Manual of Inland Revenue Act - IRD

1 1 Manual of Inland Revenue Act ( Inland Revenue Act No 24 of 2017) Issued by the Inland Revenue Department Draft2 Prelude The Inland Revenue Act No 24 of 2017 (the Act) was enacted by the Parliament with effect from This Manual sets out very briefly the law and administrative proceedings applicable to income tax. It also includes some useful information related to taxation on profit and gain. This publication is comprehensive guide to the income tax. It is written in general terms having the average tax payer in mind and deals only with the provisions of the tax legislation applicable to normal situation.

2 Therefore, it should not be regarded as a complete and authoritative statement of the law. Ivan Dissanayake Commissioner General of Inland Revenue . Draft3 Contents PART I TAX REGULATIONS PART II TAX ADMINISTRATION Draft4 PART I TAX REGULATIONS Draft5 Contents Chapter 1 - Imposition of Income tax .. 1 Charging Provision .. 1 Types of Persons and Special Industries .. 1 Types of Persons .. 1 Special Industries .. 1 Chapter 2 - Income Tax Base .. 2 Taxable Income ( ) .. 2 Assessable income ( ) .. 2 Sources of income .. 3 Employment income ( ) .. 3 Business Income.

3 3 Investment Income ( ) .. 3 Other income .. 3 General Rules .. 3 Concept of Payments .. 3 Deciding factors of the source .. 5 Chapter 3 - Employment Income .. 12 What is employment? .. 12 Gain and profits (section 5) .. 12 Items included .. 12 Items excluded .. 14 Value of Benefits (section 27) .. 14 Deductions .. 14 Pre-and post-employment receipts .. 14 Basis of payment .. 15 Withholding by Employer .. 15 Aggregate reliefs referred to in section 52 (schedule 5) .. 16 Treatment for Retirement Benefits .. 16 Exemptions relevant to employment income (Third Schedule).

4 17 Pay As You Earn scheme .. 17 More than one employment .. 17 Primary Employment .. 17 Secondary Employment(s) .. 18 Employer s Obligations .. 18 Chapter 4 - Business Income .. 19 Draft6 What is Business Income? .. 19 Trade, Profession and Vocation .. 19 Prospective business .. 20 Deciding facts of Business income .. 21 Gains and Profits from Business .. 21 Deductions .. 22 General deduction rules .. 22 Domestic expenses .. 24 Main deduction rule .. 26 Special Deduction rules .. 28 Trading Stock .. 30 Research and Development .. 30 Agricultural startup expenses.

5 31 Depreciation allowances and balancing allowances .. 31 Repairs and Improvements .. 34 35 Other deductions in the Act .. 36 Chapter 5 - Capital allowances and balancing allowances .. 37 Relevant provisions .. 37 Capital allowances .. 37 Calculation of capital allowance .. 38 Balancing 39 Basic Concepts .. 39 Classifying the depreciable Asset .. 40 Special Case .. 41 Capital allowances for Intangible Assets .. 43 The circumstances of including assessable charges or granting balancing allowances .. 47 Enhanced Depreciation Allowances Second Schedule .. 49 Chapter 6 - Investment Income.

6 50 What is Investment Income? .. 50 Investment receipts .. 52 Rent .. 52 Royalties .. 53 Natural resource Payments .. 54 Dividend .. 55 Interest .. 57 Draft7 Other receipts .. 57 Gift Received on Investment .. 58 Winnings from lotteries .. 58 Chapter 7 - Capital gains .. 59 General Rules (Sections 36-41) .. 59 Calculation of gains and liability (Section 36) .. 60 Cost of the assets and liability (Section 37) .. 60 Consideration received (Section 38) .. 61 Reversal quantification and compensation of amount (Section 41) .. 63 Special Rule (Sec 42-51) .. 63 Cost of trading stock and other fungible assets (Section 42).

7 63 Realization with retention of asset (Section 43) .. 63 Transfer of asset to spouse or former spouse (Section 44) .. 64 Transfer of asset on death (Section 45) .. 65 Transfer of asset to an associate or for no consideration. (Section 46) .. 65 Involuntary realization of asset with replacement (Section 47) .. 66 Realization by separation (Section 48) .. 67 Transfer by way of security, finance lease or instalment sale (Section 49) .. 68 Apportionment of cost and consideration received. (Section 50) .. 68 Filling of CGT .. 68 Payment of CGT .. 69 Exemption .. 69 Capital Loss .. 70 Chapter 8 - Method of Accounting.

8 71 Chapter 9 - International .. 72 Residence & Source .. 72 Residence Individuals& Others (Section 69) .. 72 Source - Section 71& 72 .. 74 Double Taxation Agreements (DTA) & Mutual Administrative Assistance Agreements (MAAA) .. 76 Foreign tax credit .. 79 Chapter 10 - Transfer Pricing .. 82 International Transaction .. 82 Permanent Establishment (PE) .. 82 Mutual Administrative Assistance Agreements .. 83 Chapter 11 - Rules governing on taxation of types of persons .. 84 Individuals .. 84 Draft8 Qualifying Payments and Reliefs for Resident Individuals and Entities .. 84 Qualifying payments.

9 84 Basic relief .. 85 Employment income relief .. 86 Rental income relief .. 87 Senior citizen interest relief .. 88 Partnerships .. 90 Trust .. 94 Unit Trust .. 99 Companies .. 101 General .. 101 Dividends .. 102 Bonus Shares .. 104 Tax Rates .. 105 Definitions .. 106 Specified Undertaking .. 106 Bank and Financial Institutions .. 107 Mortgaged bonds.. 109 Finance Leases and Instalment Sale Agreements.. 109 Chapter 12 - Tax Payment Procedures .. 115 Tax payment 115 Withholding by Employer .. 115 Withholding from Investment Returns.. 115 Withholding from service fees and contract payments (Section 85).

10 116 Tax Payable by instalment (Section 90) .. 1 Draft1 Chapter 1 - Imposition of Income tax Charging Provision Types of Persons and Special Industries Types of Persons Under the charging provision, income tax is payable by a person. A person is defined as an individual or an entity, and includes an executor, non-governmental organization and charitable institution (s. 195(1)). An entity means a company, the charging provision is found in Chapter I of the Act (specifically, s. 2(1)), and is the central provision from which the rest of the provisions considered as branches.