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The Inland Revenue (Amendment) Act No. 04 of 2023 has been officially certified by the Speaker on 8th May 2023. This Act will be implemented on specific dates mentioned in the attached Tax Alert, bringing about changes to the existing tax legislation.
Prior to the enactment of this Amendment Act, the main legislation governing tax matters, known as the Inland Revenue Act No. 24 of 2017, had already undergone modifications through Amendment Act No. 10 of 2021 and Amendment Act No. 45 of 2022.
Outlined below is a summary of the Amendments introduced by the Inland Revenue (Amendment) Act No. 04 of 2023 (referred to as the Amending Act):
1. Restrictions in carrying out cash transactions
A new provision has been introduced that aims to discourage cash transactions. This provision states that if you make a payment of Rs. 500,000 or more in a day, or for a single transaction, or for a series of transactions related to one event, and you don’t comply with the criteria laid down, then you won’t be able to deduct that amount from your taxable income. Additionally, that payment won’t be considered as part of the cost of an asset.
To comply with this provision, you must make the payment through an account payee cheque, account payee bank draft, credit card, debit card, or electronic payment system through a bank account. If you don’t follow this procedure, you may be subject to penalties and your payment won’t be tax-deductible.
It’s important to note that there are certain exceptions to the provision mentioned. The following situations would not be affected by this provision:
- Payments made by the Government of Sri Lanka or any Government institution.
- Payments made by a bank or financial institution.
- Payments made by specific classes of persons or falling within specific categories, as determined by the relevant authorities.
Furthermore, while the provision was originally planned to be enforced starting from 1st April 2023, the Amending Act states that its effective date will be on or after the date of commencement of the Act. This means that the provision will take effect from the Act’s commencement date and onwards.
I hope this explanation helps you understand the new provision. If you have any further questions or concerns, please don’t hesitate to reach out to us
2. Amendments in relation to Dividends
(a) Tax rate for dividend for the second six months of the Year of Assessment.
This law makes it clear that any money earned from dividends (which are a type of investment) will be taxed at a rate of 15%. This tax rate will apply to any money earned from dividends during the last six months of the tax year starting from April 1st, 2022.
(b) Pass through dividend exemption
Effective from 01 October 2022, a new provision will come into effect whereby dividends received by members from a resident company will be exempt from income tax. This exemption will apply to dividends that are received by the resident company or another resident company, and subsequently paid out to members
(c) Dividend paid to a non-resident person
Dividend payments made to non-resident individuals who are members of a company will be subject to different tax treatment depending on the payment date. If the dividend is paid prior to 1 January 2023, it will be exempt from income tax. However, for dividend payments made after 1 January 2023, income tax liability will apply, which means that a withholding tax rate of 15% will be applied. It’s important to note that this withholding tax is subject to the pass-through dividend exemption mentioned earlier.
3. Introduction of Exemptions
(a) Income Tax Exemption for Foreign Grant-Funded Projects
Non-resident individuals participating in Sri Lankan government projects may be eligible for income tax exemption. This exemption applies to projects approved by the Minister, considering their economic benefit to the country. Additionally, the projects must be entirely funded by foreign grants. Income generated from such projects will be exempt from income tax, effective from April 1, 2023.
(b) Colombo Port City Economic Commission Act Tax Exemptions
The Colombo Port City Economic Commission Act, No. 11 of 2021, grants income tax exemptions to authorized persons engaged in “Businesses of Strategic Importance.” This eliminates income tax liability for profits and gains earned through such business activities.
Furthermore, the Act exempts employment income of employees hired under Section 35, up to a limit specified within the Act. These tax exemptions have been in effect since May 27, 2021.
(c) Income Tax Exemption on Asset or Liability Realization Gains
Entities with a direct or indirect government ownership exceeding 50% are exempt from income tax on gains realized from selling business capital assets, liabilities, or investment assets. This exemption applies to profits earned from such transactions. This income tax exemption came into effect on April 1, 2022.
4. Restrictions introduced for claiming exemptions for certain undertakings
Please be advised that specific deadlines exist to qualify for the exemptions introduced by the Inland Revenue (Amendment) Act No. 10 of 2021. These deadlines expired on April 1, 2023. For your reference, the details of the exemptions are as follows:
- Exemption for Businesses Started by TVET Graduates (April 1, 2021 – April 1, 2023): Individuals who successfully completed vocational education from a TVET-approved institution and established a business between the aforementioned dates may be eligible for a five-year tax exemption.
- Exemption for Construction of Communication Towers (January 1, 2021 – April 1, 2023): Resident entities involved in constructing and installing communication towers in Sri Lanka using local labor and materials, or providing related technical services, initiated between these dates may qualify for a five-year tax exemption.
- Exemption for Investments in Bonded Warehouses (April 1, 2021 – April 1, 2023): Investments made after April 1, 2021 but before April 1, 2023 in bonded warehouses or warehouses related to offshore businesses in the Colombo and Hambantota Ports may be eligible for a two-year tax exemption.
It is important to note that these exemptions are no longer available for new applications after April 1, 2023.
5. Payments to a Non Resident Person
In accordance with the Amending Act, the Government is authorized to retain tax on payments issued to non-resident individuals pertaining to the following:
a) Dividends, interest, rent, royalties, discounts, charges, or premiums originating from Sri Lanka.
b) Service fees or insurance premiums arising from activities in Sri Lanka.
6. Enhanced Capital Allowance for Expansion
The Inland Revenue (Amendment Act) grants the Sri Lankan government the authority to retain tax on certain payments made to non-resident individuals. This includes income generated within Sri Lanka, such as dividends, interest, rent, royalties, discounts, charges, and premiums.
It also encompasses service fees or insurance premiums associated with activities conducted in Sri Lanka. By implementing this tax withholding mechanism, the Sri Lankan government aims to strengthen its tax base and capture revenue generated from economic activity within the country.
7. Income Tax rate for BOI Registered Company
A Board of Investment (BOI) company that invests in expanding its current operations will be eligible for Enhanced Capital Allowances in any given Year of Assessment. These Enhanced Capital Allowances are provided in addition to regular capital allowances and their rate will range from 100% to 200%, depending on the amount of investment made and the specific location.
8. Time Bar for CGIR’s decision on request for administrative review w.e.f. commencement of the Act
In accordance with the Amending Act, any Administrative Review request made subsequent to its implementation should be resolved by the Commissioner General of Inland Revenue (CGIR) within a period of two years from the date of the taxpayer’s request. If the CGIR fails to communicate the decision within the specified timeframe, the review request will be considered as granted, unless the taxpayer has filed an Appeal with the Tax Appeals Commission.
9. Utilization of refund Amount before the Tax Audit
Option to Utilize 60% of Claimed Refund Amount
Upon the taxpayer’s request, it is possible to allocate 60% of the unaudited refundable amount towards future income tax liabilities.
Refunds for Overpaid Income Tax by Resident Individuals
The Central Government Income Revenue (CGIR) is obligated to disburse refund amounts to resident individuals before a tax audit if the refund value is below Rs. 100,000/-. This payment should be made within three months from the date of the refund claim submitted by the resident individual.
In the case of senior citizen resident individuals who are not installment payers and have a refund claim of less than Rs. 25,000/- for any quarter ending on June 30th, September 30th, December 31st, and March 31st, the refund claim must be paid within three months from the date of the refund claim made by such an individual, prior to a tax audit.
The specific manner and procedure for the payment of the refund amount will be defined by the CGIR.
10. Relief from Penalty or Interest
The corporate Capital Gains Tax Rate was raised to 30% starting from October 1, 2022. In order to alleviate the burden of penalties or interest on companies that failed to pay taxes at the revised rate of 30% for transactions occurring after October 1, 2022, the Act includes provisions for relief. However, to qualify for this relief, the taxes must be paid within 30 days of the following month from the commencement date of this Amending Act.
11. CGIR has authority to specify procedures for Withholding Agents and Financial Institutions regarding payments to non-residents.
In the event of non-compliance with the tax withholding procedure specified by CGIR for payments to non-residents, Financial Institutions may incur a penalty of Rs. 50,000/- or a lesser amount.
12. Quarterly statements by the Withholding Agents
The Act imposes an additional compliance requirement on withholding agents, mandating the submission of a quarterly statement within 30 days following the conclusion of each quarter.
13. Application of Electronic Filing
Effective from the Year of Assessment 2023/24, starting from April 1, 2023, non-corporate entities are obligated to electronically file their tax returns alongside corporations. Additionally, the Act grants CGIR the authority to permit a written filing of a tax return for a specific Year of Assessment, provided the request is deemed fair and reasonable.
14. Miscellaneous
a) A new provision mandates Specified Institutions such as the Registrar of Companies, CG of Motor Traffic, financial institutions, and CSE to regularly provide information, including details of financial transactions, in a prescribed electronic format to CGIR.
b) Information and documents received by CGIR in an official capacity regarding a specific taxpayer can now be disclosed to the Director General of the Department of Fiscal Policy.
c) CGIR has the authority to seek the opinion or observation of the Secretary to the Treasury regarding private or public rulings and any Acts administered by CGIR. This is done to ensure a clear understanding of tax policy for proper interpretation of the Law.
You can find the entire Act along with it’s changes on the Inland Revenue Department website. Link below
http://www.ird.gov.lk/en/publications/Acts_Income%20Tax_2017/IR_Act_No._04_2023_E.pdf
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