Publications & Reports >> Classified List Of Rulings

1. Section 2

Off Shore Companies – Liability to Tax

 

(a) Where business transacted

In terms of the Companies’ Act, off-shore companies cannot do business in Sri Lanka. However, for purposes of income tax, mere fact of registration as an off-shore company will not be conclusive evidence that business is not transacted in Sri Lanka. This would depend on the actual activities of the company.

(b) Residence

A company registered as an off-shore company will be treated as a non-resident company for tax purposes if it was not incorporated in Sri Lanka, and

   (i) its registered or principal office is not in Sri Lanka, and

   (ii) the control and management of its businesses are exercised outside Sri Lanka.

A company which has registered an office in Sri Lanka for the purpose of Sections 241 and 242 will not, on that account alone, be treated as a resident company, if its principal office is outside Sri Lanka and if it was incorporated outside Sri Lanka.

(c) Tax Liability

In the case of an off-shore company which is treated for tax purposes as a non-resident company, the business of which consists solely of the purchase and sale of goods, there would be no liability to income tax in Sri Lanka if no sales are effected in Sri Lanka.

 

Act 5/17 C.G.I.R

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2. Section 3
 

(a) Section 3(a)

(i) Central Bank Securities

Interest accruing to, and the discounts received by an investor from Central Bank Securities will be  liable to tax. If the securities are sold before maturity, the difference between the sale price and the  cost will be treated as income.

 

ACB 75 folio 25 CGIR

 
(ii) Income – Sale of Nadun Trees in Estate

Nadun trees in a rubber estate form part of the capital of the land. Accordingly it’s
sale proceeds cannot be treated as normal agricultural income, such as sale proceeds of old, uprooted trees in a rubber estate or gunnys in a paddy mill. But, whether it is a capital receipt or receipts from an adventure in the nature of trade depends on the circumstances of each case.

 

 23/4 C.I.R. (Metropolitan)

 

(iii) Exchange Gains

Un-realized exchange gain appearing in the accounts should be considered as a business receipt for tax purpose in computing the profits and income. If this profit has been generated by exempt undertaking by engaging the relevant activity, undertaking is entitled to claim the exemption.

   Act 3/3 D.C. Secretariat 09.08.1995

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3. Section 4
 

(a) Commissions to Sales Executives

Commission paid to Sales Executives is part of the employment income of the executive.

 

Act 3/3 C.I.R. (Corporate Tax) 05.02.1996

 

(b) Reimbursement of Medical Expenses

Reimbursement of medical expenses for injuries sustained while on duty is exempt from income tax in the hands of the recipient of such reimbursement.

 

Act 3/3 D.C. (Secretarial) 05.07.1996

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4. Section 7

 

(a)        Applicability of capital gains tax to Non-resident shareholders

Shares purchased by non-national individual companies and approved regional funds are sometimes registered in the name of their global custodians who are responsible for the administration of the investments made by such individual/regional funds/companies. The global custodian, who is the registered owner, can be a bank, a trust, a fund management company or a nominee company.

The liability to tax on any capital gains arising from the disposal of such shares attaches primarily on the beneficial owner, though very often the registered owner offers to pay the tax (on behalf of the beneficial owner). Assessors may, in exceptional circumstances, accept such offer.

However, concessions under double tax treaties are available only to beneficial owners (and NOT to registered owners). Accordingly, where the beneficial owner is not identified (i.e. where the registered owner undertakes to pay the tax) treaty concessions, if any, should not be granted.

 

Act 4/1 D.C. (Secretariat)

 

(b)        Section 7(1) a

Transfer of shares to a holding company

The transfer of any share held by any person in any company to the holding company of that company in consideration of any share/shares in that holding company (with or without a cash payment as well) may produce a capital gain/loss.

 

 

 Act 4/1 C.I.R. (Corporate Tax) 02.09.1996

  (c)       Section 7(1)(k)

Capital Gain

The consideration for the transfer of rights under a lease agreement, prior to the termination of the lease-period, is a capital gain liable to tax.

 

 Act 3/3 C.I.R. (Corporate Tax) 20.11.1996

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5. Section 9

 

Section 9(1)(b)

Commissions paid to Sales Representativeof State Corporations

Commissions based on sales effected, received in addition to the monthly salary, by sales representatives of State Corporations from part their emoluments and are exempt from income tax, if the contract of employment specifically provides for payment of such commissions.

  Act 3/3 D.C. (Secretariat)

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6. Section 10

 

(a) Section 10(d)

         (i) Special Accounts

Emoluments and fees earned in foreign currency by an individual (or partnership), as are referred to in Section 15(ccc) and subsequently converted into Sri Lanka rupees cannot be treated as “sums obtained by him by exchange of foreign currency held by him outside Sri Lanka,” within the meaning of that expression in Section 10(d) of the Act.

Accordingly, an individual referred to in Section 15(ccc) in receipt of emoluments and fees in foreign currency, is not eligible to open and maintain a ‘special account’ with the proceeds of foreign currency converted into Sri Lanka rupees.

   Act 5/10 D.C. (Secretariat)
 

(ii) Special Accounts

The exemption of interest referred to in Section 10(d) applies only in respect of interest on deposits made with sums obtained by the exchange of foreign currency held by the person concerned. It does not apply in respect of interest

                (a) on sums credited as interest on such deposits,

                (b) from investment to which Section 15(b) applies

  Act 5/10 D.C. (Secretariat)
 

(iii) Exemption of Interest

The provisions of Section 10(d) do not apply to money placed in interest-yielding deposits in the State Mortgage and Investment Bank.

  Act 4/22 D.C. (Secretariat)-
 

(b) Section 10(g)

Interest on moneys in a Foreign Currency Banking Unit

A deduction under Section 81 of the Act need not be made where any interest is paid to any person or partnership on moneys lying to his credit in foreign currency in any Foreign Currency Banking Unit.

   Act 5/15 D.C. (Secretariat)

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7. Section 11

 

(a) Section 11(b)

(i) Exempt Dividends

Exempt dividend should be paid within the period stipulated in Section 11(b). The word ‘paid’ means that the company declaring the dividends should part with funds equal in amount to such dividends. Crediting the amount of the dividends to the shareholder’s account in the books of this company is a mere book entry and does not amount to such dividend having been ‘paid’ within the meaning of Section 11(b).

 

Act 3/3 D.C. (Secretariat)

 

(ii) Exempt Dividends

The expression ‘out of profits and income of the company which are exempt from income tax’ as used in Section 11(b) refers only to adjusted profits for tax purposes. This interpretation is equally applicable to exempt profits from all sources including profits covered by Section 20 of the Act.

 

Act 3/3 C.I.R. (A.C. & Computer Services)

 

(iii) Dividends paid out of EDISS
(Export Development Investment Support Scheme) grant

The EDISS grant paid to exporters by the EDB is intended to be for investment purposes. It cannot be utilized for the payment of dividends. Where any export company (whose export profits are exempt for income tax) pays any dividends out of exempt export profits inclusive of such grant, such part of the dividend as consist of such grant is not exempt from income tax in the hands of the recipient shareholders.

 

Act 3/3 D.C. (Secretariat)

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8. Section 12

 

(a) Exemption of Net Annual Value

Section 12 provides that there shall be exempt from income tax –

(i) the net annual value of not more than one place of residence owned by, and occupied or on behalf of an individual.

(ii) The net annual value of any house owned and occupied by an individual, for the year of assessment in which the construction of that house was completed and for the six years of assessment immediately succeeding that year of assessment.

If a person is in occupation of two houses, one of which does not qualify under paragraph (ii), it would still be possible for him to claim the exemption in relation to that house under paragraph (i) and the other house which qualifies under paragraph (ii).

 

 Act 3/3 D.C. (Secretariat)

 

(b) Section 12(1)(b)

(i) Exemption of Income from Land and Improvements

Where a house, the income of which is exempt, is sold the new owner is entitled to the exemption. The exemption is available to the owner of the house not the builder.

 

 ACB 75 folio 51 C.I.R. (Corporate Taxes)

 

(ii) Rental Income

A company, undertaking a project for the construction of residential apartment for the purposes renting does not qualify for the above exemption.

 

- Act 3/3 D.C. (Secretariat) 21.11.1996 -

 

(c) Section 12(1)(bb)

New owner can claim the balance period of exemption

Where a person purchases a house in the course of the period for which the rent income from that house is exempt, then that person is entitled to the exemption for the balance part of such period.

 

Act 7/4 D.C. (Secretariat) 15.05.1996

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9. Section 13

 

Section (a)

Subsidy paid by Sri Lanka Tea Board to the
Factories participating in the Guaranteed
Minimum Price Scheme for Green Leaf

Only subsidy payments made by S.L.T.B. out of funds voted directly to it are exempt from tax under Section 13(a).

 

Act 3/3 C.I.R. (Asst. Control & Computer)-

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10. Section 14

 

(a) Section 14(a)(ii)

(i) Exemption - Capital gains

In the case of sale of a house which is co-owned by a number of individuals, the capital gains will be exempt from tax in the hands of each such individual under Section 14(a)(ii), provided the other conditions of the Section are satisfied. The co-owners will not be eligible to claim exemption under this section in respect of any subsequent sale of houses.

 

Act 4/1 D.C. (Secretariat) 10.06.1987 

   
 

(ii) Capital gains exemption on sale of houses

The capital gains arising on the sale of a house, part of which is used for non residential purposes (e.g. the ground floor which used as an office and the upper floor as a residence) is not exempt under Section 14(a)(ii).

 

Act 4/1 D.C. (Secretariat)

   
 

(b) Section 14(a)(xv)

(i).Capital gains exemption on conversion of a partnership into a company

The “transfer” of a business carried on buy an individual or a partnership to an existing company, which is not formed to take over that business, cannot be regarded as a “conversion”.

 

 Act 3/3 D.C. (Secretariat)

 

(ii). Capital gains exemption on conversion of a business into a limited liability company

The provisions of Section 14(a)(xv) do not apply to capital gains arising on the absorption by a limited liability company, already in existence, of a business run by a proprietor or a partnership.

 

 Act 4/1 D.C. (Secretariat)

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11. Section 15

 

(a) Section 15(c)

Profession or Vocation

A person takes up an assignment abroad to write ‘text books’. It is accepted that ‘writing’ is a vocation. Such person is in the category of an author. The emoluments (i.e. fees) earned by such persons are exempt, if other conditions presented by the section are satisfied.

 

Act 3/3 C.I.R. (A.C. & Computer Services)

 

(b) Section 15(cc)

Construction Project

The exemption provided in Section 15(cc) relates to services rendered in the course of carrying on, exercising or carrying out a profession or vocation or a construction project. It does not apply to profits and income derived from the business of hiring machines and vehicles for an overseas construction project.

 

Act 3/3 D.C. (Secretariat)

 

(d) Section 15(ccc)

(i) Exemptions – Emoluments and fees earned in
Foreign currency in the course of profession or vocation

For the purpose of the above Section., to decide whether an individual or partnership exercises a profession or not, some importance has to be attached to the fact the particular person is a member of an organized profession “with a recognized standard of ability enforced before he can enter it and recognized standard of conduct enforced while he is practicing in it”.

 

Act 4/17/1 D. C. (Secretariat)-

 

(ii) Professional fees & emoluments

Emoluments and fees paid from External Accounts do not fall within the ambit of the provisions of Section 15(ccc).

 

Act 5/10 D.C. (Secretariat)

 

(iii) Professional fees & emoluments

Section 15(ccc) does not apply to the profits earned on recruitment, on behalf of foreign principals, of workers for overseas employment.

 

- Act 4/17/1 D.C. (Secretariat) -

 

(iv) Professional fees and emolument

Exemption in terms of Section 15(ccc) will be available only where there is a direct remittance of fees in foreign currency. Where the remittance is made through a local intermediary, the exemption will not apply

 

Act 4/17/1 D.C. (Secretariat)-

 

(e) Section 15(m)

(i) Export of Diamonds

The profits from the export of diamonds are exempt from income tax under Section 15(m). This follows from the fact that “gem”, by definition, includes ‘diamonds’.

 

Act 5/9 D.C. (Secretariat)

 

(ii) Export of Geudas

Geudas are gems by definition and profits from the export of geudas are exempt from income tax under Section 15(m) of the Act.

 

Act 7/3 D.C. (Secretariat)

 

(f) Section 15(o)

(i) Sales of gems and jewellery in foreign currency

Payments received for sales of gems and jewellery through international credit cards are to be treated as payments made in foreign currency. (This is based on a ruling given by the Controller of Exchange).

 

Act 3/3 D.C. (Secretariat)

 

(ii) Gems and Jewellery Exhibitions

The profits and income from sales made in foreign currency at Gems and Jewellery Exhibitions will be exempt from income tax.

 

Act 3/3 C.I.R. (Corporate Taxes)

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12. Section 17

 

(a) Section 17(f)

(i) Liability to ACT on Expansions Profit

When there is a loss or a profit less than the average profit, there is no profit attributable to expansion. If any dividends is paid out of such profits, it would constitute qualifying distribution, and therefore advance company tax is payable on the distribution.

 

Act 3/3 D.C. (Secretariat)

 

(ii) Exempt profits attributable to expansion of industry

The expression ‘profits’ and income in the context of ‘profits and income attributable to expansion’ means profits adjusted for income tax purposes.

 

Act 7/1 D.C. (Secretariat)

 

(iii) Who is an employee

The term “employees” as used in this section does not include temporary and casual employees.

 

Act 3/3 D.C. (Secretariat)

 

(iv) Capital Expenditure

No extension of time beyond the twelve months from the relevant date to incur the new capital expenditure, is permissible.

 

Act 3/3 C.G.I.R

 

(v) Employees

(a) Where an undertaking in addition to, satisfying the requirements set out in paragraph (a) and (b) of Section 17f (2) employees, at the end of the year commencing on the relevant date (the first year), not less than 25 employees (the additional employees employed in the year proceeding, the profits attributed to expansion, (the incremental profits) for that first year will be exempt.

(b) Where in any year during the four years immediately succeeding such first year, the average number of the additional employees does not exceed such average in the first year, the exemption will not apply to the incremental profits of that year.

 

Act 2/90/3 C.I.R. (Secretariat)

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13. Section 20

 

(a) Section 20 A 

Application

When a company gets exemption under clause 17 of GCEC Act which over rides the Inland Revenue Act, it cannot change this agreement, and claim exemption under Section 20A of the Inland Revenue Act subsequently
 

ACB 75 folio 50 C.I.R. (Assessment)

 

(b) Section 20 C

Indirect Exporters – Sales to G.C.E.C. Enterprises

Section 20 C of the Act stipulated that the exemption of profits and income from sales made to G.C.E.C. enterprises is conditional on payment for such sales being made by the enterprise out of funds drawn on any account maintained by it an F.C.B.U of a commercial bank. The certificate issued by such enterprise confirming that such payment has been so made, would be accepted as adequate evidence of the matter.

 

Act 7/3 D.C. (Secretariat)

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14. Section 21

 

(i) Relief on Sale of Houses

If an undertaking qualifying for relief under Section 21 is carried on by a partnership, each partner is entitled to the relief under Section 21.

 

C.I.R. (Metropolitan)

 

(ii) Exemption of Profits from the Construction and
First sale of certain houses

The Profits/Loss on construction and sale of houses will be computed by deducting of the cost of construction from the gross proceeds on sale. The cost of construction should be the actual cost of land plus expenses on construction. The cost cannot be computed on an imputed value basis. This applies whether the undertaking is carried on by an individual or partnership.

 

ACB 75 folio 39 C.I.R. (Assessment)

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15. Section 23

 

(a) Deductible Expenses

(i) Expenses incurred by a lawyer in the purchase of books

Lawyer’s books can be treated as “plant” and 33 1/3% depreciation rate can be applied in terms of Section 23(1) (eee) if they are not replacements.

 

ACB 75 folio 64 C.I.R. (Metro)

 

(ii) Deductible expenses

Stamp duty paid on the execution of the legal document with a bank on the hypothetication of stocks in obtaining a loan that is required as working capital of a business is an allowable deduction.

 

Act 4/25 D.C. (Secretariat)

 

(iii) Purchase of Trade Mark

The expenditure incurred on the purchase of trademark is of a capital nature, and therefore cannot be deducted in computing profits and income. Further, trade mark rights are intangible assets, and therefore do not qualify for any allowance for depreciation.

 

Act 3/3 09.01.1995 D.C. (Secretariat)

 

(b) Section 23 (1)

(i) Losses on Forward Booking of Foreign Exchange

Any losses incurred by forward booking of foreign exchange by exporters is an allowable deduction, as it is an expense in the production of income.

 

ACB 75 and CIR/CT/1 C.I.R.(Assessments)

 

(ii) Expenditure in the Production of Films

Where the production of a film commences in one year of assessment and its exhibition is in a subsequent year of assessment, the expenses of production should be carried forward as work-in-progress for set off against receipts from it’s exhibition in a subsequent year. The expenses of production cannot be treated as a “loss” and set off against other income of that year.

 

Act 3/3 D.C. (Secretariat) 26.07.1988

 

(iii) Licence Fees

The licence fee paid annually to the Government Agent by a tavern keeper to obtain licence to carry on the business is an allowable deduction. It is not a capital payment to acquire a right or create an enduring benefit.

 

ACT 75 folio 22 C.I.R. (Assessments)

 

(iv) Deductibility of start-up expenses

Certain start-up expenses which are incurred prior to the actual commencement of business in Sri Lanka will be treated as referable to the operations after the commencement of business and allowed as a deduction. These expenses are :

(a) expenses of hiring staff in advance of opening of the branch for purposes of training, some of which would take place outside Sri Lanka.

(b) administrative overheads of maintaining a temporary office while the branch premises are being prepared for the opening.

(c) transfer expenses of any staff assigned to the Branch prior to the opening.

 

Act 4/25 C.I.R. (Corporate Taxes)

 

(v) Deductible Expenses

The contributions made by the desiccated coconut millers to the Mill Development Fund administered by the Coconut Development Authority are not outgoings and expenses incurred in the production of income.

 

- Act 3/3 D.C. (Secretariat) -

 

(vi) Deductible Expenses

Approved pension funds are not entitle to claim any management expenses, as their sources of income is ‘interest’ dividends etc.

 

Act 4/10 – 26.02.1997

 

(c) Section 23(1)(e)

(i) Capital Allowances – Video cassettes

Video Cassettes, used as apparatus in carrying on the business of hiring will qualify for depreciation.

 

Act 4/4 D.C. (Secretariat) 30.03.1988

 

(ii) Capital Allowances, Machinery used in a hiring business

A person who carries on the business of hiring plant, machinery and fixtures to other persons, will be entitled to capital allowances in respect of such plant, machinery and fixtures, purchased by him and used in the business of hiring. To be entitled to these allowances, it must be established that the person concerned is carrying on a business and not merely receiving income from rent.

 

Act 4/4 C.G.I.R.

 
(d) Section 23 (1) (eee)

(i) Transformer installed for the supply of electricity to a consumer taxpayer payments made to the Electricity Board by the consumer taxpayer

Is the transformer an asset acquired by the consumer taxpayer? Does he qualify for depreciation allowance?

The payments made by the consumer-taxpayer are only in respect of cables. Sub-station, compensation for trees etc and also includes a Protective Deposit. The payments are not towards the cost of the transformer, which remains the property of the Board. The consumer taxpayer does not qualify for the depreciation allowance as he is not the ‘owner’.

 

Act 4/4 D.C. (Secretariat)

 

(ii) Capital Allowances

A company carrying on the business of letting premises for commercial purposes is not entitled to claim capital allowances on a building acquired. A building acquired in a business of letting premises for commercial purposes cannot be considered as a ‘plant’. Only a ‘qualified building’ as defined in Section 23(7) (e) of the Act is eligible for capital allowance

 

Act 4/4 D.C. (Secretariat)

 

(d) Section 23(I) (j)

 

Contributions to Provident or Pension Fund

The contributions made by an employer during any period commencing on or after the date of approval of the Fund, provided such contributions fall within the percentage limits of the salaries of the employees’, stipulated by the Commissioner General, are deductible in ascertaining the profits and income of such employer for that period.

 

Act 4/2 D.C. (Secretariat)

 

(e) Section 23(1) (0)

Company Formation Expenses
Company formation expenses include;

(a) cost of drawing up and printing, memorandum and articles of Association and of registration fees.

(b) share issue expenses

(c) stamp duty on issue of shares

(d) legal and professional charges (as are incurred in connection with the formation of the Company)

(e) cost of prospectus, brokerage and other expenses in connection with public issue of shares.

(f) value of free issue of shares to promoters.

but does not include

(i) Expenses of foreign collaborators who visit Sri Lanka for consultation in connection with the formation of the Company.

(ii) Cost of feasibility and project report

(iii) Other pre-commencement expenses such as staff recruitment staff training, staff remuneration and setting up of accounting system.

(i), (ii) and (iii) are not deductible and cannot be carried forward and taken into account in the first year of operation of the business.

Expenses similar to (b), (c), (d), (e) and (f) incurred by a company already in existence in connection with the fresh issue of shares are not allowable.

 

Act 4/7 D.C. (Secretariat) 03.08.1979 and 03.10.1980

 

(g) Section 23(1) (k)

(i) Turnover Tax as a deductible expenses

The broad rule regarding deduction of expenses is that they must be “incurred by such person in the production” of income. Any expenses to be deductible must first qualify under this rule in Section 23 (1) which then goes on to give certain types of such expenses specifically to be allowed, like turnover tax payable and so on. Secondly, none of the expenses, even if they qualify under Section 23, should be allowed if specifically excluded as under Section 24.

The words “incurred by such person” has two connotations. On the one hand, it means that legal liability has arisen to that person in respect of that expenses. On the other hand, it also means that the money in respect of that expense must be actually expended ‘by such person’. Therefore, where, for example, the Co-operative Department pays the turnover tax on behalf of the Co-operatives, the co-operatives do not ‘incur’ any expense by way of turnover tax and, therefore, notwithstanding the provisions of Section 23(1) (k), the co-operatives are not entitled to a deduction in respect of turnover tax.

 

Act 3/3 C.I.R. (Assessments)

 

(ii) Turnover Tax as a deductible expenses

Additional turnover tax pertaining to an year of assessment cannot be deducted in ascertaining the profits and income of a subsequent year of assessment. Section 23(1) (k) is specific in providing that what is deductible on this account is that which is attributable an amount a taxpayer is liable to pay “for any period for which profits and income are being ascertained”.

 

Act 3/3 C.I.R. (Assessments)

 

(h) Section 23(3)

(i) Profit on sale of fixed assets

A capital gain arising from the change of ownership of a motor vehicle used in a business, in respect of which no allowance for depreciation has been granted, will not be liable to income tax. However, capital gains arising from the sale of a lift used in business and in respect of which no depreciation allowance is granted, is liable to income tax.

  Act 4/1 C.G.I.R 10.09.1980
 

(ii) Sale proceeds of a asset purchased under the lease agreement

The asset take over under the lease agreement is sold after its transfers to the lessee.

(i) But without being used in any trade, business etc. the sale proceeds are not taxable.

(ii) After having used in any trade business etc. (i.e. after enjoying the depreciation allowance) then the sale proceeds are taxable partly as capital gains and partly as trade profits.

 

Act 3/3 18.11.1996

 

(i) Section 23(3) (bbb)

(i) Subsidy under the “Rubber Factory
Development Subsidy Scheme”

Any sum received in terms of any subsidy scheme is not a sum subject to income tax. Where any capital asset is acquired out of that subsidy, the “cost of acquisition” of that asset for purposes of Section 23(1) (eee) will be reduced by the amount of such subsidy.

 

Act 3/3 D.C. (Secretariat)

 

(ii) Replacement of capital asset

A van which is a dual purpose vehicle, intended for both transport of goods and of persons, will not be a replacement of a truck which is intended solely for transport of goods.

 

 Act 4/4 C.I.R. (Asst. Control)

 

(j) Section 23(7) (d) – Capital Allowances

When an assessee enters into a lease agreement in respect of capital asset which he used in an undertaking for the production of profits and income, there is a disposal of the capital asset. When the lease terminates and the possession of the asset reverts to the owner, no capital allowance is due since he was the owner of the asset throughout. But, he should, in equity, be granted the straight-line depreciation allowance, if any, under Section 23(1) (e).

 

ACB 75 folio 11 C.I.R. (Assessment)

 

(k) Section 23(7) (f) – Capital Allowance

Where, upon conversion of any partnership, into a non quoted company any asset of that partnership is transferred, after March 31, 1987, to that company, the cost of acquisition by such company of such asset is equal to the cost of acquisition by the partnership of that asset reduced by the total allowance for depreciation granted to the partnership in respect of that asset. In other words, in computing the depreciation allowance for the company, the rate of depreciation (i.e. the rate applicable to the partnership) should be applied on the written down value of assets of the partnership at the time of transfer.

 

Act 3/3 D.C. (Secretariat)

 

(l) Section 23(7) (f) (i) – Replacement of capital asset

A bus with seating capacity for 30 was sold and out of full sale proceeds, purchased another bus with a seating capacity for 47, can be treated as a replacement.

 

Act 3/3 C.G.I.R. 27.02.1996

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16. Section 24

 

(a) Section 24 (1) (c)

Foreign Travel Expenditure

Expenditure on foreign travel incurred by travel agents and tour operators would be allowed as a deduction only if it could be related to “the provision of any service for payment in foreign currency”. The relation ship should be direct if the expense is to be tax deductible.

 

 Act 4/25 D.C. (Secretariat)

 

(b) Section 24(1) (d)

(i) Entertainment Expenses

The expenses incurred on food and liquor (mostly at hotels), by money brokering business to influence or solicit business from bankers are entertainment expenditure, even though it is labeled as business promotion expenses.

 

C.I.R. (Metro)

 

(ii) Entertainment Expenses

Following expenses incurred by export oriented companies are disallowed in terms of Section 24(1) d.

(a) Board and lodging expenses on foreign buyers.

(b) Expenditure incurred in arranging special functions to welcome or bid farewell to foreign buyers or in entertaining foreign buyers.

 

Act 4/25 D.C. (Secretariat)

 

(c) Section 24(1) (f) – Advertisement expenses


The purchase price of a “Demonstration Vehicle” is commercial advertising expenditure but the total expenditure cannot be allowed in computing the profits and income, as the expenditure is of a capital nature.

 
 

(d) Section 24(1) (h)

(i) Loss on Foreign Exchange

There is no provision in the act to allow as an expenses, loss on foreign exchange on capital transactions. The difference in exchange will be disallowed if it is a loss and will not be taxed if it is a profit

 

Act 10/6 C.G.I.R

 

(ii) Capital Expenditure

Stamp duty payable on a lease agreement constitutes a capital payment or acquisition of a right and is not an allowable deduction.

 

Act 4/25 D.C. (Secretariat)

 

(iii) Expenditure incurred in respect of telephone connection

The connection charges constitute capital expenditure and therefore cannot be deducted in computing profits and income and further no depreciation allowance is claimable as the subscriber is not the owner of the telephone connection

 

D.C. (Secretariat) 25.03.1995

 

(e) Section 24(1) (pp)

(i) Pre-lettered as (q) by Act No. 22 of 1990 – Lease Rentals

Where any car or jeep is used in the business of providing security services solely for transporting cash and/or uniforms and books, any rental paid in respect of such car or jeep is, subject to the limitation prescribed in Section 24(1) (q), deductible in ascertaining profits and income.

 

Act 3/3 D.C. (Secretariat)

 

(ii) Lease rentals

Lease rentals in respect of an asset paid prior to the commencement of business do not qualify for deduction in computing profits or income.

 

 Act 3/3 D.C. (Secretariat) 11.09.1996

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17. Section 29

 

(a) Section 29(2) (a)

(i) Deductions of interest on joint loans

The deduction for the interest payment made on a joint loan taken by husband and wife should, without apportioning between husband and wife, be allowed in the hands of that spouse who makes the payment.

 

 Act 4/25 (Commissioner – Secretariat)

 

(ii) Interest paid on overdrawn funds by a person in the capcity of an “attorney” while operating the account of his “principal”

Interest paid on overdraft obtained by a person (say Mr. ‘X’) who holds a power of attorney (for his personal use), from an account of the “principal” cannot be deducted in ascertaining his (i.e. Mr. ‘X’s) assessable income. This ruling is in accord with the legal position that all acts performed by a person qua attorney are in law performed by the “principal”. Therefore any loan taken by Mr. X in his capacity as attorney and any interest paid thereon are legally attributable to the “principal”.

 

Act 3/3 C.I.R. (Secretariat)

 

(iii) Interest on loans

For the purpose of paragraph (i) of the proviso, ‘loan’ includes ‘overdraft’.

 

 Act 3/3 D.C. (Secretariat) 03.07.1996

 

(iv) Deduction of interest for personal taxes

Where any person who carries on the business of buying and selling of shares, obtains any loan/overdraft for the financing of such purchases, and pays any interest on such overdraft, then such interest is deductible under Section 23 in computing the statutory income of such business. Such interest is not deductible under Section 29. Where the loan/overdraft is utilized for the purchase of shares to be held as long term investments any interest payable on the loan/overdraft is deductible under Section 29 in computing the assessable income.

 

 Act 3/3 C.G.I.R. 04.04.1995

 

(v) Annuity to wife, In Return for full Consideration in money or money’s worth

The words “in return for full consideration in money or money’s worth” excludes capital payments or return of capital.

 

C.I.R. (Metro) ACB 75 folio 64

 

(vi) Deduction of Defence Levy and Turnover Tax

recovered by banks

‘Interest’ for the purposes of Section 29, does not include items such as turnover tax, and N.S.L. charged by banks and other lending institutions. Such items are deductible under Section 23 if the loan on which the interest is paid is utilized for business purpose.

 

CIR (Computer) ACT 4/25 05.06.1995

 

(vii) Annuity

Deductions under Section 29(2) will be permitted only in respect of an annuity paid under an order of Court by way of payment of alimony or maintenance and do not include:
(i) the payment of a lump sum after the order Nisi is made absolute; and

(ii) the payment of any further lump sums (to be deposited in the Bank) in the names of the children of the marriage.

 

Act 3/3 C.I.R. (A.C. & Computer Services)

 

(b) Section 29(2) (b)

(i) Tax treatment of losses

The loss incurred prior to the commencement of tax holiday of any undertaking (other than an undertaking referred to in Section 29(3A) is not deductible from the total statutory income of that undertaking of any period after the termination of the tax holiday.

 

Act 3/3 D.C. (Secretariat) 14.05.1996-

 

(ii) Adjustment to a loss

The adjustments to a loss can be made at any time notwithstanding the provisions of Section 115(5), so long as such adjustments do not result in the assessment of income.

 

Act 3/3 C.G.I.R. 13.02.1996

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18. Section 30

 

(i) Taxation of Provident and Pension Funds

Investment income of a provident fund includes –

1. Interest derived from

- fixed deposits in banks and financial institutions

- government securities

- loans advanced to members of the Fund

2. Dividends (other than exempt dividends).

3. Rental income from –

- part of office premises rented out

- other premises

4. Capital gains arising on disposal of

- Shares

- Other assets

 

 Act 4/2 C.I.R. (PAYE & Withholding Tax)

 

(ii) Taxation of Provident and Pension Funds

No deduction in respect of management expenses is allowable in computing the investment income of a provident or pension fund, derived from investments made by it.

 

Act 4/2 D.C. (Secretariat)

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19. Section 31

 

(a) Section 31(2) (b) (v)

Qualifying Payments

The “Wild Life Preservation Fund” established under the Fauna & Flora Act and Regulations made there under is a fund established by the Government” within the meaning of Section 31(2) (b) (v) of the Act.
- Act 3/3 C.I.R. (A.C. & Computer Services) -

(b) Section 31(2) (b) (i) or (ii)

Construction of clock towers

Clock towers constructed by garment manufacturers as part of the 200 Government Factories Project, constitute donations to the Government/local authorities and, accordingly, are qualifying payments falling within Section 31(2) (b) (i) or (ii). Relief may, therefore, be granted on the cost of such construction.

 

Act 4/36 C.I.R. (Assessment Control)

 

(c ) Section 31(2)(ee) (ff) and (gg) – Housing

(i) The expression “…………………. at a cost not exceeding one million rupees……………..” applies in relation to the house or site. Accordingly, where a house is purchased or constructed, or a site is purchased, jointly by two or more individuals, the ceiling of one million applies not in relation to the contribution made by each individual but in relation to the aggregate of all the contributions.

(ii) In determining the cost of purchase, in relation to the ceiling of Rs. 1 million, expenses such as stamp duty and brokerage may be ignored.

 

Act 3/3 C.I.R. (Computer Service & Rulings)

 

(d) Section 31(2) (f)

Qualifying Payments – Housing

Money spent in extending and altering an already constructed house cannot be considered as expenses on the construction of a house and would not be considered as a qualifying payment under Section 31(2) (f).

 

ACB 75 folio 68 C.I.R. (Metro)

 

(e) Section 31(2) (g)

Qualifying payment relief

Purchase of any ordinary share (other than existing share) in any approved undertaking constitutes a qualifying payment whether or not such share carries voting rights.

 

Act 4/36 D.C. (Secretariat)

 

(f) Section 31(2) (gg)

Qualifying Payments – Housing

Where a person purchases a house in excess of Rs. 1 M, inclusive of the cost of the land, he does not qualify for relief. The cost of the house includes the cost of the land even if the latter is separately identified in the deed of purchases.

 

- Act 4/36 D.C. (Secretariat) -

 

(g) Section 31(2) (i)

Qualifying Payments

Contributions to approved Provident/Pension Funds mean payments made as a percentage of an employee’s gross salary including all allowances other than overtime, incentive payments and traveling.

 

3/GEN/21 C.I.R. (PAYE)

 

(h) Section 31(2) (II)

Purchase of condominium property –

Advance payments made before/during Construction and prior to transfer of
Ownership, Whether qualifying payments?

Payments made to the property/condominium developer prior to the construction will not constitute a qualifying payment. Any payment during an year in which the house/flat is ready for occupation will be a qualifying payment. Carry forward of such qualifying payments for 14 years provided under Section 31(3) will only be available when the title deed is executed.

 

 Act 4/36 C.I.R. (Assessment Control)

 

(i) Section 31(2) (I) & (II)

Qualifying Payments – Housing for Staff
The provisions of Section 31(2) (I) and (II) are applicable only in respect of construction of any house or flat or purchase of a housing unit in a condominium, on which no allowance for depreciation is deductible.

It should be noted that Section 23(I) of the Act specifically lays down that “there shall be deducted ……………..” certain items of expenditure of which depreciation on qualified buildings is one.

 

Act 4/4 D.C. (Secretariat)

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20. Section 32

 

(a) Section 32(2)

(i) Concessional Rate of Tax for Refunds of Provident Fund

Section 32(2) applies in all cases of ordinary retirement. To decide whether there is a retirement or not, the decisive factor is whether the employer has given notice to the provident fund of the termination of services. What is material is the fact of retirement and not the circumstances which led to the retirement.

 

ACB 75 folio 40/41 C.I.R. (Assessments)

 

(ii) Retiring benefits

“A scheme uniformly applicable to all individuals” is one under which the same percentage of contributions is made to all employees irrespective of their grade. Payments out of a scheme having uniformity only within grades of employees will not qualify for the concession rates of tax.

 

3/GEN/21 C.I.R. (PAYE)

 

(iii) Compensation for loss of office

Compensation for loss of office will be taxed at the concessionary rates set out in Part 4 of the First Schedule of the Act if –

(a) the compensation paid is in terms of an award made by a tribunal, or

(b) the compensation paid is on the basis of the remuneration that the employee would have ordinarily earned to the date of his normal retirement and this basis is adopted in the case of all employees.

 

Act 4/17 D.C. (Secretariat)

 

(iv) Taxation of Terminal Benefits of Employees

Each of the terminal benefits – provident fund balance, retiring gratuity, compensation for loss of office will be considered separately in order to determine whether the payments are in accordance with a uniform scheme or not. If one is in accordance with a uniform scheme and the other is not, then the one in accordance with a uniform scheme will qualify for the concessionary rate while the other will be taxed at the normal rates. If both are in accordance with uniform schemes, then the aggregate of both will be taxed at the concessionary rate.

 

Act 4/2 C.I.R (Employment)

 

(v) Assessment of Provident fund balances

The issue has been raised in regard to the rate of tax to be applied in respect of EPF refunds made at the age of 55 years to a contributor who had actually retired much earlier. According to EPF rules, the Provident Funds balance is payable only on reaching the age of 55 except in the case of sickness or migration from the country.

The tax tables in operation, as at the date of payment, should be applied when EPF refunds are made at a date later than the actual date of retirement.

 

Act 4/2 – C.G.I.R.

 

(b) Section 32 (5) and (6)

“Investment income” includes all interest received or credited from giving loans to persons irrespective of whether they are members or non-members of that Fund or Society.

 

3/GEN/21 C.I.R. (PAYE)

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21. Section 33

 

(a) Companies/Pre-incorporations Profits

Pre-incorporation profits of a Company are liable to tax, not on the Company but on the owner or owners of the undertaking, prior to such undertaking being acquired by the company
 

Act 4/7 C.G.I.R. 20.03.1980

 

(b) Section 33 (1)

Withholding tax on Dividends Payable to

Non-Residents of Treaty Countries

The tax of 15% on the gross dividends distributed by a resident company is a charge under Section 33(1) on the resident company distributing the profits.

Section 82(1) is a relief section in respect of persons who are liable to taxation in Sri Lanka as well as in the home country on income derived from Sri Lanka. It does not remove the liability to tax under 33(1).

 

Act 3/3 C.G.I.R.

 

(c) Section 33(1) (b)

(i) Dividend tax

Where a dividend is paid by a resident company to non-resident company and a deduction has been made under Section 38 of the Act in respect of that dividend by the first mentioned company; that dividend does not form part of the assessable income of the non-resident company. Because credit fro tax deducted under Section 38 is not granted to a company, a non-resident company will not be entitled to a refund of the tax so deducted.

 

Act 3/3 D.C. (Secretariat)

 

(ii) Dividend – tax

Section 33(1) (b) is applicable where the capital gains and interest component of the compensation paid by the L.R.C. are distributed to shareholders by way of dividends.

The dividends received by the shareholders are taxable in their hands.

 

Act 3/3 D.C. (Secretariat)

 

(c ) Section 33 (1) (c )

Public Corporation Tax

What is meant by “balance of the profits” is the balance of the adjusted profits. It does not refer to book profits.

 

CIR/CT/1 C.I.R. (Corporate Taxes)

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22. Section 38

 

(a) Section 38 (1)

Dividends Tax at Source

The provisions of Section 38(1) apply to a G.C.E.C. company which opts to pay income tax at 2% of the turnover. The taxable income of the company is the turnover which is deemed to be its profits.

 

Act 4/7 D.C. ( Secretariat)

 

(b) Section 38 (4)

Advance Company Tax

Where an unit trust pays a dividend (out of a dividend received from a resident company) which is exempt from income tax under Section 11(b), such dividend does not form part of the assessable income of the recipient unit-holder and therefore such unit-holder is not entitled to, in view of the provisions of Section 38(4), to credit either for the withholding tax or for the Advance Company Tax if any, paid by such resident company in respect of the dividend paid to the unit trust.

 

Act 3/3 D.C. (Secretariat)

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23. Section 66 (1)

 

Assessment on a partnership

Where an assessment is made on a partnership, it is not valid to make it in the name of the precedent partner. The notice of assessment must be in the name of the business. For example the Narammala Arrack Tavern.

 

ACB 75 folio 37, 38 – C.I.R. (Assessment)

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24. Section 67

 

(a) Section 67(1)

Non- Resident expatriates

The commencement of employment in Sri Lanka for non-resident expatriates, shall be the date to commence the employment in Sri Lanka and not the date in a particular company.

 

DTR 17 – 10.07.1997

 

(b) Section 67 (7)

(i) A non-citizen who returns to Sri Lanka and resumes employment under the same employer will not be deemed to “Commence employment” for the purpose of this Section.

 

 PAYE 11305 C.I.R. (PAYE)

 

(ii) Expatriate Employees

The provisions of Section 67 (7) will not apply to non-national individuals who had been previously employed in Sri Lanka and return to Sri Lanka to take up employment under a different employer.

 

Act 4/17 D.C. (Secretariat)

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25. Section 68

 

Liability of Non-resident persons

Where a person acts on behalf of a non-resident person and by his instrumentality, the non-resident person is able to make a successful tender for the supply of goods, either to the Government of Sri Lanka or to a government sponsored Corporation or Institution, the non-resident person becomes liable to tax. However, if the non-resident person tenders successfully, on a principal to principal basis for the supply of goods, either to the Government of Sri Lanka or to a government sponsored Corporation or Institution without the aid of a local Agent, no liability to Sri Lanka tax will arisen in respect of that non-resident person.

 

Act 4/21 D.C. (Secretariat) 14.06.1974

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26. Section 80B

 

Royalties

Any payment made for the use of designs, drawings or manufacturing process of any proprietary product is a royalty in character. The character remain the same even when the payment is a lumpsum payment.

 

Act 5/2 D.C. (Secretariat)

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27. Section 82

 

Double Tax Agreements – Lease of Aircraft

Where a non-resident company, having no permanent establishment in Sri Lanka, derives income by way of rent or lease of aircraft, it is the Article on “Royalties” which is applicable in taxing the lease rent in question. The term ‘royalties’ is defined to mean “consideration for use of, or the right to use industrial, commercial or scientific equipment ……………………..”. An aircraft constitutes an equipment.

 

Act 4/9 C.G.I.R

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28. Section 84 A

 

Relief in respect of Sri Lanka income tax

A non-resident person, referred to in paragraph (a) of subsection (2) of Section 84A of the Act, does not include a unit trust.

 

Act 5/24 D.C. (Secretariat)

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29. Section 85 A - Relief

 

The “total profits and income” for the purpose of Section 85A means the “total statutory income”.

 

 Act 3/3 D.C. (Secretariat) 11.10.1995

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30. Section 97(2) – Payments of Quarterly Tax

 

The “quarterly instalment” of income tax referred to in Section 97 in relation to any quarter means the excess of –

- One quarter of the income tax for the year calculated by the application to the taxable income of the relevant tax rate/rates specified in the relevant schedule to the Act,

- The aggregriate of taxes withheld (such as PAYE tax, withholding tax on interest, dividends, ACT etc.) in that quarter.

 

Act 3/3 D.C. (Secretariat) 10.07.1997

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31. Section 149 (6)

 

Refunds to non-resident shareholders

A refund can be made of the excess of the tax deducted under Section 38 (1) in respect of any dividend paid to a non-resident shareholder if the deduction by the resident company in respect of dividend is in excess of the rate specified in the double tax agreement.

 

Act 3/3 C.G.I.R.

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32. Surcharge on Income Tax
 

(i) Section 8 of the surcharge Act No. 7 of 1989 – Payment of surcharge by an employee.

15% surcharge is computed on the “net income tax” payable by an employee. “Net income tax” means the net tax payable after the employment tax credit.

 
Act 3/3 D.C. (Secretariat)
 

(ii) Surcharge on Income Tax – Resident Companies

In the case of a resident company the 15% surcharge on income tax is charged on income tax payable under Section 33(1) (a) :

Accordingly the surcharge –

(i) is computed on income tax before the grant of relief under Section 85, 85A and 82 (double tax relief).

(ii) Is not chargeable on tax payable under Section 33(1) (b) (i.e. 15% tax on dividends).

 
Act 3/3 C.I.R. (Corporate Tax)
  Note : However for the year of assessment 1993/94, 94/95 & 95/96 , surcharge will be computed on income tax AFTER the grant of relief under Section 82,83,85 and 85A.
 
Act 3/3 Vide Amendment Act No. 23 of 1994

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Classified List of Rulings – Supplimentary List No. 1
INCOME TAX
1 Section 4 (Employment Income)
1.1 Benefit Valuation on Vehicles Owned by Employee
According to the Gazette notification No. 1361/27 dated October 06, 2004 (and the subsequent Gazette Notification No. 1363/23 dated October 21, 2004), the value of private use of any vehicle, where accurate records of traveling is maintained by the employer is calculated as provided under item (c) of such Gazette notification.

Accordingly, where the vehicle is owned by the Employer and is used by the Employee for private purposes as well, and in relation to the use of such vehicle accurate records of traveling is maintained by the employer, the benefit for tax purpose should be calculated in the following manner.

If the Employee,

- reimburses the employer, the cost of private travel at a rate not less than the rate specified under item c of the gazette, the value of the benefit is Nil.
- reimburses at a lesser rate specified under item (c) of the Gazette, then the difference is treated as value of the benefit.
- does not reimburse the Employer, the value of the benefit is computed according to the respective rate given in item (c) of the Gazette.

Rul/2005/IT/0008 June 07, 2005

1.2 Business of hiring vehicles carried on by an employee
If an employee proves that he is carrying on a business of hiring vehicles, vehicles used in that business qualify for capital allowances, even if any such vehicle is hired to the company or firm where he is an employee.
If the Employee uses a vehicle provided by the company (whether it is owned by the company, the employee or any other person) a sum of rupees 15,000 or 7500 rupees, depending on the engine capacity, should be added as value of the benefit to the employment income of the employee.

Hire charges paid to the employee (or others), however, can not be deducted in computing the profits and income of the company.

Rul/2005/IT/0011 September 08, 2005

2. Section 7 (Capital gains)

Promotional Shares

Value of Promotional shares issued to a promoter is treated as a capital gain and is exempt in the hands of the promoter unless such prompter is engaged in such promotional activities as a business.

Rul/2005/IT/0006 April 25, 2005

3. Section 10 (Interest)
Exemption from Income Tax on NRFC Gift Scheme
“Ran Kahawanu Wasana”

No provision in the Inland Revenue Act to accommodate any exemption from withholding tax on lottery prices under the “Ran Kahawanu Wasana” Gift Scheme conducted by the Bank of Ceylon.

Rul/2005/IT/0013 October 12, 2005

4. Section 13 (Subsidies)

Government Subsidy on Sale of Solar Home Systems

Subsidy paid by the Government to cover up discounts allowed to consumers on the sale of Solar Home Systems in the areas stipulated by the Government, is liable to tax, as it is a part of normal profit margin of the company.
Rul/2005/IT/0009 July 11, 2005

5.Section 15(aa) – (Exemptions)

Exemption of profits and income under Section 15(aa)

Any resident company or partnership in Sri Lanka deriving any profits and income in foreign currency prior to April 1, 2001 in respect of services rendered outside Sri Lanka, in the course of carrying on or exercising any trade, business, profession or vocation, is liable to tax at 15%, if such profits and income (less reasonable expenses) are remitted to Sri Lanka through a Bank.

Section 15(aa) provides an exemption for such profits and income earned in foreign currency on or after April 1, 2001, if the other conditions as above are satisfied.


Rul/2005/IT/0016 November 16, 2005

 

6. Section 23 – (Ascertainment of Profits)

What is a “Train Engine” – Is it a motor vehicle?

“A train engine” cannot be categorized within the meaning of motor vehicle in order to deduct allowances for depreciation for the purpose of Section 23 of the Inland Revenue Act.

It is a “plant or machinery” to which the applicable rate of depreciation is 12½ % per annum.

Rul/2005/IT/0010 July 11, 2005

7. Section 24

Expenditure on Overseas Travel and Advertising, Incurred outside Sri Lanka

(A) In terms of Section 24(1) (d) of the Inland Revenue Act, any expenditure incurred, in traveling outside Sri Lanka, in connection with the business of operating a Hotel is disallowable, except the expenditure incurred solely in carrying out a programme which is approved by the Ceylon Tourist Board.

A Hotel (approved by the Sri Lanka Tourist Board) taking part in programs organized by the Tourist Board itself, can be treated on the same footing as that of carrying on a programme approved by the Tourist Board. Accordingly, travel expenses in that regard are deductible in computing profits for tax purposes.

(B) The cost of advertisements incurred outside Sri Lanka can be deducted if it is incurred solely in connection with the export trade of any article or goods, or the provision of any service for payment in foreign currency. Accordingly, if it is proved that any cost of advertisement outside Sri Lanka is incurred solely in relation to a service for which payment is made in foreign currency, such advertisement expenses are deductible.

(C) Any programme organized by the Sri Lanka Convention Bureau, cannot be considered as programmes approved by the Sri Lanka Tourist Board.

Rul/2005/IT/0020 November 16, 2005

8. Section 29 (Deductions in arriving at Assessable income)
8.1 Limitation of Deduction of Losses to 35% of Total Statutory Income

In terms of Section 29 (1A) of the Inland Revenue Act, any interest accruing to any company should be taken into account when computing its statutory income if it is not exempt under Section 10 of the Act. Further, the limitation of deduction of losses to 35% of the total statutory income, with regard to a company, is calculated on the basis of such statutory income.

Rul/2005/IT/0019 November 16, 2005

 

8.2 Deduction of Interest

A loan taken from a Bank to repay a housing loan preciously obtained from another Bank could be treated as a loan the proceeds of which are utilized for the purchase or a construction of a house, if it is proved that the money has been transferred direct from Bank to Bank together with relevant security documents.

Rul/2005/IT/0012 July 08, 2005

9. Section 51 – (Professional services provided from Sri Lanka to a person outside Sri Lanka)

Fees received in foreign currency for services rendered outside Sri Lanka

In terms of Section 51 of the Inland Revenue Act, the rate of income tax applicable to fees received in foreign currency in respect of professional services provided from Sri Lanka to a person or partnership outside Sri Lanka is 10%, if such fees are remitted to Sri Lanka in foreign currency through a Bank.

Rul/2005/IT/0015 November 03, 2005

10. Section 73 – (Residence)

Residence of Individuals

Section 73(2) of the Inland Revenue Act reads as “An individual who is physically present in Sri Lanka for one hundred and eighty three days ……………….. shall be deemed to be resident in Sri Lanka ………………”

Accordingly, when counting one hundred and eighty three days for determining individual’s status of residence the date of arrival as well as the date of departure is required to be taken into account since such individual has been physically present in Sri Lanka in both days.

Rul/2005/IT/0002 April 05, 2005

11. Section 81 – (Non resident shipping companies)

Tax Liability to income tax by non resident shipping companies

A non resident company is liable to pay income tax on the profits and income at the rate specified in the Second Schedule and on remittances at the rate specified in Section 57. Since 2.5% percent in the Second Schedule is an additional amount on account of Human Resources Endowment Fund (HREF) and such collection will subsequently be transferred to that Fund, the tax relief under the Double Taxation Relief Agreement should be calculated after excluding this 2.5% tax. However, remittance tax should be calculated on the balance profits and income after deducting income tax including HREF contribution.

Rul/2005/IT/0003 April 05, 2005

12. Section 98 – (Returns)

Requirement for furnishing a Return – Clubs or Similar Institutions

In terms of Section 98(1) and Section 98(2) respectively of Inland Revenue Act, any person, in relation to an year of Assessment, who is chargeable with income tax or to whom a return is issued by a Deputy Commissioner, is required to furnish a return of income on or before November 30th of the following Year of Assessment or within the time specified in the notice.

However, the exemption stipulated in the proviso to subsection (1) of that section, is applicable to individuals only. Clubs or similar institutions are required to furnish a return under the said Section 98 of the Inland Revenue Act, even though interest is the sole income of such Institution.

Rul/2005/IT/0007 June 28, 2005

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13. Withholding Taxes
13.1 Section 122A

Withholding Tax on Interest

In terms of Section 122A(2)(b) of the Inland Revenue Act, any interest exempt under Section 10 or any interest credited or paid to any Ministry, Department, Local Government Institution, Foreign Government or any person exempt under Section 8(a) have been excluded from the chargeability to withholding tax.

However, as Section 8(a) exemption does not extend to interest (or dividends) other than of Foreign Institutions, this exclusion is not applicable to interest paid to persons other than such Foreign Institutions referred to in the Section 8(a).

Rul/2005/IT/0005 July 26,2005

13.2 Section 131

Withholding Tax on Specified fees

The following supplies are treated as supply of services and, therefore, fall within the meaning of specified fees.

- Supply of goods under a Tender Agreement (eventhough the goods are purchased by the person who supplying such goods)

- any payment made under a Contract or an Agreement

- Supply of goods on quotations

Accordingly, any specified person is liable to deduct withholding tax from such specified fees. Further, the same principle is applied in the determination of VAT liability.

Rul/2005/IT/0021 October 12, 2005

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ECONOMIC SERVICE CHARGE
14. Entrypot Trade

The turnover from entrypot trading can not be treated as commission income but is the turnover from such entry pot trading for the purpose of Economic Service Charge.

Rul/2005/ESC/0001 April 15, 2005

15. Change of Accounting year

If a person has been granted approval for changing the accounting year under Section 25 of the Inland Revenue Act in relation to any trade, business, profession or vocation carried on by such person, he is entitled to declare for income tax purposes the statutory income from such trade, business, profession or vocation on the basis of an accounting year ending in that year of assessment.

For the purpose of determining the liable turnover, in relation to Economic Service Charge, the same basis as for income tax, can be adopted. It means that the liable turnover for any relevant year of assessment is the turnover of the corresponding accounting year of the preceding year of assessment.

Rul/2005/ESC/0002 May 02, 2005

16. Deductibility of ACT from ESC payable:

In terms of Section 3 of the Finance Act No. 11 of 2004, Economic Service Charge paid can be set off against income tax payable, subject to conditions stipulated in subparagraph (2) and (3) therein and Section 4. However, the Inland Revenue Act includes no provision to set off any income tax paid against Economic Service Charge payable. Accordingly, any Advance Company Tax (ACT) paid cannot be setoff against ESC since ACT is an income tax paid in advance. Further, ACT cannot be refunded and it can only be set off against income tax.

Rul/2005/ESC/0003 October 25, 2005

17. Registration for Economic Service Charge

Economic Service Charge is payable by every person or partnership for every year of assessment commencing on or after April 1, 2004 on the liable turnover. ‘Liable turnover’ means the turnover of the immediately preceding year, from any trade, business, profession or vocation.

If any person has had business operations in the year of assessment 2003/2004 and has (liable) turnover exceeding the threshold, then such person is liable to pay ESC for the year of assessment 2004/2005 on such (liable) turnover for that year of assessment, even if there is no business operations in the year of assessment 2004/2005.

Rul/2005/ESC/0004 May 12, 2005

18. Economic Service Charge (Situation where profits are exempt partly)

Section 21 G of the Inland Revenue Act provides that the profits and income attributable to the expansion of any undertaking of a company is exempt from income tax for a period of 2 years. “Profits and income attributable to the expansion” means the excess of profits and income over the annual average of profits of such undertaking.

If any company has incurred business losses for the period of three years immediately preceding the year of assessment in which such exemption commenced, the annual average of profits is zero, and then the total profits will be the incremental profits which qualify for exemption and then the applicable ESC rate is 0.25%.

Rul/2005/ESC/0008 July 11, 2005

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VALUE ADDED TAX
19. International Transportations

Supplies referred to in item 10 of the Gazette Notification No. 1201/9 dated September 11, 2001, which specifies services which are zero rated for the purposes of Section 7 of the Value Added Tax Act, are applicable only in relation to shipping lines.

That has not been extended to ‘airlines’.

Rul/2005/VAT/0003 October 25, 2005

20. Exemption of VAT on supplies made to Diplomatic Mission

The identification of goods or services referred to in item (viii) of paragraph (b) of PART II of the Schedule to the Value Added Tax Act is applicable to both Diplomatic Missions and Diplomatic Personnel of such Mission.

The provision of the Act does not permit to split the Diplomatic Mission and Diplomatic personnel in order to apply the requirement of identification of goods or services by the Commissioner General of Inland Revenue to apply only to Diplomatic personnel of the Mission.

Rul/2005/VAT/0004 April 07, 2005

21. The value of supply of Fertilizer, the cost of which is partly subsidized by the Government

The price of fertilizer has been fixed by the government. It would, therefore, be the price on which fertilizer could be sold in the open market. Hence, determining Market Value of such Fertilizer by adding government subsidy (or grant) may not be a realistic value of such supply. Therefore, the open market value of fertilizer should be the price fixed by the Government.

Further, the subsidy (or grant) paid by the government is not connected either to a good, or to a service supplied to the government. Hence, it may not be possible to connect such payment to a taxable activity of the supplier, with the Government.

Accordingly, it is more appropriate, to disallow input tax credit on the subsidy (or grant) given by the Government, on import or manufacture of fertilizer, instead of adding the subsidy to the value of supply.

Further, it could be justifiable since the cost of such part of Fertilizer which is subsidied by the Government is not incurred by the supplier.

Therefore,

(i) treat the value of Government subsidy (or grant) on fertilizer, as an excluded supply; and

(ii) disallow input tax credit attributable to the value of such subsidy or grant paid by the Government.

Rul/2005/VAT/2005 April 20, 2005

22. VAT Liability on supply of goods following the Tender Procedure

Under a Tender Agreement, a Tenderer supplies specific goods to a specific person at a specific time at a specified price and passing of exclusive ownership to another person. Thus, it is liable to VAT. The supply on tender does not, by itself, amounts to a retail or wholesale business which is excluded from VAT under Section 3 of the Value Added Tax Act. Any person engaged in the wholesale or retail trade and supplying goods under a Tender Agreement may also required to pay turnover tax to provincial council.

Rul/2005/VAT/0007 October 25, 2005

23. Liability to VAT (Services provided by a person in Sri Lanka to a person out side Sri Lanka)

In terms of paragraph (c) of subsection (1) of Section 7 of the Value Added Tax Act –

“Services provided by any person in Sri Lanka to a person outside Sri Lanka, to be consumed or outside Sri Lanka, shall be Zero rated provided that payment for such services in full has been received from outside Sri Lanka, in foreign currency through a bank in Sri Lanka”

If the supply of service originates in Sri Lanka and finally such services are utilized in the course of carrying on or carrying out a business in Sri Lanka by a foreign principle, then such services are not treated as consumed outside Sri Lanka. The utilization of services will depend on the fact that the place where the taxable activity is carried out. If the person outside Sri Lanka does a business in Sri Lanka through a person in Sri Lanka such services are not treated as services utilized outside Sri Lanka, even though the recipient of the services is not physically present in Sri Lanka, to utilize such services.

Rul/2005/IT/0015 November 03, 2005

24. VAT Exemption on import of project related Articles

(1) In terms of item (iv) of para (c) of PART II of the First Schedule to the Value Added Tax Act, the exemption on the import of project related goods is applicable to any person who has entered into a agreement with the BOI –

(a) prior to May 16, 1996; or

(b) prior to April 1, 1998 but on or after May 16, 1996, in respect of any project the total cost of which is not less than Rs. 500 million.

Under Section 17 of the Board of Investment of Sri Lanka Law No. 4 of 1978, goods prescribed as project related goods (articles), are goods to be utilized in the project specified in the agreement, during -

(i) the project implementation period of such project as specified in the Agreement; or

(ii) up to the date of completion of such project, which date shall not be later than thirty six months from the date of the last agreement entered into prior to the 19th November 2003.

whichever is earlier, other than any article in the negative list published by the Secretary to the Treasury for this purposes.

(2) After the completion of the project implementation period, if any company has signed a Supplementary Agreement with the BOI then it means that it continues the project under the same Agreement entered into on which the project implementation period is already completed and it is liable to VAT. The input on import or supply of goods or the local purchase of goods or services can be claimed as a deduction against the output tax payable so far as such imports or purchases are connected to such liable supplies.

Rul/2005/VAT/006 July 11, 2005

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