SALIENT FEATURES OF PROPOSED INLAND REVENUE ACT

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Lindsey Collins
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1 SALIENT FEATURES OF PROPOSED INLAND REVENUE ACT

3 The parliament introduced a new income tax bill on 07 th September 2017 This bill is expected to be implemented on the 1 st of April The features of the new bill including its terminology are different to what tax payers are conversant with. In this booklet we attempt to bring to your attention important changes of the proposed Inland Revenue Act. 01

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5 CONTENTS PART ONE: SOURCES OF INCOME a). Employment Income b). Business Income c). Investment Income PART TWO: ADMINISTRATION PROCEDURES

6 SOURCES OF INCOME PART ONE The Present 10 sources of income have been regrouped under 04 sources. a). Employment Income b). Business Income c). Investment Income d). Other Income Employment Income Key Changes to the Employment Income The Maximum rate increased from 16% to 24%. Income slabs modified. Current Provision Proposed Provision Employment Income Rate Employment Income Rate First Rs. 750,000 Nil First Rs.1,200,000 Nil Next Rs. 500,000 4% Next Rs. 600,000 4% Next Rs. 500,000 8 % Next Rs. 600,000 8% Next Rs. 500,000 12% Next Rs. 600,000 12% Balance 16% (over Next Rs. 600,000 16% Rs.2.25 Mn) Next Rs. 600,000 20% Balance 24% (over Rs.4.2 Mn) List of exemption given in the exciting Inland Revenue Act has been removed. New Exemption has been Introduced reimbursement or payment of medical expenses available to all fulltime employees on equal terms. 04

7 Business Income The law specifies that gains and profits from business should include the following: a). Service fees; b). Consideration received in respect of trading stock; c). Gains from the realization of capital assets and liabilities of a business; d). Gains on realization of depreciable assets of a business; e). Amounts derived as consideration for accepting a restriction on the capacity to conduct a business; f). Gifts received by a person in respect of the busines g). Amounts derived that are effectively connected with a business and that would otherwise be included in calculating a person s income from an investment; and h). Other amounts to be included under the Act. Tax rates for business have been revised -Lower Rate 14% -Standard Rate 28% -Higher Rate 40% Sector/Institution Proposed Rate Prevailing Rate SMEs 14% 12% Exporters of Goods and Services 14% 0%/12% Agriculture 14% 10%/12% Educational Services 14% 10% Promotion of Tourism 14% 12% Information Technology Services 14% 0%/10%/28% Liquor/Tobacco/Betting and Gaming 40% 40% Others 28% 0%10%/12%/28% In calculating income from business, the following are deductible. a). Expenses to the extent they are incurred during the year. b). Incurred in the production of income. 05

8 14% 28% 40% SMEs Exports Education Agriculture Promotion of Tourism and IT All other industries including banking finance insurance leasing and related services trading and unincorporated bodies Betting & Gaming Liquor & tobacco Key Sectors where the rate of tax is increased from 10% or 12% to 28% Construction Services Healthcare Services Warehousing Agro processing, animal feed and fishing Alternative energy including mini hydro power projects(on expiry of 3 years) Clubs and association Losses The current laws provide business loss can be deducted but the deduction is limited to 35% of assessable income. According to the new bill the loss can be deducted in full. A remaining loss can be carried forward up to 6 years. 06

9 Depreciation Allowances Depreciation allowance rates have been revised. Asset category Proposed Act Current law Computers and data handling 20% 25% equipment together with peripheral devices. Buses and minibuses, goods 20% 20% /33 1/3% vehicles; construction and earth-moving equipment, heavy general purpose or specialised trucks, trailers and trailer-mounted containers; plant and machinery used in manufacturing Railroad cars, locomotives, 20% 20% /33 1/3% and equipment; vessels, barges, tugs, and similar water transportation equipment; aircraft; specialised public utility plant, equipment, and machinery; office furniture, fixtures, and equipment; any depreciable asset not included in another class Buildings, structures and 5% 10% similar works of a permanent nature Intangible assets, excluding goodwill The actual useful life of the intangible asset, or where the intangible asset has an indefinite useful life 5% 10% The threshold for SME sector is 500 Mn under the new act. 07

10 Investment Income Investment income categories. -Dividend -Interest -Royalties -Annuities -Gains from the realization of investment assets(capital gain) -Consideration for accepting restriction on the investment assets. -Gifts received in respect of the investment. -Winning from betting and gambling. Dividend The definition of the dividend has been brodern. However the basis of the taxation is remain. WHT on dividend is 14%. Dividend distributed out of foreign dividend received is taxed at 14%. Exemption for Dividend Dividend received by a non resident is exempt if the paying company has invested more than $ 1000 Mn or depreciable assets. Foreign dividends is exempt if there is a participation of at least 10% of the value of shares in the foreign company. Interest Interest income up to Rs.1.5Mn for senior citizen is exempt. 5% WHT will be charged on -- Individuals -- Club And Associations -- Employee's Trust Fund -- Providend Funds -- Pension Funds 08

11 -- Charitable Institutions exempt for care of children and elderly or disabled. -- Financial Institutions -- Companies other than financial institution -- Foreign currency accounts maintained by corporate(fcbu & NRFC) Exept for individuals for all of the other categories given above, interest income will form part of the assessable income and the WHT credit will be given. Capital Gain Capital gains tax has been introduced with exemptions. The tax will be charged when investment asset are realized. The proposed rate is 10%. What are Investment assets? An investment asset is a capital asset held as part of an investment. A capital asset is defined to mean. -Land or building -A membership interest in a company or partnership -A security or other financial asset -An option, right or other interest in the above assets -But excludes trading stock or a depreciable asset Therefore an investment asset is any of the above assets held as part of an investment and not as an asset connected to the business. Realization of investment assets Realization of an asset means when the owner of that asset parts with the ownership of that asset by Sale, Transfer, exchange, distribution, cancellation, redemption, destruction, loss, expiry, expropriation or surrender 09

12 When a person ceases to exist including the death of an individual there would be a realization of that asset immediately before This would include gifting of an asset. Gains from realization of assets How is the gain computed Gain = Consideration Cost of the asset Cost of an investment asset held as at September 30,2017, shall be equal to the market value at that time. Gains from realization of assets Cost of the asset includes -Expenditure to acquire -Expenditure on construction -Expenditure in altering, maintaining and repairing -Advertising -Transfer taxes -Duties -Expenditure in preserving or defending title -Service fees for retaining accountants, lawyers for the above purposes Consideration The consideration is defined to mean the amount received or receivable for the asset. Only where consideration is given in kind-the market value must be considered. Exempt amounts shall be excluded from the consideration. 10

13 Exemptions No tax will be imposed if it s the principle place of residence if it is owned continuously for 3 years before disposal and lived in for at least 2 years. Gains by a resident individual from the realization of investments assets that does not exceed Rs 50,000/- per asset and does not exceed Rs 600,000/= per annum in total. Gains from the realization of assets consisting of shares quoted in any official list published by any stock exchange licensed by the SEC Sri Lanka. Exclusions In the following cases the Act deems that there would be no capital gain from the realization of an asset as it deems the amount realized from the transfer to be the net cost of the asset. Transfer of an asset to a spouse or former spouse due to death or part of a divorce settlement (where the spouse specifically asks for this exclusion to apply in writing). Transfer on death the realization of any asset upon the death of an individual. Capital gains from realization of investment assets Transfer to an associate where the associate is defined to include the individuals child, spouse, parent, grandparent, grandchild, sibling, aunt, uncle, nephew, niece or first cousin including by way of marriage or adoption and where the asset is an interest in land or building. 11

14 Losses from realization of assets Unrelieved losses from a business may be deducted in calculating investment income. Unrelieved losses from an investment can be deducted only in calculating income from investments. A gain from the realization of an investment asset cannot be reduced by a loss on the disposal of another investment asset. ********************************************** 12

15 PART TWO ADMINISTRATION PROCEDURES Changes to the administration procedure has been introduced. Time bar provision for raising assessment has been extended to 4 years. The proposed Law does not mandate the Commissioner General to give reason when the return is not accepted. Appeal procedure has been revised the word appeal has been replaced by the term review. ********************************************** 13

16 This publication was prepared to presenttime-sensitive information affecting our clients. Hence, it has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. 14

BUDGET An Over View

BUDGET An Over View BUDGET 2017 An Over View 1 BUDGET PROPOSALS 2017 1. Personal Income Tax Employment Income 1.1 Tax Free Threshold Tax free threshold on employment income will be increased from Rs. 750,000 to Rs. 1.2Mn.