Why you should plan your tax in Sri Lanka?

Life is full of Taxes!!!!

Benjamin Franklin once said that “nothing is certain, but death and taxes”!!

I obtained the below quote from Mr. O.M. Weerasooiya - Retired Commissioner General of Inland Revenue, Sri Lanka :)

"Tax his land, tax his bed,
Tax the table at which he's fed.
Tax his tractor, tax his mule,
Tax his cow, tax his goat,
Teach him taxes are the rule!!"

Even though the lines above are hilarious, it just reminds us that Tax is a very important part of our life which we cannot get rid of. You cannot stay away from tax. But you can manage your tax!

If you search in internet, there are enough and more articles written about tax planning. But I hardly found any descriptive article on tax planning in Sri Lanka except for the few explanatory notes in Inland Revenue web site.

Albert Einstein said that "The hardest thing in the world to understand is the income tax.” Many of my friends are complaining that they do not understand tax. All of them are accountants. Therefore the situation of ordinary people is much worst.

In Sri Lanka even if anyone is interested in learning tax, there is no proper publications exist for them to refer. I'm not a tax consultant. But I hope I can be at least little bit helpful by giving you an insight in to tax planning and referring you to a place where you can get information. Therefore this article is not about tax planning in detail, but just guidelines to give an idea to someone who is absolutely clueless on our tax system.

Why is it important to plan tax in Sri Lanka?

Tax planning often results in substantial tax savings. There are many concessions given by the Tax laws, but by the time people get to know about those, such rules replaced by other new rules. I've met many people who simply pay unnecessary amount of taxes just because they do not know. I've met people who had to pay huge amounts of penalties only due to their ignorance of the tax procedures. Tax planning is something you should do as part of your financial planning. In case of a business, even before you start a company. But often people remember the taxation, when they have to submit the records.

Tax Planning in Sri Lanka

The main law applicable is the Inland Revenue Act No 10 of 2006 and subsequent amendments.

Acts Related

You can read all the related laws and regulations in the below link.
http://www.inlandrevenue.gov.lk/acts.html

Individual tax planning


1. Assessment Process

It’s important to know about the assessment process.

Every tax payer should submit a Return on Income on self assessment basis on or before 30th day of November in the succeeding year.

It is the obligation of the tax payer to obtain a form from the Inland Revenue department.

2. Few Tax planning tips

(a) Tax Planning with Housing Loans

If you are paying high amount of PAYE taxes, and if you dream to buy a house of your own, best thing is to go for a housing loan. Because when you obtained a housing loan from a bank in Sri Lanka, you can get a direction to pay reduced amount of PAYE depending on the amount loan.

Same as there are many other benefits allowed when it comes to taxes relating to houses. There are exemptions for the rent income - Section 11.

(b) Obtain the salary in foreign currency while working in Sri Lanka

E.g. Services for payment in foreign currency [S. 13(dddd)

Employees who are working in BPOs and Some of the BOI projects have the opportunity of obtaining an exemption on employment income, if they opted to receive the salaries by foreign currency. Most of such companies give the option for the employees to select whether they prefer to get the salary in Sri Lankan rupees or foreign currency.

Accordingly, the Profits and income,
- Earned in foreign currency,
- For the period 01.04.2009 to 31.03.2011,
- By any resident company, resident individual or partnership in Sri Lanka,
- From any service rendered in or outside Sri Lanka,
- To any person or partnership outside Sri Lanka,

are exempt from income tax, if such profits and income(less such amount, if any, expended outside Sri Lanka as is considered by the Commissioner- General to be reasonable expenses) are remitted to Sri Lanka, through a bank.

(c) Investments in tax free sources

There are interests which are exempt from tax. (Section 9).

E.g. Savings in FCBU accounts, Investments in Reconstructions bonds, Sri Lanka nation building bonds issued by government.

(d) Apply Senior Citizens benefit schemes

E.g Interest up to Rs 200,000 from any deposit in any state bank of Sri Lanka is exempt from tax to a citizen resident individual over 59 years old.

Such banks include the Housing development finance corporation bank, SME Bank, Lanka Puthra development bank, any cooperative rural bank and regional development bank. – Section 9(h)

If you have the same amount of money invested in a private bank, and if you do not deal much with it rather than obtaining the interest, best thing is to move it to a state bank. That gives more security to the money as well as the tax exemption.

Business Tax planning

1. Register for Tax

You should refer to section 106,163,171 & 172 of the Inland Revenue Act.

If you go to the tax payer service unit of the Inland Revenue department, officers there will assist you in this regard. Below link has all the details of this unit.

http://www.inlandrevenue.gov.lk/units/tpsu.html

2. BOI Concessions.

There are many concessions under BOI Act which people do not know or not being used in planning.

E.g. Profits and Income of any company from any specified undertaking (Sec 17/ Sec 21 A of the IRA Act, No 38 of 2000).

Under the above Law, there is a concession for Non traditional products. Any non traditional products including deemed export of such products, where not less than 80% of the total revenue of such undertaking is from export or deemed export of such non traditional goods for the year of assessment, profits are exempt for 5 years reckoned from the year of assessment in which the undertaking commences to make profits.

In this situation we'll assume there's a company which does mainly exports but some local sales as well. Most of such companies have a separate subsidiary for local sales. But if the company's local sales can be maintained at a level of less than 20% of the total revenue, best thing is for them to have one company which does both local sales and exports. Then their local sales can be taxed at a lower rate where as if they formed a separate company it is taxed at the rate of 35%.

That decision is to be taken when the company is formed, not when the tax return is submitted. But to do that, people who take the management decision, should have that understanding of the relevant tax laws applicable or they would have hired an expert for that matter.

2. Deciding the amount to declare as dividends

If the company has not declared at least 25% of its distributable profits as dividends, they have to pay a deemed dividend tax of 15% on excess over the limit. Otherwise the expense is only the 10% dividend tax.

Below article would be helpful to understand an actual scenario.

http://www.dailynews.lk/2008/01/25/bus12.asp

3. Other tax concessions

There are many industries which the profits are exempted from tax and profits are taxed at lower rates. If a potential investor wishes to start a company or acquire a business, it’s always good to know which industries have the tax benefits. I have mentioned few such concessions below. You can refer Sections 7,13,17,20,21,22,23 & 24 of the Inland Revenue Act.

(a) Tourism related business

Where the taxable income of a company includes profits and income from any undertaking for the promotion of tourism, the tax on such profits is 15% - Section 46

(b) Agriculture, fishing and construction work

Where the taxable income of a person including a company including any profits and income from any agricultural and construction undertakings, such part of the profits and income in taxed at 15% - Section 45 & 46.

(c) Sale of Gold, Gems and Jewellery – Section 13(ii), 13(j) & 7(5)

(d) Export companies

Profits taxed at 15% - Section 51, 52 & 60(c)

(e) New and Relocating undertakings outside Colombo and Gampaha districts

Exemption period depend on the investment – Section 20 & 21

4. Other Business tax planning tips

(a) Lowering Gross Income
(b) Deferring Income as suitably
(c) Prepaying Taxes and Adjusting Withholding
(d) Maximizing Deductible Expenses
(e) Apply Tax Credits

Links on tax planning - Sri Lanka

If you have a basic idea on taxation, below links has some useful tips for tax planning throughout the year. If you know about exemptions/concessions/allowances/reduced rates/tax credits/qualifying payments etc, you can plan rest of your individual or business acts accordingly.

Explanatory Notes - Inland Revenue Department

http://www.inlandrevenue.gov.lk/publications/Explanatory/ENIRDAct192009.pdf

How to learn Taxation in Sri Lanka?

1. Faculty of Taxation - Institute of Chartered Accountants of Sri Lanka (ICASL)

There are couple of courses available at ICASL for different target groups. There are many publications available at ICASL on latest tax rulings

(a) ICASL Certificate Course in Taxation

http://www.icasrilanka.com/Courses/Taxation.html

(b) Taxation Course for Professionals & Practitioners

http://www.icasrilanka.com/Courses/Taxation2.htmlll

2. Publications and reports

Official website of the Inland Revenue Department, of the Government of Sri Lanka

http://www.inlandrevenue.gov.lk/

If anyone is interested in knowing the budget highlightes of 2011, below article covers many of it.


http://www.lk.kpmg.com/Others/Budget_Highlights_2011.pdf


3. Information desks at Inland Revenue department

If you go to the relevant section of the Inland Revenue department, they will refer you to an assessor and assist you as to how to plan your taxation. Below guide will help you to find which section you should go to.

Guide to Tax payers by Inland Revenue department - Sri Lanka

http://www.inlandrevenue.gov.lk/guide.html

4. Other Taxation courses

http://www.taxsrilanka.com/services.php


References used for this article -

1. Book -Advanced Taxation & strategic tax planning - K Sivanesan

2. ICASL Guide to Income tax law - 2009

2. Quotes - http://www.caclubindia.com/

3. Explanatory Notes IR –

http://www.inlandrevenue.gov.lk/publications/Explanatory/ENIRDAct192009.pdf