Salient features of Inland Revenue Amendment Bill-12.10.2022

The salient features of Inland Revenue Amendment Bill issued on 11th October 2022 are as follows.

The changes resulting from the Bill are subject to committee stage amendments and will take effect once it is signed into law.

Exemptions

• Dividend payment attributable to, or derived from, another dividend received by a resident company or another resident company which is subject to AIT w.e.f. 1 October 2022
• A gain made by an entity fully owned by the Government of Sri Lanka as a gain from the realization of a capital asset or liability of the business or realization of an investment asset, if such gain was made due to any decision by the Government of Sri Lanka as being essential for the economic development of Sri Lanka and subject to the prior written approval of the Ministry.(w.e.f 01st April 2022)
  

Removal of exemptions 

REITS – Effective from 01st October 2022

• Gain from realization of land or building which was sold, exchanged or transferred to a real estate investment trust (REIT)
• Dividends and gains on the realisation of units or amounts derived as gains from the realization of capital assets of a business or investment by a unit holder, from real estate investment trust listed in the Colombo Stock Exchange and licensed by the Securities and Exchange Commission of Sri Lanka

Dividends paid to Non Resident Persons – Effective from 01st October 2022

• The exemption granted for dividends paid by a resident company to a non- resident person is to be revoked

IT and enabled services – Effective from 01st April 2023

• The exemption granted for providing information technology and enabled services is to be revoked.

Removing of certain income tax holidays granted under the Inland Revenue Amendment Act No.10 of 2021 except where projects or undertakings commenced prior to 31st March 2023.

• Recycling of construction material – 10 years
• Business commenced after TVET training – 5 years
• Manufacturing of boats or ships in Sri Lanka and received or derived any gains and profits from the supply of such boats or ships - 7 years
• Installation of communication towers -5 years
• Letting bonded warehouses or warehouses related to offshore businesses
• Renewable energy project with capacity to produce not less than one hundred Mega Watts of solar or wind power to national grid – 7 years

Limiting the exemptions on Vocational education Institution

• From 5 years to 2 years (w.e.f 01.04.2021)

 Allowable & disallowable Expenses

Taxes and other levies (w.e.f. 01st April 2021)

• Taxes and other levies specified by the Commissioner General is non-deductible. This prohibition has been extended to any tax or levy which is not allowed to be deducted in calculating a person’s income in terms of any other written law.

Improvements made to depreciable assets (w.e.f. 01st April 2022)

• Where the tax written down value of the depreciable asset is zero, the deduction for improvements will be deducted in equal installments as follows;
  • Class 4 assets – 12 years of assessments
  • Other classes of assets – 3 years of assessments

Capital Allowance

• The claiming of capital allowance has been limited to the cost of the depreciable asset.(w.e.f. 01st April 2022)

Allowable Financial costs

• The Bill provides that, where there are no financial costs incurred during the year, the unused limitation for the above deduction can be computed by using the same amounts of the immediately preceding year.

Loss deduction rules (w.e.f. 01st April 2018)

Loss deduction after the tax rate has been increased

• Loss from business: Claim on account of a loss in relation to the business where the tax rate has been substantially increased, the losses incurred at lower rates will
  not be considered as being taxable at a reduced rate. This proposal would allow companies with unrelieved losses prior to proposed changes to claim such losses against profits under the amended tax rate. .

Investment losses deductible up to 6 years of assessment

• The law currently has a restriction on the time available for carrying forward unrelieved losses from business up to 6 years. This has been extended to investment losses, which will also only be deductible within six years of assessment commencing on the first date of the year of assessment immediately succeeding the year of assessment in which such losses were incurred.

No loss deductible from a gain on the realization of an investment asset

• No loss can be deducted from the gain on realization of an investment asset.

Marketing & communication Expenses

• Additional deductions available for Marketing & communication expenses will be limited to 2 years commencing from 01st April 2021.

Impact on Individuals 

• Personal Tax relief has been restricted to Rs.1,200,000 per annum w.e.f 01.10.2022 for resident and non-resident citizens. Accordingly, Individuals with gross monthly earnings exceeding above of Rs. 100,000 are subject to income tax.
• Expenditure Relief available for resident individuals up to Rs.1.2Mn has been withdrawn with effect from 01.10.2022.
• Individuals will be taxed at 6% to 36% on their income as follows.

• The individual's gains and profits from employment shall not include any retirement payment which are received at the time of retirement from employment. This applies as long as the employee has already paid tax on the retirement contributions for income tax purposes in a previous year of assessment and the respective retirement contributions have already been considered.

The maximum rate of 14% applied on individual's income from following sources has been removed w.e.f. 1 October 2022

• Consideration received in respect of gems and jewellery
• Amounts received on the supply of electricity to national grid generated by using renewable energy resources by any individual

 Corporate Income Tax rates 

Concessionary tax rates removed

• The concessionary tax rate of 14% and 18% applicable on identified gains and profits will not be applicable w.e.f. 1 October 2022. 
• Accordingly standard rate would be 30% and Liquor, Tobacco, Betting and Gaming at 40%.
• Trust -30% 
• Unit trust or Mutual funds-30%
• Non-Governmental Organizations - 30%

Revision of Capital Gain Tax Rate for companies (Effective from 01st October 2022)

• 30% on gains from realization of investment assets

Industry specific changes

• The reduction on tax payable for persons engaged in agro farming together with agro processing or manufacturing is to be restricted as "Tax payable reduced by 25% for the period of two years of assessment commencing on April 1, 2021"

Advance Personal Income Tax 

• Every employer is mandated to deduct Advance Personal Income Tax ("APIT") from  payments made to employees beginning on October 1, 2022 upon exceeding the limit.
• An individual whose tax payable for the year of assessment is exclusively derived from employment income from which advance personal income tax has been deducted is not required to file a Personal Income Tax Return.

Advance Income Tax / WHT

• Dividend, interest, discount, charge, natural resource payment, rent, royalty or premium which has a source in Sri Lanka will subject to  Advance Income Tax (“AIT”)/ WHT at the following rates.
  
  • Interest or discount paid –5%
  • Rent payments made to a resident person where the aggregate payment exceeds or is equal to Rs. 100,000 per month – 10% on full amount
  • Dividends-15%
  • All other payments except dividend – 14%
    
• The AIT deducted on dividends paid by a resident company will be treated as a final withholding payment.

Withholding Tax on payments made to Non-residents

• Any person making a payment for service fee or an insurance premium with a source in Sri Lanka to a non-resident person will be liable to withhold tax at 14% or the relevant DTA rate with effect from the commencement of the amendment act.
  

Withholding Tax on service fees

• Service fee paid with a source in Sri Lanka to a resident individual who is not an employee of the payer and exceeds Rs. 100,000 per month will be subject to withholding tax at the rate of 5%.
• Service fee will be for;
  • for teaching, lecturing, examining, invigilating or supervising an examination;
  • as a commission or brokerage to a resident insurance, sales or canvassing agent; or
  • 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

Payments having a source in Sri Lanka (w.e.f. 01st April 2018)

• Any interest, charges, annuities, a royalty, technical service fee, or similar payment paid by the Government of Sri Lanka, including such payments made by any institution on behalf of the Government of Sri Lanka will be considered to have a source in Sri Lanka.

Administrative Review

• Time period to request for Administrative Review : 30 day period provided to make a request for an administrative review to CGIR has been reduced to 14 working days after the taxpayer is notified of the decision, w.e.f. 1 April 2023.
  
• Time period to issue acknowledgement by the CGIR : 30 day period provided to CGIR for acknowledgment of receipt of an administrative review has been reduced to 14 working days, w.e.f. 1 April 2023.

Filing of SET Return (w.e.f. 01st April 2021)

• The estimated gains derived or expected to be derived from the realization of an investment asset during the year of assessment shall not be considered for the purpose of ascertaining the quarterly income tax payment.

Segregation of tax accounts

• Where a person has expenses incurred in common or commonly used any assets on all business or investment activities, and such expense or deduction cannot be separately identified for the calculation of tax accounts, it is permitted to divide such expenses or deductions on a proportionate basis (according to the proportion of turnover or proportion of asset usage) .
  

Source : Inland Revnue Amendment Bill