of 2017 § Taxable income of Company tax at 28% § Small and Medium Enterprises – 14% “Small and Medium Enterprise” means a person who satisfies the following conditions: (a) the person who conducts business solely in Sri Lanka other than an individual who is engaged in providing professional services individually or in partnership being an individual who is professionally qualified; (b) the person does not have an associate that is an entity; and (c) the person’s annual gross turnover is less than Rs. 500, 000; Section 195

Tax Rates for Company Inland Revenue Act No. 24 of 2017 § Predominantly conducting a business of exporting goods and services – 14% § Predominantly conducting an agricultural business – 14% § Predominantly providing educational services – 14% § Predominantly engaged in an undertaking for the promotion of tourism 14% § Predominantly providing information technology services-14%. § A business consisting of betting and gaming, liquor and tobacco (excluding such income which is merely incidental to another business) – 40%

Tax Rates for Company Inland Revenue Act No. 24 of 2017 “Predominantly” means 80% or more calculated based on gross income. Schedule 5

Tax Rates for Company Inland Revenue Act No. 24 of 2017 Company’s taxable income includes gains from the realization of investment assets § those gains shall be taxed at rate of 10%

Inland Revenue Act No. 24 of 2017 Example : Assessable income for Employment – Rs. 2, 000 Assessable income for Business – Rs. 4, 000 Assessable income for Investment – Rs. 3, 000 Assessable income for Other – Rs. 500, 000 Donation to Government – Rs. 600, 000 Self Assessment Payment – Rs. 1, 000 WHT on Service fee – Rs. 600, 000 Calculate the Tax liability of the Mr. Ruwan for Year of Assessment 2018/19

Mahesh Ranawaka Arachchi Deputy Commissioner of IRD MBA(Taxation)PIM, B. B. Mgt. (Acc. ) Sp. , CTA, ATII, FPFA, NCBS Contract Details: 0773489549 maheshranawaka@gmail. com