Inland Revenue (Amendment) Act No. 9 of 2008 Explanatory Notes ...

Inland Revenue (Amendment) Act No. 9 of 2008
Explanatory Notes and Instructions
1. Exemptions / Concessions
1.1 Institutions
(Amendments made to section 7 of the principal enactment)
- Co-operative Societies ( sections 7(b)(xvii) and 7(h) of the Principal
enactment)
The profits and income from all the sources of registered co-operative societies
(including co-operative rural banks) within the meaning of the Co-operative
Societies Law No. 5 of 1972 are exempt from income tax for the five years of
assessment falling within the period 01.04.2008 - 31.03.2013.
- Clause 2 (3) of the Amendment Act
The sub- paragraph (xvii) of paragraph (b) of section 7 which provided for a
specific exemption to co-operative societies on any business specified by the
Minister by notice published in the Gazette is kept closed for the above period of
five years. This provision will re-activate effective from April 1, 2013.
- Clause 2(1) of the Amendment Act
- Api Wenuwen Api Fund ( section 7 (i) of the principal enactment)
The profits and income from all sources of “Api Wenuwen Api” Fund
established by the Api Wenuwen Api Fund Act No. 6 of 2008 are exempt
from income tax with effect from April 1, 2008.
- Clause 2 (3) of the Amendment Act
The exemptions referred to above are extended to cover the withholding tax on
interest on money deposited by such co-operative societies or Api Wenuwen Api
Fund. [The paragraph (a) of subsection (3) of section 133 of the principal
enactment is amended by the insertion of sub -paragraphs (iv) and (v) to provide
for such exemption on withholding tax].
- Clause 41(1) of the Amendment Act
1.2 Employment income
(Amendment to section 8 of the principal enactment)
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- Employment income of Non – citizen experts { Amendment to
paragraph (d) of section 8}
(i) The present exemption applicable on employment income from Sri Lanka
of experts who were brought to Sri Lanka by BOI undertakings which are
exempt from income tax under an agreement entered into with BOI prior
to December 31, 1994 during the period of such exemption, is closed with
effect from April 1, 2008. (However, this amendment has been reverted
by the subsequent amendment and the exemption is remained unchanged
as if an amendment was not made).
- Clause 3(1) (b) of the Amendment Act
(ii) A new exemption is introduced with effect from April 1, 2008 in respect
of emolument arising in Sri Lanka of non citizen experts. {Insertion of
paragraph (dd) of subsection (1) of section 8}.
The emoluments arising in Sri Lanka and any income not arising in Sri
Lanka of any non citizen individual who is an “expert” is employed in Sri
Lanka;
- by any undertaking entered into agreement with the Government, being
an agreement which provides for exemption of such emoluments ; or
- by any strategic development project gazetted by BOI under Strategic
Development Projects Act No 14 of 2008.
Up to now there are no any approval granted for strategic development
projects. Therefore, this provision is applicable only to “experts” work for
undertakings entered into agreements with the Government, being agreements
in which the agreement of the Government to exempt such experts is included.
For the purpose of this exemption, the expert has been defined to mean an
individual who has expertise in such field as may be determined by the
Commissioner General, as being a field in which sufficient expertise is not
available among the citizens of Sri Lanka. The approval of the Commissioner
General, to treat an individual as an expert, is a requirement for the
exemption.
- Clause 3(1) (c) of the Amendment Act
- Employment income of employees of Government institutions.
The exemption of one half of the official emoluments of employees of
Government institutions [referred to in paragraph (b) of subsection (1) of
section 8] is restricted to operate only up to 31.03.2008. A relief on the
official emoluments has been provided through a tax credit mechanism. This
is explained later in item 6.
- Clause 3(1) (a) of the Amendment Act
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- Grant of shares or share options to employees by the employer
The requirement for the scheme under which shares or share options are
offered to employees, to be uniformly applicable to all employees of an
employer to qualify for exemption, is revised replacing it with the requirement
for the scheme to be a reasonable one. The amendment is made to paragraph
(p) of subsection (1) of section 8.
The reasonability is decided based on the specific criteria (based on a set
of guidelines). The concurrence of the Commissioner General should be
obtained by the respective employer for the scheme that it is reasonable in
his opinion. If so, the benefit is exempt.
Any other circumstances (i.e. where the scheme is not reasonable) the
liability arises at the time of the allotment or vesting of shares to the
respective employee. Before granting exemption, verify from the
Secretariat whether the Scheme is reasonable in the opinion of the CGIR.
- Clause 3(1) (e) of the Amendment Act
1.3 Exemption of certain Interest income
(Amendment to section 9 of the principal enactment)
(i)
The current exemption of senior citizens on interest up to Rs.
200,000/- from deposits in State Banks is extended also to interest
from deposits in Co- operative Societies within the meaning of the
Co operative Societies Law No 5 of 1972. (Section 9(h) is amended).
- Clause 4 (1) of the Amendment Act
(ii) The interest or discount arising or accruing to any non-resident
citizen of Sri Lanka, who invests in Motherland Development
Bonds denominated in foreign currency and issued by or on behalf
of the Government of Sri Lanka is exempt from income tax. Section
9 (l) is inserted to the principal enactment.
- Clause 4 (3) of the Amendment Act
(iii) The interest accruing or arising on or after April 1, 2008 , from any
investment made outside Sri Lanka to any person resident in Sri
Lanka , if such interest is remitted to Sri Lanka through a bank.
Section 9 (m) is inserted to the principal enactment.
- Clause 4 (3) of the Amendment Act
1.4 Exemption of certain Dividend income
(Amendment to section 10 of the principal enactment)
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Any dividend paid on or after April 1, 2008, by a company not resident in
Sri Lanka to any shareholder resident in Sri Lanka is exempt from income
tax, if such dividend is remitted to Sri Lanka through a bank. Section 10
(j) is inserted to the principal enactment.
- Clause 5 of the Amendment Act
1.5 Exemption on income accruing to the owner of certain low
cost houses constructed (Amendments to section 11 of the
principal enactment)
The present exemption on income accruing to the owner of any house
constructed, (rent or the Net Annual Value) is restricted to such houses,
the construction of which is completed prior to April 1, 2008.
Accordingly,
(i)
if the construction is completed prior to April 1, 2008 , the
income from rent or net annual value, as the case may be, from that
house is exempt from tax for the year of assessment in which the
construction is completed and 4 subsequent years of assessment ,if
such house is used solely for residential purposes.
This exemption is extended to further two years of assessments, if
the floor area of that house is one thousand five hundred square feet
or less,
(i.e. the year of completion of the construction, and 6 years of
assessments immediately succeeding that year of assessment. )
(The amendment is made to subsection (2) of section 11 of the
principal enactment)
- Clause 6 (a) of the Amendment Act
(ii) The exemption of rent from or net annual value of any house, the
construction of which is completed on or after April 1, 2008 is
available to the owner only in respect of any house where the floor
area of that house constructed is 500 hundred square feet or less.
The period of exemption is 5 years of assessment. ie. the year of
assessment in which the construction is completed and four years of
assessments immediately succeeding that year of assessment, and the
house should be used only for residential purpose.
(The amendment is made to subsection (2) of section 11 of the
principal enactment)
- Clause 6 (b) of the Amendment Act
1.6 Other Exemptions (Trade, business, profession or vocation)
(Amendments to section 13 of the principal enactment)
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(i)
Profits and income from services in the course of a profession or
vocation.
Profits and income earned in foreign currency
- by any resident company, resident individual or partnership in Sri
Lanka
from Services rendered in or outside Sri Lanka in the course
of carrying on of any profession or vocation , as is specified by
the Commissioner General of Inland Revenue by notice
published in the Gazette
to a person outside Sri Lanka,
are exempt, if such profits and income (less reasonable expenses
where applicable) are remitted to Sri Lanka through a bank.
- New Paragraph, paragraph (ddd)is introduced to Section 13,
which covers the exemption by resident companies, resident
individuals or partnerships in respect of the profits and income
earned in foreign currency in or out of Sri Lanka from such
services listed in the gazette published by the Commissioner
General.
{It is important to note that the services provided in or outside
Sri Lanka should be the services Gazetted and the services
should be provided to a person or a partnership outside Sri Lanka
for which payments received in foreign currency should be
remitted to Sri Lanka (in foreign currency)}
The relevant Gazette is No 1565/19 dated 05.11.2008 and the
notice is applicable with effect from April 1, 2008.
- Clause 7 (1), (2), (3) & (4) of the Amendment Act
(ii) Profits and income from cutting and polishing of gems [Section
13 (ii) of the principal enactment]
The profit and income (Trade profits) arising from the cutting and
polishing of gems, which are brought to Sri Lanka and exported after
cutting and polishing is exempt from tax. This exemption was
applied even prior to the introduction of this paragraph as such cut
and policed gems are in fact exported.
The amendment clarifies this position.
- Clause 7 (5) of the Amendment Act
(iii) Interest received by a bank from loans given to new
undertakings referred to in section 24C - Section 13(xx) of the
principal enactment.
An amount equal to the interest payable to any bank in Sri Lanka in
respect of any loan granted , where the full amount of such loan is
invested in a new undertaking referred to section 24C is exempt from
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tax. A similar exemption is currently available on loans given to
undertakings located outside Colombo and Gampaha referred to in
sections 20 and 21 of the Act.
Section 24C referred to new undertakings located within the Eastern
Province.
- Clause 7 (6) of the Amendment Act
(iv) Payments made to outside bodies for the use of machinery etc. in
an approved project – Section 13(yy) of the principal enactment.
Any profits and income arising or accruing to any company,
partnership or body of persons outside Sri Lanka,
from any payment made for the use of any plant, machinery or
equipment supplied by such company, partnership or body of
persons
to a Government institution, public corporation or any other
undertaking
for the use on or after April 1 2008, in any project approved by
the Minister as being essential for the economic progress of Sri
Lanka
is exempt from tax.
- Clause 7 (7) of the Amendment Act
(v)
Profits and income of non-citizen employees, arising outside Sri
Lanka – Section 13(zz) of the principal enactment.
Profits and income arising outside Sri Lanka, of any non- citizen
individual employed in Sri Lanka, is exempt from income tax during
the period commencing from April 1, 2008 and ending on the date of
cessation of such employment.
This provision is introduced consequent to the removal of
concessionary rate of taxation of employment income of non citizens
deemed to be non resident under section 79(7), to avoid their outside
income (outside Sri Lanka) being taxed
- Clause 7 (8) of the Amendment Act
(vi) Profits from construction of low cost houses – Section 12(zzz) of
the principal enactment.
Profits from the construction of low cost houses are exempt, if
- constructed under any scheme approved by Urban
Development Authority or the National Housing Authority ;
- the floor area of each does not exceed 500 s.f ; and
- the sale of any such house takes place before April 1, 2013.
(The sum invested is a qualifying payment deductible without any
restriction. Refer item 5)
- Clause 7 (8) of the Amendment Act
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1.7 Tax Holiday for certain undertakings
1.7.1 Relocated undertakings (enjoying a tax holiday beyond
01.04.2009) – Section 21A of the principal enactment
The profits and income from trade or business of a company from any
relocated undertaking is exempt from income tax for the period of 5 years
commencing from April 1, 2009.
Relocated undertaking is an undertaking:
- of which, profits and income are exempt beyond April 1, 2009
under any other provision of Inland Revenue Act or under a BOI
agreement;
- which was being carried on by that company prior to November
01, 2007 within Colombo or Gampaha District, with not less than
100 employees;
- relocated outside Colombo and Gampaha Districts and which
commences commercial operations not later than March 31, 2009,
employing not less than the number employed prior to November
01, 2007; and
- which incurred not less than Rs. 100 M, in the relocation.
The intention of the introduction of this tax holiday is to make provisions
to companies presently enjoying a tax holiday to relocate an undertaking
outside Colombo and Gampaha districts. As the commencement of the tax
holiday is April 1, 2009, such undertakings would be benefited.
(The sum invested is a qualifying payment deductible without any
restriction. Refer item 5)
- Clause 13 of the Amendment Act
1.7.2 New undertakings established in the Eastern Province (Section
24C) of the principal enactment.
Profits and income from trade or business of any new undertaking as
defined in section 24C is exempt for a period of 5 years commencing from
the year of assessment in which such undertaking commences to make
profits from transactions entered into in that year of assessment, or from
the commencement of the year of assessment immediately succeeding the
year of assessment in which such undertaking completes two years
reckoned from the date on which the undertaking commences to carry on
commercial operations, whichever occurs earlier.
For the purposes of this exemption, the new undertaking means an
undertaking:
- not formed by splitting up, reconstruction or the acquisition of an
undertaking that was in existence before November 7,2007;
- located within Eastern Province;
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- commenced commercial operations on or after November 7, 2007;
and
- by which the sum invested therein (other than in land) before April
1, 2010 is not less than Rs 30 M.
(The sum invested is a qualifying payment deductible without any
restriction. Refer item 5)
- Clause 17 of the Amendment Act
1.7.3 New undertakings located in a “lagging region” - Section 24D
of the principal enactment
Profits and income from trade or business of a new undertaking (other
than any specified undertaking) located in a lagging region is exempt
for a period of 5 years commencing from the year of assessment in which
such undertaking commences to make profits from transactions entered
into in that year of assessment or from the commencement of the year of
assessment immediately succeeding the year of assessment in which such
undertaking completes two years reckoned from the date on which the
undertaking commences to carry on commercial operations, whichever
occurs earlier.
For the purpose of is exemption:
New Undertaking means an undertaking:
- which commences commercial operations on or after April 1,
2008;and
- in which the sum invested in the acquisition of capital assets (other
than land) after November 7, 2007, but before March 31, 2010 is
not less than Rs 30 M.
Specified Undertaking means an undertaking engaged in the sale of any
article not produced or manufactured by such undertaking.
Lagging region means:
Any Divisional Secretaries Division other than such Divisions in the
Western Province.
Refer Gazette Extraordinary No 1546/5 dated April 22, 2008
(The sum invested is a qualifying payment deductible without any
restriction. Refer item 5)
- Clause 17 of the Amendment Act
1.7.4 Extension of last date for completing investment (Section 20
and 21 of the principal enactment)
The last date specified in section 20 ( new undertaking located outside
Colombo and Gampaha) and section 21 ( relocated undertaking outside
Colombo and Gampaha) for completing the investment to qualify for the
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espective tax holiday, is extended (from March 31, 2008) to March 31,
2009.
1.7.5 Limitation of the period of certain exemptions
(i) The 5 year period of tax exemption offered under the Inland
Revenue Act, in relation to undertakings referred to in the following
sections is limited to 3 years, if the period of exemption commences
after April 1, 2008.
- Exemption of profits and income of any company from any
specified undertaking.
(Section 17 of the principal enactment)
The exemption is for a period of 5 years commencing from the year
of assessment in which such undertaking commences to make profits
from transactions entered into in that year of assessment or from the
commencement of the year of assessment immediately succeeding
the year of assessment in which such undertaking completes two
years reckoned from the date on which the undertaking commences
to carry on commercial operations, whichever occurs earlier.
The said period of 5 years is restricted to 3 years, if the period of
exemption commences after April 1, 2008.
- Clause 8 of the Amendment Act
- Exemption of profits and income of any company from any
specified undertaking for small scale infrastructure projects.
(Section 19 of the principal enactment)
The exemption is for a period of 5 years commencing from the year
of assessment in which such undertaking commences to make profits
from transactions entered into in that year of assessment or from the
commencement of the year of assessment immediately succeeding
the year of assessment in which such undertaking completes two
years reckoned from the date on which the undertaking commences
to carry on commercial operations, whichever occurs earlier.
The said period of 5 years is restricted to 3 years, if the period of
exemption commences after April 1, 2008.
- Clause 10 of the principal enactment
- Exemption of profits and income of any company engaged in
research and development
(Section 22 of the principal enactment)
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The exemption is for a period of 5 years commencing from the year
of assessment in which such undertaking commences to make profits
from transactions entered into in that year of assessment or from the
commencement of the year of assessment immediately succeeding
the year of assessment in which such undertaking completes two
years reckoned from the date on which the undertaking commences
to carry on commercial operations, whichever occurs earlier.
The said period of 5 years is restricted to 3 years, if the period of
exemption commences after April 1, 2008.
- Clause 14 of the Amendment Act
- Exemption of profits and income of any venture capital company
(Section 23 of the principal enactment)
(a) The 5 year exemption commencing from the year of assessment in
which such undertaking commences to carry on commercial
operations, subject to fulfilment of certain conditions specified, is
restricted to 3 years, if the commercial operations of the company
commences on or after April 1, 2008.
(b) The exemption is restricted to the profits and income derived by the
venture capital company from any specified investment in any project
referred to in that section.
- Clause 15 of the Amendment Act
(ii)
The exemption of profits and income of a company for undertaking
carried on for specific infrastructure development projects referred to
section 18 of the principal enactment is restricted to any such undertaking
commenced on or before March 31, 2009,
The Amendment is made to section 18 of the principal enactment.
- Clause 9 of the amendment Act
1.8 Concessionary rates applicable on profits from sale of Gems
The taxation of profits from the sale of gems at any auction conducted by
The National Gem and Jewellery Authority (NGJA) established by the
National Gems and Jewellery Authority Act No 50 of 1993, is brought
under a withholding tax system (WHT) with effect from January 1, 2008.
The NGJA is required to deduct income tax at the rate of 2.5% from the
sale price of any gem sold at any such auctions.
Profits and income from the sale of any such gem is not subject to further
tax. (It is treated as final tax)
The NGJA is considered as a WHT agent for this purpose and the
provisions relating to collection of tax, remittances, keeping records, issue
of assessments, collection of default tax etc. as regards banks or financial
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institutions in the deductions of tax from interests are applicable to NGJA.
(with necessary modifications)
The CHAPTER XXA (section 161A) has been inserted in the principal
enactment, to make these new provisions.
- Clause 47 of the Amendment Act
1.9 Post tax holiday tax rates
Section 48 of the principal enactment that provided for concessionary rates
structure after the completion of tax holiday under certain sections has
been substituted with a new section 48. .
Under this new section 48, the concessionary rates are offered to the
following undertakings only if the respective tax holiday period is ended
in any year of assessment commencing on or after April 1, 2008.
(a) any specified undertaking referred to in sections 17, 18 or 19;
(b) any new undertaking referred to in sections 20, 22, 24C or 24D;
(c) any relocated undertaking referred to in sections 21 or 21A;
(d) any venture capital company referred to in section 23;
(e) any business referred to in section 24;
(f)
any new cinema or upgraded cinema referred to in section 24A; or
(g) any re-opened abandoned factory referred to in section 24B.
The concessionary rates are as follows:
1 st Year of assessment (commencing immediately after the tax holiday ends) - 5%
2 nd Year of assessment (commencing immediately after the tax holiday ends) - 10%
3 rd Year of assessment (commencing immediately after the tax holiday ends) - 15%
Thereafter-the normal rates
- Clause 25 of the Amendment Act
2. Deductions in ascertaining profits and income (Amendments to
section 25 of the principal enactment)
(i)
Capital allowances on a ship
An amendment is made to the paragraph (b)(ii) of the proviso to section
25(1)(a).
Accordingly, capital allowance is allowed only in respect of a ship
acquired on or after April 1, 2007 which is owned by such person.
As the charter charges are considered as an allowable expenditure subject
to the restriction specified in paragraph (p) of sub section (1) section 26,
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the allowance for depreciation will be a double deduction. Hence, the
provision for capital allowance in respect of any ship chartered is
removed.
- Clause 18 (1) (a) of the Amendment Act
(ii)
Deductibility of travelling expenses
The deductibility of travelling expenses incurred in the production of
income as specified in section 25(1)(k) is subject to the removal of certain
parts of the expenditure referred to in the proviso to that paragraph. The
amendment was made to remove an ambiguous situation created earlier.
Accordingly, the travelling expenses are allowable subject to the
conditions specified in paragraph (k) and expenditure of capital nature
specified as disallowable expenses in section 26 which is to be decided
based on the facts of the case.
Paragraph (k) of subsection (1) of section 25 of the principal enactment is
amended by deleting the proviso to the proviso of that paragraph.
- Clause 18 (1) (b) of the Amendment Act
3. Disallowance of certain expenditure in ascertaining profits and
income
(Amendments to section 26 of the principal enactment)
The definition of employee for the purposes of paragraphs (s), (t) and (u) of
section 26
The meaning of the “employee” referred to in relation the following expenditure
born by the employer on behalf of employees is same as in section 131.
- any expenditure or outgoing in relation to :
(i) any asset provided by such person to any employee to be used in the
residence of such employee;
(ii) any movable or immovable property given by such person to any
employee at a price, less than market value at the time of giving such
property;
(iii)
any loan , other than advance or credit granted to any employee which is
subsequently written off as a bad debt by such person.
(Here such person means the employer)
Accordingly, here the employee also includes any director of a company or
corporation, any working partner of a partnership and any person receiving
remuneration for past services performed by him or any other person.
- Clause 19 (1) of the Amendment Act
4. Deductions from total statutory income ( Amendments to section
32)
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(i)
The profits and income from which tax is deducted at source and not
subject to further taxation.
The following profits and income of any person arising from an
instrument or source already taxed will not form part of such persons
assessable income (and not subject to tax).
(i)
The profits and income of such person from the sale of any Rupee
Denominated Treasury Bond, purchased out of funds drawn from
any Treasury Bond Investment External Rupee Account (TIERA);
(ii) Interest accruing to the Credit Guarantee Fund of the Central Bank
of Sri Lanka, from any Treasury Bond issued under the Registered
Stocks and Securities Ordinance (Chapter 420) or from any Treasury
Bill issued under the Local Treasury Bills Ordinance (chapter 417) ;
(iii) Interest on which income tax has been deducted under section 95 and
accruing to any person or partnership out side Sri Lanka, on any
corporate debt security within the meaning of section 135, issued by
or on behalf of any company in Sri Lanka and purchased by such
person or partnership out of foreign currency brought into Sri Lanka
and converted into Sri Lanka currency for such purchase; and
(iv)
The profits and income from the sale of any gem on which tax has
been deducted by the National Gem and Jewellery Authority
(established by the National Gem and Jewellery Authority Act, No.
50 of 1993), under subsection (1) of section 161A of this Act.
- Clause 20(3) of the amendment Act
(ii)
Set off of losses incurred in the business of leasing [amendment to
32(5)(d)]
A loss incurred on or after 01.04.2008 in a leasing business cannot be set
off against any profits or income other than profits from such business.
- Clause 20(4) (c) of the Amendment Act
(iii)
Set off of losses after the completion of the tax holiday period of
certain undertakings
The sections 24A, 24B, 24C and 24D are included in subsection (6) of
section 32 so that the residue of the loss as at the end of the tax holiday
thereunder could be deducted after that completion of the tax holiday
period subject to the conditions specified in that subsection.
The amendment is effective with effect from April 1, 2008.
5. Qualifying payments (Amendments to section 34)
- Clause 20 (5) of the Amendment Act
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(i)
Donations to Api Wenuwen Api Fund [ 34(2)(b)(ix)]
Donations made to Api Wenuwen Api fund are qualifying payments
similar to the donations made to a Government Fund, and fully deductible.
Any balance can be carried forward and deducted until fully absorbed.
- Clause 21 (1) (a) of the Amendment Act
(ii)
Expenditure in local film industry
Expenditure incurred by any person in the production, at a cost not less
than five million rupees, of any film is treated as a qualifying payment and
deducted subject to a limitation. This deduction is increased from Rs. 25
million to 35 million with effect from April 1, 2008 ; and
The unabsorbed part of the expenditure after deducting ( subject to the
other conditions specified in section 34) can be carried forward and
deducted in the subsequent years of assessments until the total cost is
deducted, if such expenditure is incurred on or after April 1, 2008,
(subject to the same conditions).
Section 34(2)(h), (4)(a)(iii)(B), (4)(b)(ii)(B), (5) and (6) of the principle
enactment have been amended to reflect the above changes.
- Clause 21(1) (b) ,(2) (b), (3) and (4) of the Amendment Act
(iii)
Expenditure in the construction and equipping a cinema.
Expenditure not exceeding twenty five million rupees incurred in the
construction and equipping of a cinema, being a cinema –
(a) in which the exhibition of cinematographic films commences on
or after April 1 2008; and
(b) which is certified by the National Film Corporation of Sri Lanka
established by the National Film Corporation of Sri Lanka Act,
No. 47 of 1971 as being equipped with digital technology,
Digital Theatre system and Dolby Sound Systems;
is deductible as qualifying payments.
(iv) Expenditure incurred in the upgrading a cinema -
Expenditure not exceeding ten million rupees incurred in the upgrading of
a cinema, being a cinema-
(a) in which the exhibition of cinematographic films had
commenced prior to April 1, 2008;
(b) which was not equipped with digital technology, digital
Theatre systems and Dolby Sound Systems, prior to April 1,
2008; and
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(c) which is certified by the National Film Corporation of Sri
Lanka, established by the National Film Corporation of Sri
Lanka Act, No. 47 of 1971, as being equipped on or after
April 1, 2008 with digital technology, digital Theatre systems
and Dolby systems;
is deductible as qualifying payments.
(v) Expenditure incurred in the relocation of an undertaking -
Expenditure incurred by any company in the relocation of any relocated
undertaking referred to in subsection (2) of section 21A; is deductible as
qualifying payments.
(vi) Any sum invested by any person in an undertaking referred to in paragraph
(zzz) of section 13 (Construction of houses for low cost families), is
deductible as a qualifying payment.
Section 34(2) of the principal enactment is amended by the insertion of
paragraphs (n), (o), (p) and (q) , and effective from April 1, 2008.
- Clause 21 (1) (c) of the Amendment Act
The unabsorbed part if any, of the above qualifying payments after the
deduction (subject to the other conditions specified in section 34) can be carried
forward to the subsequent years of assessments and so on until the total cost is
absorbed. (subject to the same conditions).
- Clause 21 (3) of the Amendment Act
(vii) Limitation of the deductibility of donations made to approved
charities, as qualifying payments.
The limitation of the deduction of donations made to approved charities as
qualifying payments, which was limited to 1/5 of the assessable income is
further restricted by this amendment to 1/5 of the assessable income or
Rupees 500,000 whichever is less.
Amendment is made to paragraph (b) of subsection (2) of section 34 of the
principal enactment.
- Clause 21 (2) (f) of the Amendment Act
6. Taxation of Employees of Government Institutions (Chapter xv of
the principal enactment)
Provisions relating to taxation of official emoluments of employees of the
Government institutions have been revised with effect from April 1, 2008.
Accordingly,
- employees of Government institutions (including others paid out of voted
allocation from the consolidated fund, or provincial funds) are required to
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compute the total statutory income having included therein the employment
income computed under normal rules.
- thereafter, a tax credit can be deducted from such tax, in the proportion of
official emoluments ( other than any pension, bonus, incentive payments,
rewards, share of fines or other similar payments ) to the total statutory
income .
- no any tax is deducted by the employer. Any tax payable by the employee is
required to be paid under the self assessment basis.
In order to accommodate the above, the amendments made to the principle
enactments are as follows:-
(i) Paragraph (b) of subsection (1) of section 8 is amended to make 50%
exemption applicable only up to March 31, 2008. Accordingly, there is no
exemption for any period commencing from April 1, 2008;
(ii) Section 132 of the principal enactment is terminated with effect from April
1, 2008;
(iii) Government Institution, the purpose of section 132 is removed from the
definition of “employer” for PAYE purposes. Accordingly, the requirement
of deduction of tax by the employer does not arise.
The relevant provisions regarding the liability on emoluments from Government
Institutions as specified in section 8 and section 132A of the Inland Revenue Act,
are described below.
(i)
(ii)
The exemption of one half of the official emoluments paid to an employee of
a Government institution referred to in paragraph (b) of subsection (1) of
section 8 is terminated with effect from April 1, 2008. Accordingly, the whole
emoluments of the Government employees are liable to income tax.
Section 132A provides for a deduction from income tax payable for any year
of assessment (commencing on or after 1.4.2008) on the official emoluments
(except certain, emoluments), if any included in the assessable income of any
employee of a Government institution as described below.
- Tax is computed on the basis that whole emoluments (i.e. employment
income) form part of the assessable income of the employee.
- Then a deduction is made from the tax so computed. The deduction is an
amount which bears to the income tax payable by such employee for that
year of assessment, the same proportion which the official emoluments
(other than any pension, bonus, incentive payments, reward, share of
fine or other similar payments of such employee for that year of
assessment, bears to the total statutory income of that employee for that
year of assessment.
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Example: Year of Assessment 2008/ 2009
A resident individual
Rs.
Employment
- Salary from a Government institution 400,000
- Incentive payment 200,000
Other income
- Rent income
Gross income 600,000
Less- Rates (assumed) 60,000
540,000
25% Repair allowance 135,000 405,000
Total Statutory income 1,005,000
Assessable Income 1,005,000
Less: Tax free allowance 300,000
Taxable income 705,000
Tax payable First Rs 300,000 5% 15,000
Next Rs 200,000 10% 20,000
Next Rs 200,000 15% 30,000
Balance 5,000 20% 1,000 66,000
Tax attributable to officials emoluments = 66,000 x 400,000 = 26,268
other than incentives 1,005,000
Tax payable Rs 66,000 – 26,268 = Rs 39,732
========
(iii) The provisions relating to deduction of taxes under PAYE do not apply in
respect of salaries paid to employees of Government institutions. The tax, if
any, is payable by such employees on self assessment basis.
- Clauses 39 and 40 of the Amendment Act
7. Taxation of airline Pilots (Section 40A)
The employment income of a Sri Lankan pilot (i.e. a citizen of Sri Lanka) of any
airline licenced under the Air Navigation Act, forming part of the taxable income
for any year of assessment commencing on or after 1.04.2008, is charged with
income tax at the graduated personal income tax rates but with the maximum rate
not exceeding 20%.
(This is further clarified by the subsequent amendment).
-Clause 23 of the Amendment Act
8. Taxation of non citizens employed in Sri Lanka.
Effective from April 1, 2008, the different treatment in the taxation of non
citizens employed in Sri Lanka was terminated, and accordingly, they are
- not treated as non residents for 3 or 5 years under Section 79(7);
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- not taxed at concessionary rate of 15% during that period and subsequently,
on employment income at 20%, for 2 to 5 years.
It means that the provisions applicable to citizen or non citizen employees are
same. However, any income of a not citizen employee not arising in Sri Lanka is
not taxed. [Section 13 (zz)]
- Clauses 7(8) and 31 of the Amendment Act
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