CHARTERED ACCOUNTANCY Certified Senior Business Accountant CSBA. Business Level KB 3 Business Taxation T - 02

Transcription

1 CHARTERED ACCOUNTANCY Certified Senior Business Accountant CSBA Business Level KB 3 Business Taxation T - 02 Chapter Topics Page No 01 Partnership Tax Agricultural Undertaking Bank & Financial Institution Administration Provision Tax Holidays & Concessions Value Added Tax Nation Building Tax Economic Service Charges Stamp Duty Taxation of Charitable Institution Taxation of Clubs Taxation of Trade Associations Receiver, Trustees, Executor Question Nishshanka Wijerathne Bandara ACA, ACMA, BSc Mgt Sp USJ, MAAT Visiting Lecturer - University of Sri Jayewardenepura 1

2 PARTNERSHIP TAX A partnership is defined in the Partnership Act of 1890 as the relation which subsists between persons carrying on a business in common with a view to profit. Business includes every trade, occupation, profession or vocation Partnership shall not include any disposition, trust, grant, covenant, agreement, assignment, settlement, or other arrangement by which the share of the divisible profits or the divisible loss of a partner of any partnership, is shared with any other person or partnership; Sec 217 Precedent Partner A precedent partner is defined the Act (Sec 217) as follows, Precedent partner means the partner who, of the active partners resident in Sri Lanka (a) Is first named in the agreement of partnership; (b) If there is no such agreement, is specified by name or initials singly or with precedence to the other partners, in the usual name of the partnership; or (c) Is the first named in the statement made under section 4 of the Business Names Act, No.7 of 2007; Divisible profit of a partnership Divisible profit of a partnership is the adjusted profit for tax purposes after deduction of deduction permissible under Sec 32 in respect of annuity, ground rent, royalty and interest paid during the year. However following adjustments are required in respect of transactions of partners with business. Partner s salary and interest on capital This is merely methods of dividing up the profits and such sums are not deductible in arriving at the divisible profits. However, when the allocation of the divisible profit is made between the partners, the necessary adjustments are made for salary & interest on capital. Interest on loans given by partners and Rent Where a loan has been given by a partner to the partnership and where the interest has been debited to the profit and loss account of the partnership, no adjustment is made in determining the divisible profit. However, when the allocating the profits of the partners, the interest received by the partner should be shown separately. Interest on Drawing Considered as income and no adjustment is required Working partner Who gets a share of profit with or without salary but not involved in losses is not considered as a partner. Any remuneration, share of profit payable to such partner is deductible in ascertaining the profit. Salary to wife Allowed in computing the divisible profit but need adjustment in the profit allocation Other income 2

3 If the partnership derives income from other sources, such income is separately computed and allocated among the partners in their profit sharing ratio. Sub division of the share of profit of any partner Is not allowed by the definition Davoodbhoy Vs CGIR (1979) A Davoodbhoy was one of five partners of a firm carrying on business under name Abdul Hassen Davoodbhoy and was entitled to 1/5 th share in the profit. In order to provide an income for his children he entered into an agreement with them, the rights under this agreement was rejected by the assessor on the grounds that it is artificial and fictitious and sub division was not allowed. Appeals to CGIR & the Board of review were dismissed Court of appeal answered against the appellant Supreme Court gave its judgment in favor of the appellant, allowing sub division. Subsequently IRA was amended to exclude sub divisions from partnerships. And therefore the facts of this case are not valid today. Divisible profit should be divided among the partners based on their profit sharing ratio. The following losses and payments are also should be divided among the partners based on their profit sharing ratio. 4. Divisible loss 5. Capital loss 6. Qualifying payment Aggregation of income of spouses Sec 25 (6) Profit & income received by one spouse for services rendered in any trade, business, profession or vocation carried on or exercised by the other spouse by a partnership of which that other spouse is a partner, Shall be deemed to be the profits and income of the other spouse Partnership Tax o Every partnership is required to pay income on the aggregate amount of Divisible profit and other taxable statutory income of the partnership Less Rs. 1,000,000 (Tax Free Allowance) o o o 8% Quarterly installments. Where there is a divisible loss, tax should be paid on the total amount of other income, without any set off such divisible loss from other income. The share of the tax paid attributable to each partner using the profit sharing ratio, may be set off against the income tax liability of the relevant partner for the same year of assessment on such share of profit and other income from the partnership, without any right to Refund or Carry forward of any excess o o Quarterly installment can be estimated on the basis of the preceding year s divisible profit and other income, where the details for the current year are not available. Income tax paid by any partnership is not allowed as a deduction from income in ascertaining the divisible profit. 3

4 The net tax, if any, after deducting ESC paid by the partnership can be distributed to partners in the ratio of share of profits to set off against the income tax payable by partners for the same year of assessment. Eg: Profit and loss account of partnership Vindya & Sandya for the year ended is as follows (all Rs. 000') Gross profits 85,000 Less: Expenses Partners' Salaries Vindya 12,000 Sandya 10,000 22,000 Salaries & Wages 21,000 Ground Rent 4,000 Interest on loan from Vindya 12,000 Interest on Capital Vindya 6,000 Sandya 6,000 12,000 71,000 14,000 Apportioned: Vindya 7,000 Sandya 7,000 14,000 - Calculate divisible profits for the Y/A 2014/15 Tax credit on Partnership tax Credits is limited to the tax attributable to income from partnership other than individual income or share of partnership tax whichever is lower Gross income tax X Shares of income from partnership Total Statutory income Eg: A & B partners sharing Profit 1:1 Information relevant to Y/A 2014/15 Divisible Profit Rs. 3,000,000 & it includes salary of Rs. 500,000 to A & Rs. 300,000 to B Other income and expenditure of partnership Rent gross (Rate Paid Rs. 20,000) Rs. 1,200,000 Interest WHT Not deducted Rs. 60,000 Donation to approved charity which services provided to care need people Rs. 200,000 Apart from income from Partnership A is employed in mercantile firm and salary from employment Rs. 175,000 per month provident fund contributions are made according to law PAYE tax amounted to Rs. 125,800 was paid by Mr. A. Calculate balance tax liability of Mr. A for the Y/A 2014/15 Eg: Vass Opticians is a partnership. Partners are Wasantha & Samantha, sharing profits / losses in the ratio of 2:1. Income & Expenditure statement for the year ended is given below: Rs Rs Rs Optical Service Income 1,400,000 Less Expenses Partner s Salaries asantha 200,000 4

5 Samantha 100, ,000 Interest on Partners Capital Wasantha 60,000 Samantha 40, ,000 Salaries 40,000 Vision Testing Machine 600,000 Rent paid 240,000 Electricity 20,000 Telephone 8,000 Bank overdraft Interest 10,000 Interest paid on bank loan 12,000 Entertainment hotel bills 6,000 (1,336,000) Profit 64,000 Rent paid to Samantha s wife, who is owner of the business premises, which was taken for a two year period from Rent is Rs. 10,000 per month. iii. Calculate the divisible profit of the partnership iv. Calculate the statutory income of each partner from the business. Agricultural undertaking An agricultural undertaking is defined in Sec 217 as an undertaking for the purpose of the production of any agricultural, horticultural or animal produce and includes any undertaking for the purpose of rearing livestock or poultry as well as provision of management services for cultivation A. Agricultural profit include 1. Profits taxable at 10% (individual maximum 10%) a. Income from any undertaking for the production of any agricultural horticultural or any dairy product b. Income from cleaning, sorting, sizing, grading, chilling, dehydrating, packaging, cutting, canning of agricultural produce other than manufacture of tea. 2. Following profits are taxable at 12% (individual maximum 12%) a. Fees received from management services provided for cultivation. Profit on sale of capital assets (not considered as part of agricultural profit) tax at normal rate B. Profits and income from fishing (excluding profit on sale of capital assets) exempted up to 2015/16 An under taking for fishing includes any undertaking for the cleaning, sizing, sorting, grading, chilling, dehydrating, packaging, cutting or canning of fish in preparation of such produce for the market. If engaged in both fishing and manufacture of any product using such produce, such fish shall be deemed to have been sold to manufacturing department at the market value. Exemption is applicable only for the profit from fishing department. Tea industry, profit from plantation (estate) is at 10%. But factory profit is taxable at normal rate. When engaged in both profit to be separated as follows. 1. Factory sales actual sales of made tea 2. Estate sales market value of green leaf issued to factory (deemed purchase) 3. Other expenses to be apportioned on a fair basis. 5

6 C. According to sec 25 (j) In ascertaining the profits of an agricultural undertaking the following expenses are also deductible. Expenses incurred in opening up land, this would include the cost of; clearing land of trees, shrub or undergrowth filling up and draining marshy and terracing constructing fences constructing access roads and tracks constructing irrigation canals preparations of land for planting and young plants Expenses incurred in cultivating that land with any plant. These would include the cost of; maintenance immature areas and replanting the land with the same or a different plant inter planting and under planting Expenses incurred in the purchase of livestock or poultry to be reared on the land D. as per the financial reporting frame works; expenses are capitalized or deferred revenue expenditure in a separate account and write off (amortized) to profit and loss account after the plantation is matured. (Commence to yield crop) over the beneficial life time. But tax purposes such expenses (actual costs) are allowed in each year and write offs are not allowed. E. Harvested crops to be valued at since realized price (price realized after the balance sheet date) F. Sales of up rooted trees in jungle clearing are a capital gain. G. Government subsidies are exempted H. Nursery expenses, actual cost incurred during the year to be allowed. Transfers and internal profits to be eliminated Sec 147 Bank & Financial Institution Financial Institution is not only bank & finance companies but any institution whose business consists wholly or partly of the acceptance of deposits for interest or loan in the form of debentures or bond or any other form. (a) interest from money lending is business income & expenses and outgoing can be deducted Case refer: Ceylon Financial Investment Ltd Vs CIT (b) Irrecoverable interest can exclude from business income, where such interest has subsequently been received it will be subject to assessment time bar will not apply (Sec 163 (5) (c) Where assessment has been received including interest that is irrecoverable, such interest could be reduced by the amount of interest unpaid. (d) If tax paid for the irrecoverable interest it will refund by the government (e) Interest income will liable at normal rate in the case of exempt company. (f) If the government securities are sold before maturity the difference between sales price and the cost will be treated as a income liable to tax Department ruling - December 1998 (g) Interest accruing to any person on money lying to his credit in foreign currency with any FCBU liable 6

7 at normal rate (h) Any bank established under regional development bank act co-operative law exempt (i) Interest income on loan granted following situation exempt a. Sec 16 undertakings b. Loan granted to re-open abounded factory c. New undertaking under Sec 20 d. Relocated undertaken Sec 21 e. Sec 24 C loan granted/eastern Province development f. Interest on sovereign bond dominated in foreign currency on or after October 21, 2008 on behalf of government g. Loan granted out of investment fund established h. Profit & income from investment made after i. Listed corporate debt securities ii. Municipal bond with the approval of secretary of ministry of finance i. Interest earned by DFCC/NDB from money lending out of fund raised from outside Sri Lanka to SME, Plantation, Construction etc Part I of Admin Provision Reporting Hierarchy of Department of Inland Revenue Commissioner General Inland Revenue (CGIR) DCGIR DCGIR DCGIR DCGIR DCGIR Tax surveillance, Legal & Collection Tax Policy, Rulings and International Affairs Direct taxes Human Resource Management (ICT & NBT) Commissioners (from Senior Commissioners) Commissioner Administration Commissioner Training Commissioner Procurement & Supplies Commissioner Information Commissioner NBT Commissioner Appeal Commissioner Legal Commissioner Investigation Commissioner Corporate Tax Commissioner Zone 2 Commissioner Zone 3 Commissioner Internal Audit & Assets Control 7

8 Commissioner Collection Commissioner LTU Commissioner VAT Commissioner VAT Refund Commissioner Tax Payers Service Department Commissioner Employment Commissioner Zone 1 Deputy Commissioners (from Commissioners) Senior Assessors (from Deputy Commissioners/Senior D.C) Assessors (from Assistant Commissioners) Tax Officers Office Assistants Decide the correct Tax Liability Collection Compliance Payment of Tax 1.Return on income (self-declaration) Settlement process Penalty provision 2. Examination by Assessor Self-assessment installment punitive action 3. Issue Assessment (Dept issue) WHT 4. Appeal Over payment 5. Appeal settlement procedure Not paid in time, tax in default 6. Fine tax liability - (supreme Court) Recovery action 1. Payment of income tax Any person or Partnership liable to income tax is required to compute his tax and remit it in 4 quarterly installments although no assessment has been made Sec 113 (1) Due Date Installment Eg: 2013/ th August 1 st 15 th Aug th November 2 nd 15 th Nov th February 3 rd 15 th Feb th May 4 th 15 th May 2014 Sec 113 (1) 30 th September any balance 30 th Sep th November Return file 30 th Nov 2014 Sec 106 (1) 10% discount granted only for individuals who pay their quarterly installment not less than 30 days prior to the due date. 2. Penalty on non-payment on or before the due date 8

9 10% immediate penalty 2% for each 30 days period (month) from the due date subject to a maximum aggregate of 50% However penalty is not levied if at least 25% of the income tax payable for the previous year is paid on or before the each due date. WHT deducted from taxable income and ESC paid up to date is considered as a part payment Where a person or partnership with an annual turnover less than Rs 100Mn has defaulted tax on or before due to Any conflict environment Financial constraint He will be exempted from the tax in default and certificate of exemption will be issued in respect of such tax in default. Such taxpayer has to produce written assurance that taxes payable after Authorized Representative Authorized Representative means any individual who is authorized in writing; by a person to act on his behalf for the purposes of this Act In any case A member of the Institute of Chartered Accountants of Sri Lanka An accountant approved by the CGIR An attorney at Law An employee regularly employed by that person In the case of an individual - a relative; In the case of a company a director or the secretary of that company; In the case of a partnership a partner of that partnership; In the case of a body of persons a member of such body 4. Furnishing of Returns 106. (1) Every person who is chargeable with income tax under this Act for any year of assessment shall, on or before the 30 th day of November immediately succeeding the end of that year of assessment, furnish to an Assessor, either in writing or by electronic means, a return in such from and containing such particulars as may be specified by the (Sec 106 1) Commissioner-General, of his income, and if he has a child, the income of such child: Provided however, the preceding provisions shall not apply to an individual whose income for any year of assessment comprises solely of one or a combination of the following a) Profit from employment as specified in section 4 & chargeable with income tax (PAYE) has been deducted by the employer on the gross amount of such profit & income; b) Dividend chargeable with tax on which tax at 10% has been deducted, c) Income from interest chargeable with tax on which income tax at the rate of 8% has been deducted. Any person who carries on any trade, business, profession or vocation, including any company which has entered into any agreement with the BOI of Sri Lanka shall obtain a registration number within one year of such registration or incorporation or commencement of the activity. Any individual, who satisfies any four requirements out of the five requirements specified in paragraph 9

10 of this subsection during any year of assessment, shall submit a return of income to the Commissioner- General not later than one month after the fulfillment of such requirement. For the purpose of this subsection, the requirements are as follows:- a) Paying a monthly residential electricity bill exceeding a net amount of Rs. 10, b) Incurring a monthly credit card bill exceeding Rs. 25, c) Paying a monthly residential telephone bill exceeding a net amount of Rs. 10, d) Purchasing an air ticket to travel abroad; and e) Owning a motor vehicle which is used for travelling purposes. Sec 106 (5) Failure to file a return would be liable to a penalty of Rs. 50, the maximum that could be imposed under Sec 202 of the Act. Every person chargeable to pay income tax under any provision of this Act shall be required to declare a) The value of every asset and liability at the last day of any year of assessment; and b) Any profits or income exempted from the payment of income under this Act for any year of assessment. Sec 106 (6) Maintenance of separate accounts a) Where any person or partnership carries on any trade, business, profession or vocation in several undertaking as one business or b) Where several trades, businesses etc are carried on and profits and income from any such unit or undertaking are either exempt or chargeable at different rates c) Such person or partnership has to maintain accounts in a manner that the profits and income from undertaking can be separately identified. Sec 106 (11) The CGIR may close any file on or after 01 st April 2011 where an individual s profits and income are derived only from sources where taxes are paid at source and treated as final. (Sec 106 (19), Sec 29(3) Amd Act No ) 5. Fuller Returns and Information An Assessor is empowered to give notice in writing to any person when and as often as he thinks necessary within 05 years from the end of the relevant year of assessment requiring him. a) To furnish fuller or further returns; b) To furnish fuller and further information; c) To produce or transmit any documents specified d) To attend in person or by an authorized representative for any interview. Sec 106 (12) & (13) Deputy Commissioner is empowered to give notice in writing to any person before the expiry of 05 years from end of the relevant year of assessment. (a) to produce for examination, or transmit to the Assessor, within the period specified in such notice, any such deeds, plans, instruments, books, accounts, trade lists, stock lists, registers, Cheque, paying-in slips, auditor s reports or other documents in his possession as may be specified in such notice; (b) To attend in person or by an authorized representative at such place and on such date and at such time as may be specified in the notice, for the purpose of being examined regarding his income. (c) To furnish information on any transactions between such person and any other person. Such documents any be retained as long as is considered necessary but not after the 05 years time bar 10

11 period. Sec 106 (14) 6. Registration The following persons have to be registered with the CGIR and obtain a registration number within a specified period. Any person, including a company, carrying on a trade, business, profession or vocation. Registration within one year of incorporation or commencement of activity Sec 106 (2) Any BOI company which has entered into an agreement with the BOI Registration within one year of registration Sec 106 (2) Any bank or financial institution liable to deduct tax from interest paid under Sec 133 Sec 150 Registration 30 days prior to deduction. Any person or partnership liable to deduct income tax from specified fees, annuity or royalty, management fees, rent or other payment made under Sec 151,152,156 Registration 30 days prior to commencement of deduction. Any person or partnership conducting a lottery, betting or gaming activity where the prizes or payments are liable to income tax deduction Sec 159 Registration 30 days prior to commencement of activity Penalty for default in respect of the above registrations is a fine not exceeding Rs. 50, Audit Reports An assessor is empowered under Sec 107 of the Act to call for any statement of accounts and any schedules specified by him from any partner of a partnership or any other person who carries on any trade, business, profession or vocation, as may be necessary for the ascertainment of statutory income. Where such accounts are prepared by an approved accountant they must be accompanied by a certificate from such accountant. Approved accountant means o A chartered Accountant o An accountant approved by the CGIR as an authorized representative o An auditor registered under the companies regulation and approved as an authorized representative o An auditor authorized to carry out audits of co-operative society where the turnover is less than Rs. 50Mn for the year. Notwithstanding the absence of any such notice issued, every o Where the company turnover is more than Rs. 250 Mn or Quoted Public companies or Net Profit is more than Rs. 100 Mn are compulsorily should submit accounts without the notice received by assessor Partnership/sole partnership/clubs should compulsorily submit accounts if followings are satisfied o Turnover more than Rs. 50Mn or o In the case of partnership Divisible profit more than Rs. 25Mn o In the case of any other person Net Profit more than Rs. 25Mn From onwards the submission of a special audit certificate and other schedules apply only to a quoted public company or any other person or partnership having a turnover over Rs.250 million or net profit (or divisible profit) over Rs. 100 million. Sec 107 as amended by Sec 35 Amendment Act No.9 of 2008 Any person carrying on more than one business, trade, profession or vocation chargeable with different tax rates, is required to prepare statements of accounts identifying income for every activity separately. 8. Penalty for Failure to Furnish a Return Failure to furnish a return within the prescribed time will render a person liable to a penalty not exceeding Rs 50,000 which the commissioner General is authorized to impose. 11

12 Such penalty may however be reduced or waived if it is proved that Such failure was due to circumstances beyond his control: and A return has been subsequently furnished within the period specified by the Commissioner General. 9. Assessments and Additional Assessments Where any person has Not paid the tax due for any year of assessment: or paid less tax than the proper amount due He may be issued with an assessment or additional assessment made after the 15 th November of the year following the year of assessment An assessment may however, be issued at any time prior to this date where such person is about to leave the island: or it is expedient for the protection of revenue. Sec Accepting or Rejecting a Return Once a person has duly furnished a return, the Assessor has two options 1) He can accept the return: or 2) He can reject it and make an estimated or additional assessment. Sec 163(3) Accepting a Return An assessor can accept a return duly furnished in three instances o Where an Assessor on examining the return finds it satisfactory and no further queries or additional assessments are required, or o Where a) an individual has duly complied with furnishing return and payment requirements for the preceding 3 years, and b) paid income tax for that year of assessment as per return 120% of the tax of the previous year, or c) specified as assessable income in that year of assessment 125% of that of the preceding year of assessment, d) Sworn an affidavit that no fraud, evasion or willful and default has been committed. Such return is accepted and no assessment or additional assessment is made. Sec 163(8) o Where a) An individual whose assessable income for a year of assessment does not exceed Rs. 1Mn, and b) Has furnished the return for that year of assessment, and c) Paid tax and penalty (if any) for that year Such return will be accepted and no assessment or additional assessment will be made (whether accounts are given or not) 12

13 Provided o He has not been notified to furnish a return under Sec 106(7) or o Not furnished a return for any previous year of assessment Sec 163(9) Rejecting a Return Where an assessor does not accept a return, he has in terms of Sec 163(3) provision to communicate in writing his reasons for not accepting the return. Such a provision is mandatory and he is bound to do so without exception. There is no doubt that this is a mandatory provision, without it an imposition of a tax will be illegal. Ismail Vs CGIR Further his reasons must be communicated at or about the time he sends his assessment on an estimated income. Any later communication would defeat the remedial action intended Case: - Samarakoon C.J. The reason so communicated must be specific and not vague or speculative. It has also been subsequently held that reasons must be differentiated from conclusions and that a statement such as because of your accounts are unsatisfactory is not a reason but a conclusion. New Portman Ltd V W. Jayewardene and others Where however, an assessment has been annulled by court on the grounds that this provision under sec 163(3) to communicate reasons in writing has not been complied with, it is still open and lawful under sec 163(6) for an assessor to make where necessary, a further assessment in place of the assessment so annulled. However, such further assessment is limited to only one assessment and no further assessment or additional assessment can be made. Sec Time Bar for Assessments For Y/A 2010/11 onwards Assessor cannot issue assessment (From 30 Nov of succeeding Y/A) 1. If return is filed on or before 30 Nov due date After 2 Years Sec 163(5) a 2. If return is not filed on or before 30 Nov or not filed After 4 years Sec 163(5) b 3. In the case of fraud, evasion or willful default No time limitation Eg: - For the Y/A 2011/12 not file return on due date which is November 30, Then time limit would be November 30, For Y/A 2006/07 and 2007/08 1. If return is filed on or before 30 Sept due date After 18 Months 2. If return is not filed on or before 30 Sept or not filed After 3 years 3. In the case of fraud, evasion or willful default No time limitation Exceptions The time bar on making assessment will not apply in the cases of o Arrears of salary received: o Excluded interest subsequently received-sec 25(4)(c): o In the case of executor by reason of an incorrect statement-sec 72 proviso(b) o Fraud, evasion or willful default. Sec 163(5) 13

14 12. Finality of an Assessment An assessment issued is final and conclusive as regards the amount of assessable income in the under mentioned circumstances. (a) Where no valid appeal has been lodged within 30 days after the date of the notice of assessment as regards the amount of the assessable income: or (b) Where an appeal against an assessment is dismissed on the failure of the appellant or his authorizes representative to attend at the hearing: or (c) Where agreement has been reached as to the amount of such assessable income: or (d) Where the amount of the assessable income has been determined on appeal. Exceptions This section does not prevent An assessment or additional assessment being made which does not involve re-opening any matter which has been determined on appeal: Revising an assessment where interest is unpaid or irrecoverable-25(4)(a) Revising any tax charged in default objected to under Sec 177(3) Sec Penalty for Incorrect Returns (a) Where an assessment made exceeds the amount of the assessable income given in a return and the assessment is final and conclusive under Sec171, a penalty may be imposed by the Commissioner General for making an incorrect return: (b) Such penalty may be imposed unless the person proves that there is not fraud or willful neglect: (c) The penalty is a sum not exceeding an aggregate of Rs 2,000and twice the tax on the excess. Sec 172(1) 14. Appeal for Penalty on Incorrect Returns (a) A person may appeal against such penalty within 21 days to the Board of Review. Sec 172(2): (b) Such an appeal should state the precise grounds of objection Sec 172(2) (c) The Board of Review may confirm, reduce, increase of annul the penalty imposed. Sec 172(3) (d) Any increase in such penalty however shall not be in excess of the maximum amount which the Commissioner-General is empowered to impose. Sec 172(3) 15. Penal Provision Any auditor or tax practitioner who in the discharge of his professional duty deliberately misinterprets any provision of the Act or Regulation, Rule or Order made would be guilty of an offence and conviction before a magistrate is liable to a fine not exceeding Rs. 50,000 or 6 months imperilment or both. (Sec 204 A, Sec 48 Amd Act No 22 0f 2011) 16. Interpretation committee The CGIR is required to appoint a committee comprising of senior officers of the department mandated to interpret the provision of the Acts administered. Such committee is to issue necessary guidelines and instructions required to ensure uniformity regarding such interpretations. Interpretation within one month 14

15 with effect from April 01, 2013 (Sec 208 A, Sec 54 Amd Act No 22 of 2011) Part II of Admin Provision Appeals & Appeals settlement process 1 Assessment Accepted - Final 01 2 Not Accepted No Appeal within 30 days - Final 02 3 Appeal Sec 165 (1) (3) a. In writing address to CGIR b. Within 30 days from the date of assessment, sent by post is deemed to have been served on the day succeeding the day on which it would have been received in the ordinary course by post. Sec 194 (3). Thus in determining the 30 day limit, a grace period of 3 days can be claimed. c. Should precisely state the grounds of appeal d. Where the assessment has been made in the absence of a return the appeal shall be sent together with a return duly made. e. Proof of the payment of the tax as per return together with any penalty up to the date notice of assessment. Eg. Assessment Rs. 4Mn, Tax declared Rs. 400,000/- to be valid appeal should pay Rs. 400,000/- + penalty, Rs. 4Mn can holdover - pending appeal settlement Acknowledgement of appeal within 30 days from appeal, the date of acknowledgement is deemed to be the date of receipt of such appeal. Tax in dispute & Receipt/ Holdover of Tax The full tax on the assessment under appeal is payable on the due date notwithstanding the appeal However, CGIR is empowered to hold over the tax in dispute or part of such tax till the appeal is determined. Sec -173 (6) Such discretion to hold over tax lies entirely with the commissioner general. He may Revoke or revise such hold over order if he considers that the tax is likely to be irrecoverable or that the appellant is unreasonably delaying the prosecution of the Appeal. Sec 173(7). Note : - Late appeal can be accepted if that person Sec 165 (6) a. Not in Sri Lanka when assessment issued b. Other valid reason - Sickness etc. 4 Appeal before the assessor other than the assessor who made the assessment on the under appeal. 15

16 On the receipt of valid appeal CGIR will refer Necessary adjustments and Settlement by an agreement Sec 165 (7) Agreed - Final 03 If no agreement is reached between the appellant and the Assessor 5 Appeal before the CGIR Sec 165 (8) Every appellant or authorized representative should attend for hearing If the appellant fails to attend in person when required the CGIR may dismissal the appeal (unless valid reason) - Final 04 CGIR is empowered to # adjourn such hearing from time to time # Summon and examine any witnesses able to give evidence # Request any person to produce or transmit any documents After the hearing CGIR may give the determination in writing Confirm Reduce Agreed with the determination - Final 05 Increase or Annual the Assessment Such determination has to be made within 2 years from the date of receipt of appeal Sec 165 (14) Appellant or authorized representative dissatisfied with the determination a. should communicate CGIR in writing b. within 30 days from the date of determination Upon such communication (dissatisfaction) CGIR should transmit in writing to the appellant his reasons for determination (within one month from the date of determination) Then appellant or his authorized representative may within one month of such transmission, appeal to The tax appeal commission. Note: - CGIR is also empowered to refer any valid appeal straight to the tax appeal commission without his Hearing the appeal Sec Hearing before tax appeal commission Tax Payer/Appellant 1.Appeal should be addressed to secretary of the tax appeal commission 2.Within 30 days from the commissioner General determination 3. It should be in writing 4. With the prescribe ground for the appeal and a copy of CGIR s determination 5. Documents which produced at the time of Commissioner General Hearing can be produced to tax appeal 16

17 Commission, other than said documents; appellant has to obtain prior approval of CGIR % of outstanding tax has to be paid or produce bank guarantee by the tax appellant in order to start the Case, it will refund once the appellant win the case. Commission is required to make its determination or express its opinion with 275 days from the date Of commencement of the hearing of appeal. Tax Appeal Commission 1. Tax appeal commission has to give 42 days written notice to Commission General Inland Revenue and Appellant for the hearing. 2. There is a time bar for the tax appeal commission which is 1 ½ years from the date of 01 st hearing day 2. All appeals are heard in camera 3. The onus of proof that the assessment as determined is excessive lies on the appellant 4. After hearing the commission may 1. Confirm 2. Reduce 3. Increase 4. Annul the assessment or 5. Refer the case to the CGIR with the opinion of commission, then CGIR has to revise the Assessment on the basis of commission s opinion. 7 Appeal to the Court of Appeals a. by the appellant or CGIR, if he is not satisfied with the decision, require the commission to state a case for the opinion of the court of appeal within one month of the decision of commission b. the stated case has to be transmitted to COA within 14 days of the receipt c. two or more Judges of the court of appeal shall hear and determine the question of law arising on the state case d. the court of appeal may pending the determination of the case, make an interim determination as regards the amount of tax recoverable of the tax in dispute, on a report made by the CGIR e. Where the court makes an interim determination, it may order the appellant to pay full tax or part thereof pending final determination of the appeal. Any excess payment arising from the final determination shall be refunded to the appellant. Sec 170(7A) Court May Confirm, reduce, increase or annual the assessment determined by the Commission; or Remit the case to the commission with the opinion of the court. The commission shall revise the assessment as the opinion of court may require. 17

18 8 Any party enable to appeal to the Supreme Court against any order of the Court of appeal Part III of Admin Provision Income tax payment under self assessment Sec 113 (1) dividend Tax 10% & Deemed Dividend Tax at 15% Investment Fund All bank and financial institutions have to invest 5% of taxable income in an investment fund established under central bank guidelines on or before the same dates specified in Sec 113 (5) This would be for a period of 3 years from 1 April 2011 for an established bank or for other from sate of establishment. Direct Assessment Where a person liable to tax for any year of assessment has not paid tax or paid less tax than the proper amount, the assessor will assess the amount of tax payable and give notice of such assessment. Sec163 (1) The tax so charged together with the accrued penalties are payable forthwith. Tax In Default 1. Quarterly tax or any part not paid on or before the due date 2. Tax payable on assessment not paid before the date specified in the notice 3. Partnership tax installments not paid on or before the due date. Tax as per the assessment to be paid irrespective of the appeal, unless the CGIR order that the tax be held over (hold over) pending the determination and such amount is not a tax in default. CGIR can revoke the hold over order (by issuing a fresh notice) if he is in the opinion that the tax is irrecoverable or the appellant is delaying the purposely or the tax is likely to due. In the final determination of an appeal to be given with the date thereafter tax in default. Notice to Defaulter Before taking proceedings to recovery any tax in default, a notice in writing is issued to the defaulter stating the particulars of such tax and the action that is being contemplated to recover such tax Sec 177 Notice may issue to the defaulter stating the steps taken for recovery within 14 days of such action. Sec (2) A defaulter is allowed at this stage a last chance to object against the tax so charged. He could make an objection within 30 days of such notice. The CGIR may consider such objection and revise the tax notwithstanding the finality provisions of Sec 171. Sec 177 (3) Any excess tax recovered may be refunded notwithstanding the limits under Sec 200. Such refund is limited only to the tax recovered under the recovery provisions Sec 177 (4) In respect of a corporate body manager, secretary, any director or other principal officer is legally considered as the defaulter unless he proves the contrary of an un-incorporated body, the partner or any other officer bearer is considered as the defaulter unless the contrary is proved to the satisfaction of CGIR. Recovery of Tax in Default 1) Seizure of property 1. Not affect the assets sold prior to seizure 2. Immovable property the tax is not rank prior to any lease or encumbrance registered prior to registered prior to seizure 3. Movable property where tax for more than one year as in default tax for one year selected by the CGIR 18

19 shall rank priority others are unsecured debts 4. The CGIR may appoint persons to be tax collectors Sec -178 (1) 5. The CGIR may issue a certificate to a Govt Agent, Asst Govt Agent, Fiscal, Deputy Fiscal or tax collector for such purpose 6. The sum realized by sale shall be applied 1. Firstly in payment of costs and charges of seizing, keeping and selling the property; 2. Secondly in satisfaction of the tax in default, and any balance shall be paid to the owner. Sec 178 (2) 7. The CGIR may also issue a certificate to a relevant district court, which will direct the fiscal to seize and sell the property of a defaulter Sec 178 (3) 2) Recovery through Magistrate s Court I. The CGIR may file plaint in court seeking the recovery of tax in default. Action could be filed in the District Court of Colombo (Tax Court) or in the magistrate s Court of the area where the defaulter resides. II. The tax in default may be imposed as a fine by the magistrate. The defaulter of such fine could be sentenced to imprisonment. Sec 179 3) Recovery out of Debts The CGIR may issue notice on a person who owns or holds money for or on account of the defaulter. Such a person is one who Owes or is about to pay money to the defaulter or his agent, or Holds money for or on account of the defaulter or his agent, or Holds money on account of some other person for payment to the defaulter or his agent, or Has authority from some other person to pay money to the defaulter or his agent. Sec 180 (1) The person on whom the notice is served is required to pay the CGIR any moneys which are in his hands or due from him or are about to be paid by him at any time within a period of 3 months. Where a person to whom such a notice is issued is unable to comply with the order, he has to inform the CGIR in writing within 14 days apprising him of the facts failure to do so may result in the tax being recovered from such person by all means provided for in the Act. 4) Joint Accounts The CGIR is empowered to issue notice to banker or other financial institution where a joint account is held by the defaulter to pay tax in default. When the other holder disagree with that he may make a claim within 02 weeks CGIR will consider such claim and if satisfied make order to refund as the same. Any joint account holder who is dissatisfied with the CGIR s order may institute action in the District Court within 3 months for the recovery of any moneys wrongly paid by the bank. 5) Recovery out of an Employee s Remuneration Notice may be issued to an Employer to deduct tax in default in monthly installments. An employee leaves or is about to leave the entire amount in default or any balance thereof has to be deducted and remitted to the CGIR. Where employer is unable to comply with such order he has to inform CGIR forthwith giving his reasons. Where an employer has failed to do so and not remitted such amounts. - Within 14 days from which the deduction should have been made; or - Could have been deducted from the monthly remuneration The employer will be personally liable for the whole of the tax in default. Sec 182 6) Prevention of persons leaving Sri Lanka 19

20 The CGIR is empowered to prevent any person from leaving the island without paying his income tax due Sec 188 7) Other means of recovery This include - Recovery from the assets of partnership. Sec Recovery from the beneficiary s tax from the trustee or executor Sec 185 and 186 CGIR has authority to recovery taxes in default by more than one means simultaneously Sec 189 8) Transfer of immovable Property in lieu of payment Any person liable to pay tax may apply to transfer any immovable property owned by him to the government in lieu of income tax payable in cash. The CGIR may allow such application after considering the feasibility of managing such property after transfer. Where the agreed value of the property exceeds the amount of tax payable, the excess is deemed a donation to the government. Sec 181 Time limits for recovery taxes in default Taxes in default have to be recovered before the expiry of 5 years from the end of the Y/A in which such tax was charged or has become final and conclusive. No default tax can be recovered after this time limit. Sec 193 Action for recovery under Sec 178, 179, 180, 181 or 182 cannot be resorted to after the time bar period. Sec 193 Where any tax hold over becomes payable either wholly or partly on settlement of an appeal, such amount is to be recovered within one year from the date of settlement of the appeal, unless it has been taken to the court of appeal. Sec 173 (13) Refunds When refund arises Taxpayers are entitled to refunds of tax paid in excess in following circumstances a) Excess due to any error in the assessment or the return on income. Sec 200 b) Any excess deduction made by the employer under PAYE scheme c) Any excess arising from loss on cessation of trade, business, profession or vocation Sec 32 (6) d) Any excess deduction of tax at source from dividends e) Any excess on revising an assessment involving irrecoverable interest Sec 25(4)(a) f) Any excess tax paid any person on interest is refundable other than deducted under sec 133 & 136 g) Excess tax deducted from foreign entertainers and artistes over any tax payable by such person. h) Any excess penalty paid over that due Sec 200 (4) i) No refund of income tax paid by deduction or otherwise an the whole or part of a person s income is due if such income is not included in his assessable income for that year of assessment. Time limit for claims a) A claim for a refund has to be made in writing within 3 years of the end of Y/A in which refund is due. Sec 200 (1) b) Nothing in Sec 200 however operates to a. Extend or reduce any time limit for appeal or repayment specified in any other section b. Validate any objection or appeal which is otherwise invalid c. Authorize the revision of any assessment or other matter which has become final and conclusive Sec 200 (1)(a) 20

21 c) Where a person could not make a claim within the 3 years time limit period, a claim may be within one year from the end of the year of assessment in which such deduction was made. Sec 200 (1)(c) d) A refund arising in consequence of the reduction of an assessment on appeal will be made any claim being made for it. e) Any refund arising to any person are to be credited directly to a bank account of such person (Sec 200 (9) ) Where a person death, incapacity, bankruptcy, liquidation or other cause Executor, trustee or receiver are entitled to claim refund Interest on refunds Where a person entitled to a refund has not been paid, he is entitled to interest for such refund remaining unpaid The rate of interest is 1% for each month for which the refund remains unpaid Sec 201 Tax Holidays & Concessions Rationale of Holidays & Concessions The rationale for the granting of tax holidays and concessions in the Inland Revenue Act is that there are expected to simulate investment both local and foreign. This is based on the assumption that taxation is a determination of investment behavior and has an effect on the allocation of resources. The have been in existence in the Sri Lanka Tax Acts since 1951 and particularly since 1977, where private investment was given the primary role in economic development in the context of an open market oriented economy. The role of tax incentives and its effectiveness in stimulating investment is however, controversial. In the context of broadening the tax base and the lowering of effective rates, their role has diminished since Still a considerable number of tax holidays and concessions exist in the tax statute particularly relating to large scale infrastructure projects, advanced technology, tourism agriculture and the export sector etc. Section Sec - 7 (b) xxviii i ii iii Description Exemption applicable for the profit & income of off shore companies Engaged in international operations Owned or chartered by such company and Deemed to be a Sri Lanka ship under the merchant shipping Act However exemption does not applicable to Dividend and Interest included in profit The exemption does not apply to profit arising from the carriage of passengers, mails, livestock and goods to or from port in Sri Lanka Sec - 7 (b) lxii lxiii Exemption from income tax is granted in respect of the profits and income, other than dividends and interest, of Institute of Certified Management Accountants of Sri Lanka, established by Act No 23 of 2009 The fund established by the National Child Protection Authority Act No 50 of

22 Sec - 7 (h) Sec - 7 (j) Sec - 7 (k) Co - operative societies profits and income of registered co-operative societies under the co-operative societies law No 5 of 1972 and Lak Sathosa Ltd - exempt from tax 10 years tax holiday from April 1, 2011 to Sri Lanka Airlines & Mihin Lanka 5 years tax holiday from April 1, 2011 to CEB, NWSDB, CPC, SPA, if 25% gross profits are paid to government Sec - 13 (i),(ii), (j) Sec - 13 (b) (iii) Sec - 13 (bb) Sec - 13 (ddd) the profit & income arising to any person from the sale of gold, gems or jewellery is exempt from tax 1 Export of such items 2 Sales in Sri Lanka for foreign currency by authorized persons 3 the cutting and polishing og gems which are brought to Sri Lanka and exported after cutting and polishing Note: - "Gems" include diamonds and geudas. Department ruling 1998 December Profit & income from sales made in foreign currency at gems & Jewellary exhibitions - exemption Department ruling 1998 December Payment received for the sales of gems & jeweler though international credit cards treated as payment made in foreign currency - Department ruling December 1998 Profits and income for the services rendered outside Sri Lanka 1 Where a resident company or partnership # carrying on any trade, business or vocation # earns profits and income in foreign currency # from services rendered outside Sri Lanka # on construction project after 01/04/2006 and # remits such profit (less reasonable exp) through a bank to Sri Lanka # or is respect of off-shore business not involving any goods manufactured or produced in Sri Lanka or imported into Sri Lanka # Is in the business of exporting any goods brought to Sri Lanka on a consignment basis and re-exported without being subject to any process or manufacture (other than packing or labeling) Such profits & income exempt from tax from 01/04/2011 Where resident company or partnership 1 carrying on any trade, business, or vocation 2 earns profits & income in foreign currency 3 through the manufacture of textile, leather products, footwear, or bags 4 from suppliers made to any buyer who has established his headquarter in Sri Lanka for Management, Supply Chain & billing Such profits & income exempt from tax from 01/04/2011 Where any profits and income are earned in foreign currency such profits and income are exempt if 22