INTEREST INCOME. Rates The rates of deduction from the payment of interest depend on the person to whom the interest is paid as follows;

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1 1.0 Computation of Interest Income INTEREST INCOME Income from interest is the full amount falling due whether received or not without any deduction for expense. "falling due" means accruing. Where any tax has been deducted at source, the amount to be included as income is the gross amount of interest. However, in certain cases like treasury bills etc, interest is payable on certain definite dates. In such case, it is treated as arising on the date on which it is payable and should be declared in the year of assessment in which it is received or credited. 2.0 Deduction of Tax from Payment of Interest There are main three provisions relating to the deduction of tax from the payment of interest under the Inland Revenue Act, No. 10 of Interest on Deposits (other than Government Securities) -Sec 133 Interest on Government Securities - Sec 134 Interest on Corporate Debt Securities - Sec Interest on Deposits (other than Government Securities) - (Sec.133) Requirement Any bank or any financial institution is required to deduct a tax at the following rates from interest payable on any sum of money deposited with it. The interest payable on fixed deposits, savings deposits or call deposits could be treated as examples. Rates The rates of deduction from the payment of interest depend on the person to whom the interest is paid as follows; (a) The recipient of the interest is any individual deduction at 2.5% (b) The recipient of the interest is any partnership, or body of persons other than charitable institutions - deduction at 8%. (c) The recipient of the interest is any company deduction at 10%. Tax Deduction Certificate Any bank or any financial institution which deducts tax under this section is required to issue the certificate of tax deduction to the deposit holders to prove the deduction. Page 1

2 2.2 Interest on Government Securities (Sec 134) Where any bank or financial institution issues any following securities at a price less than the face value, it shall deduct tax at 10% on the excess of face value over such price. Security Treasury bond Treasury bills Central bank security Such deduction shall be made at the time of issue. 2.3 Interest on Corporate Debt Securities (Sec 135) Requirement Every company which issues corporate debt security shall deduct tax at 10% from the payment of interest. The deduction should be made at the time of issue of such security. For this purpose, "corporate debt security" means any interest bearing or discounted security issued by or on behalf of any company and includes any bond, note, paper or mortgage which obligates such company to pay the holder of such bond, note or paper or the mortgagee, a specified sum of money on demand or upon such security reaching maturity or thereafter, but does not include any loan, advance, overdraft or other similar facility obtained from a bank or any financial institution. Tax Deduction Certificate The company which deducts tax under this section is required to issue the certificate of tax deduction to the debt security holders to prove the deduction. 3.0 Tax Credit Where any person's assessable income includes interest income for which the tax has been deducted, such tax deduction can be set off against the gross income tax payable. 4.0 Exemptions from Interest Income (Sec 9) There shall be exempt from income tax the following interest, (i) Interest on Special Account Interest accruing to any person on moneys in a special account in a commercial bank opened with the approval of the Central Bank. Such account has to be opened with funds obtained by exchange of foreign currency held outside Sri Lanka. Page 2

3 (ii) Interest on FCBU Interest accruing to any person in moneys lying to his credit in any foreign currency with any foreign currency banking unit (FCBU). (iii) Interest on Foreign Currency Account Interest accruing to any person in moneys lying to his credit in foreign currency opened with the approval of Central Bank of Sri Lanka. Examples would be nonresident foreign currency (NRFC) account or resident foreign currency (RFC) account. (iv) Interest from Approved Loans Interest accruing to any company, partnership or other body of persons outside Sri Lanka from a loan granted to the following persons, if such loan is approved by the Minister as essential for the economic progress of Sri Lanka. the Government any public corporation Government institution commercial bank any other undertaking (v) Interest from Loan Granted to the Government Interest accruing to any person or partnership outside Sri Lanka from any security, note or coupon issued by the Sri Lanka Government on a loan granted in foreign currency to the Government of Sri Lanka. (vi) Interest on Reconstruction Bond Interest accruing to any person on moneys invested in Reconstruction Bond issued by the Government of Sri Lanka denominated in United States Dollars. (vii) Interest on Sri Lanka Nation Building Bond Interest or discount to any individual from a Sri Lanka Nation Building bond denominated in foreign currency and issued by or on behalf of the Government of Sri Lanka. (viii) Interest on Motherland Development Bond Any interest or discount to any non resident citizen of Sri Lanka from the purchase of any Motherland Development Bond denominated in foreign currency and issued by or on behalf of the Government of Sri Lanka. (ix) Interest from Investment made outside Sri Lanka Interest from any investment made outside Sri Lanka to any person resident in Sri Lanka, where such interest is remitted to Sri Lanka through a bank. Page 3

4 1.0 Definition of Dividend (Sec 217) Dividend includes DIVIDEND INCOME any distribution of profits by a company to its shareholders in the form of money or of an order to pay money shares in any other company or debentures in that company or in any other company the amount of capital returned or distributed to the extent of the paid up value of any shares distributed by the company to its shareholders within six years and such paid up value representing the capitalization of the whole or any part of the profits of the company. 2.0 Deduction of Tax on Dividend The provisions of deduction of tax depend on the date on which the dividend is declared by a company. In general, the date of declaration is the date of payment of dividend. Dividend Paid on or after April 01, 2004 The dividend paid on or after April 01, 2004 was liable for deduction of tax at 10%. However, the deduction was made when the dividend was in the form of money or of an order to pay money, and the dividend was paid out of profits whether such profits were taxable or not excluding dividend received from another company which were subject to deduction of tax at 10% or 15% Further, the dividend tax is not deductible when the dividend is paid to the following persons Persons referred to in section 7(a) whose profits are exempt from tax Government institutions or local authority referred to in Section 7(c) Unit trusts and mutual funds Any shareholder who can claim exemption from dividend under section 10 Accordingly, dividend paid on or after April 01, 2004 is subject to deduction of tax whether company payable dividend out of taxable profits or non taxable profits. (such as exempt profits) However, no deduction is made if such dividend is exempt in the hands of shareholders. Page 4

5 Exemptions from Dividend Income (Sec 10) There shall be exempt from income tax the following dividends. a. Dividend Received from a BOI Company From a BOI Company which entered into an Agreement under Section 17 of the BOI Law prior to November 06, 2002 Any dividend paid by any above mentioned company to any shareholder of that company during the period for which the profits are exempt from income tax under the agreement or within one year thereafter out of the exempt profits. Dividend paid out of Dividend Received from Company referred to in (a) above Any dividend paid to a shareholder of a company out of any such dividend received by that company as is referred to in (a) if the first- mentioned dividend is paid during any year of assessment in which the second-mentioned dividend was received by that company or within one year thereafter. b. Dividend Received from a Unit Trust or a Mutual Fund Any dividend received to unit holder from a unit trust or a mutual fund c. Foreign Dividend 1.0 Royalty Income Any dividend received from a non resident company by any shareholder resident in Sri Lanka, where the amount of such dividend is remitted to Sri Lanka through a bank. OTHER SOURCES The income source royalty may arise for the payments made by a person for the use of any of the following for a manufacturing process or mining rights. ( Eg: Patent, Copyright, Trade mark, Industrial design, License) A person who receives this income is liable for income tax as a separate source of income. Deduction of Tax from Payment of Royalty in Sri Lanka (Sec 160) Payment of royalty in Sri Lanka is subject to the deduction of income tax at 10%, provided that each payment to any person is in excess of Rs. 50,000 in any month or Rs. 500,000 in any year. 2.0 Discounts Income This is a source of income arising from the discounting of bills of exchange, cheques, treasury bills, and certificates of deposits, commercial papers or any other negotiable instruments. Page 5

6 3.0 Premium Income This is a source of income arises to a person who receives income in excess of his entitlement. An example would be the receipt of key money for letting of houses. The full amount received should be taxable at the time of receipt under the source premium income. 4.0 Charges or Annuities A charge is usually an annual payment, which is secured on the income or the property of another person. The charge could arise out of legal obligation or as a result of any court order. In the case of Rajaratnam vs CIT (3 CTC 378), Samarawickrame J, formulated the following characteristics for there to be an annuity. a. it must be made with reference to the year though it may be paid in periodic installments, i.e. quarterly or monthly b. not be a receipt or accrual of a capital nature to the payee c. be made under a legal obligation d. be either recurrence or capable of recurrence e. be pure income or profit of the payee Deduction of Tax from the Payment of Annuity in Sri Lanka (Sec 160) The payment of annuity in Sri Lanka is subject to the deduction of income tax at 10% under section 160, provided that the payment to any person is in excess of Rs. 50,000 in any month or Rs. 500,000 in any year. Exemption for the Receipt of Annuity (Sec 13(w)) Any annuity in any year of assessment to any individual who reached in that year of assessment or had reached in any previous year of assessment the age of 60 years, being an annuity for life or for a period of not less than 10 years, purchased from any bank or any insurance company, and which accrues, in return for full consideration in money or moneys worth. 5.0 Winnings from a Lottery, Betting or Gambling This is a source of income introduced under the Inland Revenue Act for the period on or after April 01, A person who receives this income is liable for income tax as a separate source of income. Deduction of Tax (Sec 157) A person pays a lottery prize, winnings from gambling or winnings from betting shall deduct income tax at the rate of 10% on such gross payment. However, the deduction is applicable only if the payment is not less than Rs. 500,000. Page 6

7 Exemption on any Winnings from a Lottery (Sec 13 (z)) The gross amount of any winning from a lottery which does not exceed Rs. 500,000 is exempt from income tax. 6.0 In the case of a Non Government Organization, any Sum Received by way of Grants, Donations or Contributions or any other Manner Under the Inland Revenue Act for the period on or after April 01, 2006, Consequent to the introduction, a non government organization is chargeable 3% of income tax on the receipts in the form of any grants, donations, contributions or any other manner. 7.0 Income from any other Source Whatsoever, Not Including Profits of a Casual and Non Recurring Nature Page 7