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TAXATION
1995/96
1996/97
Department of Inland Revenue Sri Lanka

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Printed at the State Printing Corporation Gangodawila, Nugegoda and Panaluwa, Padukka.

FOREWORD
This booklet briefly describes the principal provisions of the Inland Revenue Act No. 28 of 1979 (as last amended by amendment Act No. 16 of 1996) in regard to taxation of profits and income. It also includes some useful information on the distribution of functions among the various offices of the Department, the location of the offices, telephone numbers etc.
The aim of this booklet is to accouaint the taxpayer with the law governing his tax liability. It is, therefore, written in general terms with examples applicable to normal situations, and is not intended to be an exhaustive or an authoritative statement of law. For an authoritative statement of the law, the taxpayer should consult to the taX Statute.
D. S. Weeraratne, Commissioner General of Inland Revenue October 1996 Colombo,

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CONTENTS
Chapter Page
1. Liability to Income Tax 2. Sources of Income 3 3. Employment 4 4. Trade, Business, Profession or Vocation 1 5. Income from Property 14 6. Dividends 17 7. Capital Gains 20 8. Interest 26 9. Other Sources of Income 28 10, Capital Allowances 29 11. Total Statutory Income 33 12. Aggregation of Income 34 13. Assessable Income 35 14. Taxable Income 37 ܫ 15. Calculation of Income Tax ... Individuals 45 16. Calculation of Income Tax - Companies 48 17. Charitable Institutions 51 18. Clubs, Trade Associations and Co-operative Societies 53 19. Receivers, Trustees and Executors 55 20. Tax Concessions for Agriculture and Animal Husbandary 56 21. Tax Concessions for Fishing 58 22. Tax Concessions for New Companies Utilizing Advanced
Technology 60 23. Tax Concessions for Existing Undertakings Utilizing
Advanced Technology 62 24. Tax Concessions for Exports and the Provision of
Services for Payment in Foreign Currency 64 25. Tax Concessions for Housing 72 26. Tax Concessions for Gem and Jewellery Trade 77
27. Tax Concessions for Non-residents Operating Yachts
and Pleasure Craft 78

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28. Taxation of Foreign Employees 79 29. Payment of Tax by Self-assessment and Filing of Returns 81
30. The Pay-As-You-Earn Scheme 86 31. Appeals 88 32. Recovery of Tax 89 33. Refund of Tax 90 34. Searches and Inspections 91 35. Double Taxation Relief 93 36. Application of Computer Technology 94
TABLES
1. Cumulative Taxable Income and Income Tax Payable 96 2. Rates of Income Tax-Y/ A 1996/97 96 3. Rates of Depreciation 97
LISTS
1. Inland Revenue Publications 98 2. Location of Inland Revenue Offices 99 3. Work Allocation of Colombo Metropolitan Branches 101 4. Inland Revenue Telephone Numbers 102
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CHAPTER 1 LIABILITY TO INCOME TAX
. Basis of Liability
Income tax is charged for every year of assessment in respect of the profits and income of a person for that year of assessment. A resident person is liable to tax on his income arising both in and outside Sri Lanka. A non-resident person is liable to tax on
his income arising in Sri Lanka.
(Section 2)
. Year of Assessment (Y/A)
An year of assessment is the period of 12 months from the 1st of
April of a year to the 31st March of the following year.
Ex. The year of assessment 1996/97 covers the period 1st
April 1996 to 31st March 1997.
. Income Period
The profits and income that are taxed for anyear of assessment
are the profits and income of that year of assessment. Income
tax is thus charged on a current year basis.
Ex.: The profits and income arising during the period 1st April 1996 to 31st March 1997 are taxable for the year of assessment 1996/97.
. Person
A "person' includes an individual, a company, a body of persons (such as a club, charitable insititution etc.) or any government.
. Resident and Non-Resident
(1) Whether an individual is “resident' or "non-resident'
depends normally on the length of his stay in Sri Lanka.
(i) If he is in Sri Lanka for a period or periods amounting in the aggregate to 183 days or more in any year of assessment, then he is deemed resident in Sri Lanka throughout that year of assessment,

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(ii) An individual who is deemed to be resident for a period of 2 or more consecutive years of assessment, will be deemed to be resident until such time as he is out of Sri Lanka for a continuous period of 365 days. (2) A company is deemed to be resident in Sri Lanka if its registered or principal office is in Sri Lanka or if it is
controlled and managed from Sri Lanka.
(Section 67)
6. Exemption Limits
(1) A resident individual is liable to tax for any year of assessment only if his assessable income exceeds the exemption limit for that year. This exemption limit for the year of assessment 1995/96 is Rs. 60,000 and for the year of
assessment 1996/97 is Rs. 100,000.
(Section 30(1))
(2) Where the assessable income of a non-resident individual does not exceed Rs. 1,000 for a year, there will be no liability to tax if such income consists solely of profits from services rendered in Sri Lanka or from business transacted
in Sri Lanka, a.
(Section 73(1))
(3) Where the assessable income of a non-citizen employee who is deemed to be non-resident for any year of assessment does not exceed the excemption limit for that year of assessment of a resident individual(see sub-paragraph (1)), there will be no liability to tax for that year if such income consists solely of income from employment. (See Chapter
3 - paragraph 4(3))
(Section 73(1A))

CHAPTER 2
SOURCES OF INCOME
A person is liable to tax on his profits and income from the following
Sources:
(1) Employment; (2) Trade, business (including agriculture), profession or vocation; (3) Income from house properties and buildings:
(i) Net annual value - Owner occupied houses, (ii) Net annual value – Occupier's income, (iii) Rents; (4) Dividends; (5) Capital gains; (6) Interest; (7) Royalities, premiums, discounts, charges or annuities; (8) Income from any other source (excluding income of a casual
and non-recurring nature).
(Section 3)

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CHAPTER 3 EMPLOYMENT
1. What is income from employment?
Remuneration of any kind received for services rendered is income from employment. Thus items such as wages, salaries, allowances, leave pay, bonus, fees, commissions and pensions are components of employment income. All benefits received (whether in money or otherwise) are also treated as income from employment. For instance, any personal expenses of the employee or of any member of his family borne by the employer (e.g. doctor's bills, electricity, insurance, telephone bills, income tax etc.) are treated as profits from empoloyment.
The rental value of free quarters, the value of holiday warrants
and passages, the value of free board, value of free travel and
similar perquisites also constitute profits from employment.
(Section 4)
2. Exemptions
(1) Certain employees are exempt from income tax on their
official emoluments,
They include:
(i) any individual who holds any paid office under the Republic of Sri Lanka and who is paid such emoluments out of the Consolidated Fund; (ii) any employee of any public corporation which pays such emoluments wholly or partly out of the sums voted by Parliament from the Consolidated Fund; (iii) the Governor and any member of any Provincial
Council; (iv) any employee of any Provincial Council, and any
officer of any provincial public service; (v) any employee of any Local Authority, any University
or the Institute of Policy Studies of Sri Lanka;

(ν)
(vii)
(viii)
any member or any employee of any board or commission of inquiry, all members of which are appointed by the President or by a Minister; any non-citizen employed in any B.O.I. enterprise which has entered into agreement prior to 31.12.1994. The exemption is available only during the period of its tax holiday or, where such enterprise has exercises the option to forgo the balance period of tax holiday in favour of concessionary rate of tax, up to the date on which the tax holiday would have ended if such option was not exercised; any employee of the World Tourism Organization, the International Irrigation Management Institute, the Colombo Plan Bureau, the Asian Development Bank, the World Bank, the International Committee of the Red Cross, or the World Conservation Union.
Pensions and terminal benefits relating to the employments referred to in paragraphs (i) to (v) are also exempt from income tax. Employees of any public corporation which is not referred to in sub-paragraph (ii), are exempt from tax on their pensions and terminal benefits.
(Section 9)
(2) Certain benefits received by an employee are also exempt
from income tax. These include:
(i)
(ii)
(iii)
(iv)
the cost of passage granted to a non-citizen to enable him to come to Sri Lanka to assume duties, to visit his home abroad or to return from Sri Lanka on the termination of his services; the cost of passage granted to a member of the family of such non-citizen to enable him to come to Sri Lanka, to visit his home abroad or to return from Sri Lanka; any allowance received for travelling, subsistence and lodging in respect of travelling abroad in connection with his employment; the value of free transport by motor coach provided by an employer for travel between the employee's residence and the place of work.

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Any sum received by an employee as reimbursement of expenses incurred in the performance of his duties is not
treated as a benefit received by him.
(Section 9)
(3) The emoluments earned in foreign currency by a resident individual from employment abroad are exempt from income tax, if such emoluments (less reasonable personal expenses) are remitted to Sri Lanka.
(Section 9) (4) Where an individual's employment income does not exceed Rs. 60,000 and his other income does not exceed Rs. 2,400, such other income is exempt from income tax. (5) Such part of any sum, paid to an employee at the time of his retirement, from any provident or pension fund as represents income derived by that fund for any period commencing on or after April 1, 1987, from investments made by it is exempt from income tax.
(Section 9)
3. Treatment of Retirement Benefits
(1) The aggregate of certain lump sum receipts at retirement is taxed at lower rates, provided that the employer has made such payments under a scheme which is uniformly applicable to all his employees; or where the payment is made out of a Fund to which the employer has contributed under a scheme which is uniformly applicable to all his employees.
The receipts so taxed are: (i) Commuted pensions; (ii) Retiring gratuity up to a maximum of
(a) Rs. 1,500,000 (up to thc Y| A 1995/96); (b) Rs. 1,500,000 or, the product of average
monthly salary for the last 3 years and the number of completed years of services, whichever is higher, (for the Y1A96/97); (iii) Compensation for loss of office; (iv) Withdrawals from an approved provident fund (excluding the employee's contribution after April 1, 1954); (v) Withdrawals from a regulated provident fund (excluding the employee's contribution and the employer's

contribution to March 31, 1968 and the interest on such contribution, if the employer had paid tax at 15% on both the contribution and interest); (vi) Withdrawals from the Employees Trust Fund.
(Section 32)
(2) The rates applicable to such receipts are -
On the first Rs. 200,000 - Nil On the next Rs. 50,000 - 5% On the next Rs. 50,000 - 10% On the balance - 15%
(First Schedule Part iv)
Note: When the retiring gratuity exceeds the ceiling referred to in sub-para (1) (ii), the excess is added to the normal income and taxed at the progressive rates.
(3) Where the employer does not have a uniformly applicable scheme under which such contributions are made or, by which such payments are made, such payments other than compensation for loss of office are taxed at normal progressive rates. Any compensation for loss of office paid under non-uniform scheme is taxed as a capital gain at rates not exceeding 25%.
. Special Cases - Residence
(1) An employee of the Government who is resident in another country for the purposes of his employment and his spouse are deemed to be resident in Sri Lanka, if his offical emoluments are not liable to tax in that other country. (2) An individual employed in a Sri Lankan ship is resident in
- Sri Lanka. (3) A non-citizen who is employed in Sri Lanka is deemed to be non-resident for a period of three years from the date of commencement of his employment in Sri Lanka. (If such non-citizen is an employee of a flagship company, the non resident period will be 5 years).
)67 Section( ܗܝ . Tax Credit on Employment Income
An individual-other than any non-citizen to whom paragraph 4(3) applies-whose assessable income includes "relevant employment income", is entitled to a tax credit which varies with the
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level of relevant employment income, as set out in sub
paragraphs (1) and (2) below.
Relevant employment income' (REI) means employment income excluding terminal benefits chargeable to tax at concessionary rates specified in para 3(2) of this Chapter, or as capital gains.
(1) Year of Assessment 1995/96
(i) If relevant employment income does not exceed
Rs... 144,000. Tax credit is the lower of
Rs... 15,700; Ο Ι. tax attributable to relevant employment income for the year. (ii) If relevant employment income exceeds Rs. 144,000
but does not exceed Rs. 170,400. Tax Credit is the lower of
Rs. 12,244-35% of (REI-144,000); Ο Υ tax attributable to relevant employment income for the year. (iii) If relevant employment income exceeds Rs. 170,400;
Tax Credit is the lower of Rs. 3,000;
Or tax attributable to relevant employment income for the year.
"Tax attributable to relevant employment income
eaS - Relevant employment income Relevant assessable income "Relevant assessable income' means assessable income excluding terminal benefits chargeable to tax at concessionary rates specified in para 3(2) of this Chapter or as capital gains, subject to a minimum of an amount equal to the relevant employment income. 'Gross income tax' means tax computed on taxable income at normal rates (i.e. rates given in Table 1).
x Gross income tax

(2) Year of Assessment 1996/97
(i) If relevant employment income does not exceed
Rs... 144,000. Tax Credit is the lower of Rs.. 4,850;
Ot tax attributable to relevant employment income for the year. (ii) If relevant employment income exceeds Rs. 144,000
but does not exceed Rs. 50,000. Tax Credit is the lower of
Rs. [3,248-54% of (REI — 144,000)
Or tax attributable to relevant employment income for the year. (iii) If relevant employment income exceeds Rs. 150,000.
Tax Credit is Nil.
(Section 32 EEE)
Examples Year of Assessment 1995/96 Contribution to provident fund by employees - at 8%
RS. (i) Remuneration for the year 120,000 Interest income 40,000
Total statutory income 160,000 Assessable income 160,000
Less: Allowance 60,000
P/F Contribution 9,600 69,600 Taxable income 90,400
Tax 17,890
120,000 Tax attributable to REI = 160,000 x 17,890
= 13,417 Tax credit (lower of 15,700 and 13,417) 13,417
Tax payable 4,473

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(ii)
Remuneration for the year Compensation for loss of office (Paid under a uniform scheme) Trade loss for the year
Employment income
(excluding terminal benefits)
Total Statutory Income
Less: Trade loss
Assessable income
Less: Allowance 60,000 P/F contribution 12,480
Taxable income
Tax
156,000 Tax attributable to REI = 156,000
=8,204
x. 8,204
Rs. 156,000 150,000
25,000
156,000
156,000 25,000 131,000
72,480 58,520 8,204
Tax credit = 12,444-35% (156,000 - 144,000);
ΟΥ 8,204; whichever is less = 8,044 or 8,204
Tax payable (Tax on compensation is nil since it is less than Rs. 200,000 see item 3(2))
8,044 160

CHAPTER 4 TRADE, BUSINESS, PROFESSION OR WOCATION
1. What income is taxed
Only net income from a trade, business, profession or vocation is taxed. It is arrived at by deducting all allowable expenses from the gross income.
(Section 23)
2. Allowable expenses
All outgoings and expenses (except those of a capital nature) incurred in the production of income, including: (1) Capital allowances (see Chapter 10); (2) Trade debts which have become bad during the year. (If a bad debt allowed as a deduction is subsequently recovered, the sum recovered will be treated as income of the year in which it is recovered); (3) Any interest paid or payable; (4) The employer's contribution to a pension, provident or savings fund or society which has been approved by the Commissioner General; (5) The turnover tax payable for the period (deduction may be
disallowed, if tax so payable has not been paid); (6) Income tax payable by a specified employer (public corporation, board, bank etc.) in respect of emoluments of its employees; (7) Research expenses incurred for the development of the
trade or business; (8) Certain capital expenses related to agriculture, animal
husbandry and fishing (see Chapters 20–21); (9) Travelling expenses, including those of employees, within Sri Lanka except those referred to in paragraph 3(1); (10) Travelling allowances paid to employees; (11) Company formation expenses; (12) Expenses incurred by an employer in operating a motor coach used for transporting his employees to and from their place of work;
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(13) Expenses incurred by a person in the payment of gratuity to an employee on the termination of employment of such employee due to cessation of the trade or business; (14) Any annual payment by a person to a fund approved by the Commissioner General and maintained for the purpose of payment of gratuities to employees on the termination of their services; (15) Such part of the rental paid under any lease agreement:
(i) in respect of any motor vehicle, lorry, bus, tractor, trailer or office furniture as does not exceed 25%, (ii) in respect of other plant, machinery, fixtures or
equipment as does not exceed 33 1/3%, of the total rental payable under such agreement. (16) Any special levy paid to the Government by a public corporation or Government owned business undertaking; (17) Proportionate part of the key-money paid in connection with the letting or lease of any commercial premises.
. Disallowable Expenses
(1) Domestic or private expenses, including the cost of travelling between a person's residence and his place of business. (2) All entertainment expenses. (3) Entertainment allowances paid by an employer to his
executive officers. (4) Expenses incurred in travelling outside Sri Lanka. However, travelling expenses incurred abroad solely in connection with the following are allowable -
(i) in the case of a tourist hotel, the carrying out of a
programme approved by the Ceylon Tourist Board, (ii) in the case of others, the promotion of the export trade of any article or the provision of services for payment in foreign currency, (5) Any expenditure of a capital nature or any loss of capital. (6) The cost of any improvements. (7) The rent of, or expenses in connection with, any premises or part of premises not occupied or used for the purposes of producing profits and income. (8) Any amounts paid or payable by way of income tax or wealth tax or surcharges or any other tax of a similar character.

A part of National Security Levy (formerly Defence Levy) is, however, allowable as follows:-
Y/A 95/96
517th of the Levy paid at the rate of 3.5% 719th of the Levy paid at the rate of 4.5% one-half of the Levy paid at the rate of 2%
Y/A 96/97 719th of Levy paid at the rate of 4.5% s one-half of the Levy paid at the rate of 2% * No deduction is available in respect of the Levy paid at 0.5%.
(9) Annuity, ground rent, or royalty paid. (10) One-half of the excess of expenditure incurred in providing a place of residence to an employees over the rental value assessed on such employee.
(Section 24)

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CHAPTER 5 INCOME FROM PROPERTY
1. Net Annual Value
(1) The net annual value of any house owned and occupied by
or on behalf of a person is treated as his income,
(Section 3) (2) Where a house has been rated by a local authority, its net annual value is the rating assessment reduced by 25% for repairs etc.
Rs.
Ex. Rating assessment (or annual value) 30,000 Less: 25% for repairs etc. 7,500 Net Annual value 22,500
(3) The net annual value of the following is exempt from
income tax:
(i) one place of residence owned by, and occupied by or
on behalf of, an individual;
(Section 12) (ii) any building owned by a body of persons, the primary object of which is the promotion of sport and used for such purpose;
(Section 12) (iii) any place of public worship administered by a charit
able institution;
(Section 8) (iv) any premises owned and occupied by a charitable
institution solely for the purposes of that institution.
(Section 8)
2. Rents
(1) Where a building islet, the owner is liable to tax on the net rent which is equivalent to the gross rent receivable less the rates borne by him and a deduction of 25% of the balance for repairs and other expenses. This deduction for repairs etc. is allowed every year irrespective of whether the actual
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expenditure on repairs is more or less than this amoint, if the owner has undertaken to bear the cost of repairs.
(Section 6) Ex: A house situated in Colombo is let at Rs. 5,000 a month. Its rating assessment is Rs. 30,000. The owner paid as rates Rs.9,000. He bears the cost of repairs. His net income is computed as follows:
Rs. Gross rent 60,000 Less: Rates 9,000 Balance 51,000 Less: 25% for repairs and other expenses 12,750 Net rent income 38,250
(2) Where the net rent, calculated as above, is less than the net annual value (rating assessment less 25% thereof) the income which is liable to tax is the net annual value subject to adjustments, if any, for -
(i) months for which the property was vacant;
(ii) months for which rent could not be recovered, and (iii) the occupier’s income.
(Section 3)
. Occupier's Income
Where a person occupies a house rent-free or pays a rent less than its net annual value, the net annual value or the excess of the net annual value over the rent paid, as the case may be, is deemed to be his income.
Ex: A house is rented at Rs. 1,500 a month. The tenant pays the rates and the owner bears the cost of repairs. The rating assessment is Rs. 30,000.
The net annual value RS. Rating assessment 30,000 Less: 25% for repairs etc. 7,500 22,500
The occupier's income: Rs. Net annual value 22,500 Less: rent paid (1,500x12) 18,000 Occupier's income 4,500
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The owner's income:
Net annual value Less: Occupier's income Owner's income

CHAPTER 6 DIVIDENDS
1.
Income from Dividends
Income from dividends is the gross amount of the dividends
increased by the amount of the Advance Company Tax in relation to such dividends. Dividend income arises on the day the company declares the dividend. In ascertaining income from dividends, no deductions are allowed for expenses.
. Deduction of Tax
(1) A resident company (other than a quoted public company) is entitled to deduct, from the dividends payable to shareholders in the form of money or an order to pay money, income tax equal to 15% of such dividends.
(2) A quoted public company is entitled to deduct from any dividend payable tö a non-resident person, income tax equal to 15% of such dividend.
(3) The tax so deducted by a compay can be claimed as a deduction from the the tax payable by a shareholder (other than a company) provided that the dividend forms a part of his assessable income. For this purpose, the shareholder is required to furnish the relevant dividend warrant counterfoils along with his return.
(Section 38)
Advance Company Tax (ACT) Where a resident company pays a dividend consisting of a qualifying distribution, it is required to pay Advance Company Tax (ACT) at the specified rate on the amount of such qualifying distribution made by it (See Chapter 16 — paragraph 3).
Credit for Tax A person, other than a company whose assessable income includes a dividend, is entitled to a credit against the gross tax payable by him for the aggregate of: (1) the tax deducted (referred to in paragraph 2 above), and (2) ACT referred to in paragraph 3 above.
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5. Exempt Dividends
Certain dividends declared by companies, the profits of which are exempt from income tax, are not subject to income tax. These include:
(1) Dividends paid by a company which has entered into an
agreement with the BOI prior to 31.12.1994,
(i) to any person, during the period of tax holiday or within one year thereafter, out of exempt profits, (ii) to a non-resident person. (2) Dividends paid by a company which has entered into an agreement with the BOI on or after 08.11.1995, to any shareholder during the period of tax holiday or within one year thereafter, out of exempt profits. (3) Dividends paid by a company out of exempt profits during
the period of tax holiday or within one year thereafter; (4) Dividends paid by a company, out of such dividends received by it, as are described in sub-paragraph (1), (2) or (3), during the year of assessment in which such dividends were received by it or within one year thereafter; (5) Dividends paid by a company out of such dividends, as are described in sub-paragraph (1), (2) or (3), received by it through one or more intermediary companies, during the period for which such second mentioned dividend is exempt or within two years thereafter if such dividend (1st mentioned) is paid during the year of assessment in which the 2nd mentioned dividend was received or one year thereafter.
(Section 11)
6. Treatment of inter-company Dividends
(1) No deduction of tax at source is made where a resident company pays a dividend out of dividend received by it from another resident company.
(2) A shareholder is assessed on the amount received as dividend increased by 17 11 / 17% and the ACT paid in relation to it and is granted a tax credit equal to 15% of the gross dividend and ACT paid in relation to it except where the dividend has been declared out of exempt dividends received.

Ex.: Mr. A received a net dividend of Rs. 60,000 from B.C. Co. Ltd. The dividend warrant counterfoil contained the following particulars: Date of declaration 10.05.
1996:
Tax ACT Distribution deducted paid at out of Profits Gross 15% Net 27% and Income RS. RS. RS. RS.
which are exempt 17,500 Nil 17,500 Nil in relation to which ACT is not payable Nil Nil Nil Nil in relation to which ACT is payable 50,000 7,500 42,500 13,500 Total 67,500 7,500 60,000 13,500 Net dividend received 60,000 Less: exempt dividend 17,500 Net taxable dividend 42,500 Add: tax deducted 7,500
ACT 13,500 21,000 Gross taxable dividend (income from dividend) 63,500 He will be granted a tax credit of
(i) tax deducted 7,500 (ii) ACT 1300 20500

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CHAPTER 7 CAPITAL, GANS
1. Income from Capital Gains
Capital gains are treated as income, and are taxed only upon realization. The maximum rate of tax applicable to any capital gain is 25% except in the case of capital gains arising from the change of ownership of property occuring within two years from date of acquisition of that property.
2. Incidence of Capital Gains
A capital gain may arise from: (1) the change of ownership of any property which may occur by sale, exchange or in any other manner whatsoever; (2) the surrender or transfer of a right in any property; (3) the redemption of shares or debentures; (4) the formation of a company; (5) the dissolution of a business or the liquidation of a
company; (6) the amalgamation of two or more businesses; (7) the promotion of a transaction by a person who is not a
party to the transaction.
(Section 7)
3. Computation of Capital Gains
(1) The capital gain arising on the change of ownership of a
property is computed as follows: Value of the property at the time of change of ownership Less: (i) value of the property at acquisition, and (ii) deductible expenses. (2) Value of the property at the time of the change of
ownership. - The value of the property at the time of the change of ownership is:
(i) the sale price, if the change occurs by sale; or (ii) the market value at the time of the change of owner
ship, if the change occurs in any other manner.

(3) Value of the property at acquisition:
(i) where the property was acquired before 01.04.77, the
value at acquisition is its market value on 01.04.77; (ii) where the property was acquired after 01.04.77, the
value at acquisition is: (a) the purchase price, if the acquisition was by
purchase; (b) the market value on the date of acquisition, if the
acquisition was in any other manner; (iii) where an immovable property was acquired on or after
1.4.1977 by gift or inheritance: (a) from a person who had owned it prior to 1.4.1977, the value at acquisition is its market value on 1.4.1977 increased by the cost of subsequent improvements to it incurred by the donors deceased, (b) from a person who had acquired that property on or after 1.4.1977, the value at acquisition is - (i) the purchase price, if the acquisition was by
purchase, or (ii) the market value on the date of acquisition, if
the acquisition was in any other manner. increased by the cost of subsequent improvements to it incurred by the donors deceased.
(4) Deductible expenses
The expenses deductible in computing capital gains are:
(i) the expenses incurred on or after 1.4.1977 solely in
connection with the acquisition of the property; (ii) the expenses incurred on or after 1.4.1977 in making improvements to the property (other than those deductible in calculating profits from other sources); (iii) the expenses incurred solely in connection with the
sale or disposal of the property.
(Section 7)
Ex.: A person sold on 10.04. 1995 for Rs. 800,000 a commercial building which he had purchased for Rs. 250,000 on 12.04. 1986. He also incurred the following expenditure:
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RS. RS.
Notarial and stamp fees on purchase 12,500 Addition of a room in 1988 50,000 Installation of drainage in 1990 18,500 Colour washing and repairs (annually) 2,500 Brokerage on sale 15,000
Capital gain arising on this transaction is computed as follows:
Sale price 800,000 Less: Purchase price 250,000 Notarial and stamp fees 12,500 Improvements 68,500 Brokerage 15,000 346,000 Capital gain 464,000
(Expenditure on colour washing and repairs which is incurred for the proper maintenance of, but not for improvement to, the building is not deductible).
4. Exemptions
Capital gains arising in the following circumstances are exempt from tax: (1) the change of ownership of -
(i) a motor vehicle for which a deduction for depreciation
was not allowed; (ii) household effects; (iii) articles of personal use excluding jewellery; (2) When property passes -
(i) on the death of the owner; (ii) on being gifted by the owner; (iii) from a trustee to a beneficiary or from an executor to
an heir; (3) (i) the sale by an individual or the acquisition by the State, of any house constructed by him and used solely for residential purposes; (ii) the first sale by an individual or the first acquisition by the State on or after 1.4.1978, of a house used solely for residential purposes (the sale of any house constructed by him not being taken into account); (4) (i) the transfer of a right to exploit property;
(ii) the surrender of life insurance policy;

(5)
(6)
(7)
(8)
(9)
(10)
(iii) the surrender, transfer or extinction of a life interest; the disposal of shares/stocks
(i) in a company registered in Sri Lanka which has
entered into an agreement with the BOI;
(ii) in a quoted public company;
(iii) held by a Venture Capital Company which is granted
tax holiday status;
(vi) held by a Unit Trust or Mutual Fund which is granted
tax holiday status;
the transfer of the capital assets, when a business carried on by an individual or a partnership is converted into a quoted public company, provided that such part of the assets as were acquired for that business before 31.03.1977 are transferred to the company at a price not exceeding their market value on 31.03.1977;
the transfer of the capital assets where a business carried on by an individual or a partnership is converted into a limited liability company, not being a company referred to in sub . paragraph (6) provided that not less than eighty per centum of the shares of such limited liability company is held by the former proprietor or the former partners in the same proportion in which profits of the partnership were shared;
change of ownership of any property occuring not less than 25 years after the date of acquisition of such property by the person to whom the capital gain arises;
the sale of units, in any Unit Trust or Mutual Fund (not necessarily those granted tax holiday status) by the holders of same after one year from the date of acquisition;
the sale of any capital asset in respect of which an allowance for depreciation has been granted, if the full proceeds of sale are used within one year of sale to replace the asset sold;
(11) the sale of any treasury bill in the secondary market;
(12) the relinquisment or transfer of any right to a shre received
under a rights issue of a quoted public company.
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24
5.
(13) capital gains arising in respect of movable property (other than stocks, shares, debentures or debenture stocks) if the aggregate of such capital gains does not exceed Rs. 2,000
for an year of assessment.
(Section 14(b))
Relief for small Income Earners The first Rs. 5,000 of the capital gain of a person for any year of assessment is exempt from tax, if the total of his assessable income for the 3 preceding years of assessment is less than the total of the tax free allowances to which he is entitled for those years.
(Section 14(c))
Capital Losses (1) A capital loss may arise from -
(i) the change of ownership of any property, (ii) the redemption of shares or debentures, (iii) the dissolution of a business or the liquidation of a
company, or when (iv) a non-trade debt which is proved to be due by
documentary evidence is proved to be irrecoverable.
(2) A capital loss is deductible from a person's total statutory income if such income includes a capital gain and to the extent of such gain. Any unabsorbed capital loss is carried forward to be set off against the total statutory income of a subsequent year which includes a capital gain.
(3) In the event of the death of an individual, any capital loss for the last year of assessment for which he was liable to be assessed is deductible from his total statutory income of that year, whether it includes a capital gain or not, and the balance, if any, can be set-off against the total statutory income of the three preceding years of assessment.
(Section 29(6)
. The Tax Rate
The maximum rate of tax applicable to capital gains other than from the change of ownership of a property is 25%. The rates applicable in respect of capital gains arising from the change of ownership of property depend on the period of ownership. They are:

Period of Ownership Maximum rate
less than 2 years taxed as normal income
2- 5 years 25% 5-15 years 17A9% 15-20 years 124% 20-25 years 5%
25 years or more exempt
Note: When any immovable property is acquired by any person by way of gift or inheritance, the date of acquisition of such property by such person for the purpose of determining the period of ownership is deemed to be the date on which the donor or the deceased, as the case may be, acquired such
property.
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Page 18
CHAPITER 8 INTEREST
1. Income from Interest
(1) Income from interest is the full amount falling due whether
received or not. No deductions are allowed. (2) Where any interest is unpaid and is likely to become
irrecoverable, such interest is excluded from assessment. (3) If such interest is subsequently received, it will be assessed notwithstanding any limitation of time for making an
SSSSSrnet.
(Section 23(4)
Note: (1) In the case of interest receivable on maturity of a fixed deposit placed in a bank or financial institution, such interest may be declared for the year of assessment in which the deposit matures. (2) When interest is received from abroad any tax payable abroad in respect of such income should be deducted and the net sum shown as income, except in the case of interest from countries with which Sri Lanka has entered into Double Tax Conventions in which case the gross interest should be shown.
2. Exemptions
(1) Interest receivable by an individual from the following is
exempt from tax; Ceylon Savings Certificates or National Savings Certificates purchased on or before 15.11.1978. (2) Interest receivable by ary person from the following is
exempt from tax;
(i) moneys held in a Special Account, opened in a commercial bank with the approval of the Central Bank, by the exchange of foreign currency held abroad; (ii) moneys held in foreign currency in any account opened in a commercial bank with the approval of the Central Bank;
26

(iii) moneys heldinforeign currency in any foreign currency
banking unit of a commercial bank.
(3) Interest forming part of the surrender value of any Tax
Reserve Certificate. (4) Interest receivable by a foreign agency from loan granted to the Government, any public corporation, government institution, commercial bank or any other undertaking, if such loan is approved by the Minister as being essential for the economic progress of Sri Lanka.
(Section 10)
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CHAPTER 9 OTHER SOURCES OF INCOME
1. Royalties
28
Royalties are payments received as a consideration for the use of, or the right to use, any copyright, patent, trade mark, know-how etc.
. Premiums
Premiums are receipts such as key money obtained on letting out premises.
... Discounts
Discounts are gains received from the casual discounting of bills of exchange, cheques etc. Gains made by a trader from discounting bills of exchange, cheques etc. in the normal course of his business will, however, be treated as income from his trade.
. Charges or Annuities
(1) A charge is an annual receipt which is secured on the
income or the property of the payer.
(2) An annuity is a fixed sum receivable annually which is not of a capital nature. The payment of an annuity which should be made with reference to a year may be in perodic instalments.
. Other Sources
Income arising from any other source, other than profits of a casual and non-recurring nature, is also liable to tax.

CHAPTER 10 CAPITAL ALLOWANCES
1. Allowances for Depreciation
(1) A person is entitled to an allowance in respect of -
(i) plant, machinery, fixtures, motor vehicle and office furniture acquired by him and used by him in any trade, business, profession or vocation carried on by
him; : (ii) any building constructed by him or any unit of nonresidential accomodation comprised in a registered condominium property acquired by him on or after 1.4.1993, for the purposes of any trade, business, profession or vocation carried on by him (other than for use as a dwelling house by an executive officer) and used by him in such trade, business, profession or
vocation.
The allowance is calculated on a fixed rate percentum per annum on the cost of acquisition or the cost of construction, as the case may be. It is deductible annually in ascertaining his profits from such trade, business, profession or vocation until such time that the total of the allowances deducted is equal to the cost of acquisition or
construction.
, (Section 23(1) (eee))
Cost of acquisition (a) The cost of acquisition of plant, machinery or fixtures
is an amount equal to - . . .
(i) the purchase price of such asset increased by any expenditure incurred in the dismantling of old machinery, and in the installation of new plant machinery or fixtures, or (ii) the market value of such asset on the date of acquisition, where the acquisition is otherwise than by purchase (i.e. gift or inhertance).
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(b) When any capital asset, in respect of which an allowance for depreciation has been granted, is sold and the full proceeds of sale used within one year of the sale, for the replacement of such capital asset, the cost of acquisition of the replaced capital asset is deemed to be the difference between the actual cost of acquisition of the replaced capital asset and the profits on the sale of the asset sold.
(c) When there is a conversion of a proprietory or partnership business into a company other than a quoted public company, the cost of acquisition of the capital asset by the company is deemed to be the cost on the date of acquisition of such asset by the proprietory or partnership business reduced by the amount of depreciation allowed.
(Section 23(7))
Rates of depreciation:
Type of asset Rate Plant, machinery and fixtures, computer software 33 1/3% Motor vehicle and office furniture 25% Qualified building 621.3%
(2) A person is entitled to an allowance in respect of -
(i) furniture, utensils or articles purchased by him for any approved undertaking carried on by him for operating hotels for tourists or for providing buildings for such use; (ii) implements or equipment purchased by him for any undertaking of deep-sea or off-shore fishing carried on by him. The allowance is an once-and-for-all allowance equal in amount to the cost.
(Section 23(1)(d)) (3) Vehicles used for travelling do not qualify for the allowances referred to in paragraph (1)(i). An exception is however made in respect of -
(i) motor cycles or bicycles used by non-executive
employees; and (ii) motor coaches used for the transportation of emplo
yees to, and from, their place of work.
(Section 24(2))

2. Cost of Renewal
The cost of renewal is deductible in respect of assets such as - (i) implements, tools, utensils, furniture and fittings; and (ii) buildings; if these are used for producing income and do not qualify for the allowances referred to in paragraph (1).
(Section 23(1)(f))
3. Disposal of Capital Assets
Where a capital asset in respect of which an allowance for depreciation has been granted is disposed of, certain adjustments are required to be made. (1) Where the proceeds of disposal exceed the actual cost of
the asset: (a) the part which is in excess of the actual cost is treated
as a capital gain, (b) that part which is not in excess of the cost of acquisition is dealt with as set out below in subparagraph (2).
(2) Where the proceeds of disposal do not exceed the cost of
acquisition of the asset: The excess of the proceeds of disposal over the cost of acquisition of the asset reduced by the amount of the depreciation granted in respect of the asset is treated as a receipt of the trade, business, profession or vocation in which that asset is used. i.e. Profit from disposal = Proceeds of disposal - (cost of acquisition-depreciation allowance granted).
Special Cases
(1) Where an asset disposed of is replaced within one year, utilising the full proceeds of disposal, the adjustment referred to in paragraph (3) will not be made. Instead the cost of acquisition of the asset acquired to replace the one disposed of is deemed to be its actual cost reduced by profit from disposal of the asset disposed of.
(2) Where a partnership or a proprietorship is converted into a company (other than a quoted public company), no adjustment
3.

Page 21
is required in regard to any capital gain or any receipts expense arising from the transfer of capital assets to such company.
(Section 23(3) & (7)) Ex. Xpurchased a van on 25.03.1992 for Rs.300,000 for use in his business. He sold it one 10. 12, 1994 for Rs. 250,000 and purchased another van on 12.05.1995 for Rs. 400,000.
Rs. Cost of the old van 300,000 Depreciation allowances granted at 25% on . Rs. 300,000.
for 1991/92 75,000 1992/93 75,000 1993/94 75,000 Total depreciation allowance granted 225,000
1994/95 No adjustment is made for the year
1995/96.
Actual cost of the new van = Rs. 400,000 Cost of acquisition of the new van = actual cost-profit on sale of the old van
= Rs.. 400,000 – 250,000 - (300,000 - 225,000)) = Rs.. 400,000 - 250,000 - 75,000) = Rs.. 400,000 – 175,000 = Rs. 225,000 Depreciation allowance is 25% on Rs. 225,000
= Rs. 56,250

CHAPTER 11 TOTAL STATUTORY INCOME
1. Statutory Income
The statutory income of a person for an year of assessment from each source of income is the income of that year of assessment from that source ascertained in accordance with the rules set out in the preceding Chapters.
(Section 25(t)) 2. Total Statutory Income
The total statutory income of a person for an year of assessment is the aggregate of his statutory income for that year of assessment from every source of his income.
(Section 27)
3. Maintenance of Accounts
(i) A person who carries on any trade, business, profession or vocation is required to make up accounts of that trade, business, profession or vocation for each successive period of 12 months ending on 31st March.
(Section 25(2)) (ii) Any person who is unable to make up the accounts in the manner described in sub-paragraph (i) above is required to give notice in writing to the Commissioner General stating the reasons for his inability to do so. The Commissioner General may direct that person to make up the accounts for such other periods as may be specified by him.
(Section 25(3))

Page 22
CHAPTER 12 AGGREGATION OF INCOME
34
1. Spouse's Income
(1) The income of a wife is not aggregated with that of the
husband. (2) The income received by a spouse for services rendered in any trade, business, profession or vocation carried on by the other spouse, either solely or in partnership with another, is deemed to be the income of that other spouse. (Section 23(6))
2. Child's Income
The total statutory income of a child of a resident individual is aggregated normally with that of his father. However, if the marriage of his parents does not subsist during the year of assessment, it is aggregated with that of his parent who maintains him and with whom he lives in that year. -
(Section 28)
3. Child
A child is defined as an unmarried child under 18 years of age. (Section 163)
4. Non-Subsistence of Marriage
A marriage is deemed not to subsist if the spouses are living apart - (1) under a decree of a court or a duly executed deed of
separation, or (2) in such circumstances that the separation is likely to be
permanent.
(Section 28)

CHAPTER 13 ASSESSABLE INCOME
1. Assessable income
The assessable income of a person for an year of assessment is his total statutory income for that year subject to the deductions specified in the following paragraphs.
(Section 29)
2. Annuity, Ground Rent, Royalty and Interest
(1) Sums payable by way of annuity, ground rent, royalty and
(2)
(3)
interest (which are not deductible under section 23- see sub-paragraph 2(3) of Chapter 4) during an year of assessment are deductible from the total statutory income for that year of assessment. Where the total of such sums payable for an year of assessment exceeds the total statutory income, the excess is treated as a loss. No deduction is allowable in respect of any such sums payable by a person out of Sri Lanka to another person out of Sri Lanka. A deduction may be refused in respect of any such sum payable but which has not been paid. If such sum is subsequently paid and a claim is made by the taxpayer within 12 months from date of paymenthe assessment will be revised notwithstanding any limitation of time.
For the year of assessment 96/97 and subsequent years "interest' referred to in this paragraph means any interest on any loan utilized: - for the construction or purchase of any building or purchase of
any site for the construction of any building; - for the purchase of any share in any company; - for use in any trade, business, profession or vocation.
3. Losses
(1)
A loss incurred by a person in any trade, business, profession or vocation is deductible provided that if
35

Page 23
36
instead of the loss there was a profit, such profit would have been assessable. (2) A loss incurred during an year of assessment is deductible
from the total statutory income of that year. (3) if the loss exceeds the total statutory income of that year; the excess is carried forward to be set-off against the total statutory income of the next year and so on. (4) A loss may be carried back for three years on cessation of a
trade, business, profession or vocation. (5) In the case of an undertaking which is entitled to a period of tax holiday, any loss incurred in an year of assessment during the tax holiday period is set-off against the exempt profits of any subsequent year of assessment during that period and only the unabsorbed loss at the end of the period is available for set-off against the total statutory income of the first year of assessment for which the profits of the undertaking become liable to tax. Any balance of the loss can be carried forward and set-off against the total statutory income of future years. (6) Capital losses (see Chapter 7, paragraph 6).

CHAPTER 14. TAXABLE NCOME
1. Taxable income
The taxable income of aperson for an year of assessment is his assessable income for that year subject to the deduction of an allowance in respect of qualifying payments made by him in that year. In the case of a resident individual or a charitable institution, a further sum is deductible. This sum is Rs. 60,000 in respect of the Y1A95/96 and Rs. 100,000 in respect of the Y1A 96/97. This deduction, however, is not available to trustees, receivers, executors or liquidators.
.(Section 30) 2. Qualifying Payments
A qualifying payment means: (1) A donation in money to -
(i) an approved charity, (ii) the CISIR., (iii) the Sri Lanka Foundation, (iv) the Tower Hall Theatre Foundation,
(v) the Sri Lanka Inventors Commission, (vi) the S.W. R. D. Bandaranaike Memorial Foundation, (vii) the Insititute of Fundamental Studies, Sri Lanka, (viii) the International Winged Bean (Dambala) Institute,
(ix) the Sri Lanka Institute of Printing,
(x) the Arthur C. Ularke Centre for Modern Technologies, (xi) the Institute of Policy Studies of Sri Lanka, (xii) the J. R. Jayawardena Centre; (2) A donation in money or otherwise to -
(i) the Government, (ii) a local authority, (iii) any Higher Educational Institute established or
deemed to be established under University Act, (iv) the Buddhist and Pali University or any Higher Educational Institution established by or under, the Buddhist and Pali University Act,
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Page 24
(v) a fund established by the Government, (vi) a fund established by a local authority and approved
by the Minister, (vii) a fund established by a Provincial Council and
approved by the Minister;
(3) Expenditure incurred on any project included in a develop
ment plan of the Government; (4) Purchase of ordinary shares, other than existing shares,
1 -
(i) an approved undertaking; (ii) certain quoted public companies operating hotels for tourists or engaged in property development projects or engaged in the cultivation of non-traditional agricultural produce or in the cultivation and processing of such produce; (5) (i) The repayment by an individual of capital of a loan obtained on or after 1.4.1973 but on or before 31.3. 1989 from the Government, a bank, a local authority or other approved institution for - (a) the construction of a house, or (b) the purchase of either the first house or the first site, for the construction of a house, purchased on or after 1.4.1973. (ii) The repayment by an individual of capital of a loan obtained on or after 1.4, 1989 but before 1.4.94 from the Government, a bank, a local authority or other approved institution for - (a) the construction of a house at a cost not exceeding Rs. 1,000,000, being the first house constructed after 1.4.1978 or (b) the purchase of either the first house or the first site, for the construction of a house at a cost not exceeding Rs. 1,000,000, purchased on or after 1.4.1978;
(6) (i) Monthly payments, made by an individual in respect of any house let, on or after 1.4.1973 but before 1.4.1989, on rent purchase terms; (ii) Monthly payments made by an individual in respect of a house let, on or after 1.4.1989 but before 1.4.1994,
38

under rent purchase terms, the consideration of which does not exceed Rs. 1,000,000, being the first house purchased on or after 1.4. 1978 on rent purchase terms; (7) (i) Any amount spent by an individual in the construction of a house on or before 31.3. 1989 where such expenditure is not met out of borrowings from sources referred to in sub-paragraph (5)(i), (ii) Any amount spent by an individual in the construction of a house, on or after 1.4.1989 but prior to 1.4.1994, at a cost not exceeding Rs. 1,000,000, being the first house constructed on or after 1.4.1978, where such expenditure is not met out of borrowings from sources referred to in sub-paragraph (5)(ii).
(8) (i) Any amount spent by an individual for the purchase, on or after 1.4.1978 but on or before 31.3. 1989, of either the first house or the first site, for the construction of a house, purchased by him on or after 1.4.1978 where such expenditure is not met out of borrowings from sources referred to in sub-paragraph (5)(i).
(ii) Any amount spent by an individual for the purchase at a cost not exceeding Rs. 1,000,000, on or after 1.4.1989 but prior to 1.4.1994, of either the first house or the first site for the construction of a house, being the first house or the first site purchased by him on or after 1.4.1978, where such expenditure is not met out of borrowings from sources referred to in paragraph (5)(ii).
Note: The expenditure referred to in sub-paragraph (7) or (8) above, may be apportioned among 15 years of assessment, and the amount so apportioned to each year is treated as a qualifying payment for
that year.
(Section 31(3))
(9) Any amount spent by an individual on the "lease' of any unit of residential accommodation constructed with the approval of the Urban Development Authority and forming part of a registered condominum property, if
(i) the lease is for more than 50 years, and
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Page 25
(ii) the full consideration for such lease was paid at the
time the lease agreement was entered into, such a lease of property is treated as a purchase' of property for the purposes of sections 3i (2) (e), 31(2)(g) and 31(3) of the Act. With effect from 1.4.1989, the consideration of the lease agreement should not exceed Rs. 1 million. (10) Contributions made by an individual to an approved provident or pension fund or to a regulated provident fund, if the emoluments, from which such contributions are made, are subject to tax; (11) Expenditure incurred by a person prior to 1.4.1992 on the repair or restoration of any immovable property, damaged or destroyed by riot or civil commotion between 25.7. 1983 and 23.8. 1983, where such expenditure is certified by REPIA or by a government department performing functions similar to REPIA, if such expenditure is not met out of a grant from REPTA or any government fund or the receipts of an insurance policy against such damage or destruction and no allowance is deductible in respect of such expenditure under Section 23.
(12) Any sum invested by any person in the purchase of ordinary shares other than existing shares in any approved undertaking being a company -
(i) referred to in Section 17C or 22 DDD or 22 DDDD, or (ii) carrying on an undertaking referred to in Section 17F, if the sum so invested is certified by such company as being solely for the purpose of expanding the productive capacity of such undertaking.
3. Allowance for Qualifying Payments
(1) The allowance deductible in respect of a qualifying payment is equal to the amount of such qualifying
payment. -
(Section 31(1))
(2) The deduction of certain qualifying payments are subject
to upper limits. These limits are as follows:- (a) Persons other than companies.
(I) Total deduction in respect of all qualifying payments other than those referred to in sub

paragraphs 2(2), (3), (4)(ii), (11) and (12) is restricted to
(i) one third of the assessable income or Rs. 50,000, whichever is lower, and the total deduction in respect of qualifying payments referred to in sub paragraphs 2(3), (4) (ii) and (11) should not exceed Rs. 50,000, (up to the Y1A95/96); V− (ii) one third of the assessable income or Rs. 25,000, whichever is lower, and the total deduction in respect of qualifying payments referred to in sub paragraphs 2(3), (4)(ii) and (11) should not exceed Rs. 25,000, (for the Y1A96/97 onwards); (II) Deduction in respect of a qualifying payments referred to in sub-paragraphs 2(12) is limited to 1/3rd of assessable income. This is in addition to the deduction referrred to in sub-paragraph (I) above. (III) Any part of the allowance in respect of a qualifying payment referred to in sub-paragraphs 2(2), (3), (4) (ii), or (11) which cannot be deducted from the assessable income of the year in which the payment is made is carried forward to be set-off against the assessable income of the next year and so on.
(Section 31 (6))
(b) Companies
(I) Total deduction in respect of all qualifying payments other than those referred to in subparagraphs 2(2), (3), (4)(ii) and (11) is restricted to -
(i) one third of the assessable income (upto the
Y1A95/96); (ii) one fifth of the assessable income (for the
Y| A 96/97 onwards); (II) Any part of the allowance in respect of a qualifying payment referred to in sub-paragraphs 202), (3), (4)(ii) or (11) which cannot be deducted from the assessable income of the year in which the
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Page 26
payment is made can be carried forward to be set-off against the assessable income of the next year and so on.
4. Withdrawal of the Allowance
(1) An additional assessment will be made withdrawing the
allowance granted in respect of a qualifying payment referred to in paragraph 2(4) and (12) if
(i) the shares are disposed of within five years, otherwise than on the death of the individual who purchased them or by the dissolution of the company or body of persons which purchased those shares; (ii) any money in respect of those shares is returned, or (iii) the company which allotted the shares has not utilised the moneys within 2 years for the approved purpose.
(2) The allowance will not be withdrawn if the sale proceeds of
such shares are utilized within one year to purchase ordinary shares, other than existing shares, in an approved undertaking.
(Section 31(7) & (8))
5. Approved Charity
42
(1)
(2)
An approved charity is a public charitable trust or institution which is declared as such by the Minister by notice published in the Gazette Application for approval should be made to the Secretary, Ministry of Finance, Charitable institutions which are engaged in any one of the following activities are eligible for approval provided these are either societies registered under Section 5 of the Societies Ordinance (Chapter 123) or associations and institutions recommended by the appropriate Government authority:
(i) relief of poverty;
(ii) medical relief; (iii) advancement of education.
Religious institutions do not qualify for approval. However, a fund which is set up for the construction or restoration of a place of worship will be considered for approval on the recommendation of the Department of Cultural Affairs or the Archaeological Department.

Where an institution is engaged in several activities some of which are outside the scope of the objects enumerated above, approval can be granted to a particular activity of the institution - e.g. Educational Fund, Medical Fund etc., so long as the institution is in a position to maintain separate accounts and utilise the moneys in the fund solely for the purpose for which approval is sought.
Approved Charities are required to furnish annual statements of accounts to the Department.
(Section 31 (9))
6. Approved Undertaking
(1) An approved undertaking is a company which is engaged
solely in -
(i) carrying on an undertaking capable of exporting goods or of providing services for payment in foreign currency; (ii) the construction and sale of houses; (iii) the development and sale of land for building purposes under any scheme approved by the Minister in charge of the subject of Housing;
(iv) the construction and sale of houses and in the development and sale of land for building purposes under any scheme approved by the Minister in charge of the subject of Housing; (v) carrying on an industrial undertaking for the production or manufacture of goods or commodities being an undertaking which - (a) commences its production or manufacture in an area which is specified as an area of high unemployment by the Minister by notice published in the Gazette and (b) employs more than 25 persons.
(vi) carrying on an undertaking which is considered by the Minister to be essential for the economic progress of Sri Lanka, and which is approved by the Minister by notice published in the Gazette prior to 1.4, 1992, (2) A company which has been approved by the BOI prior to 1.4, 1992 and which has entered into an agreement prior to
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44
1.9.1992 under Section 17 of that the BOT is also an approved undertaking.
(Section 31 (9))
7. Example
The assessable income of a resident individual for the year of assessment 1995/96 is Rs. 300,000. During the year ended on 31.03.1996 he donated Rs. 5,000 to an approved charity, paid life insurance premia amounting to Rs. 15,000 and made monthly repayments of Rs.9,000 on a housing loan obtained from the Bank of Ceylon on 01.06. 1991. He also invested Rs. 20,000 on the purchase of new shares in an approved undertaking,
The total of his qualifying payments:
RS.
donation to approved charity 5,000 repayments of housing loan 90,000 investment in approved undertaking 20,000 15,000
One-third of his assessable income is Rs. 100,000. However, the deductible allowance in respect of these qualifying payments is restricted to Rs. 50,000 and his taxable income is computed as follows:
RS.
Assessable income 300,000 Less: Personal allowance 60,000
allowance for qualifying payments 50,000 110,000
Taxable income 190,000

CHAPITER 15
CALCULATION OF INCOME TAX - INDIVIDUALS
1. Calculation of Income Tax
(1) The income tax payable by an individual is calculated after the determination of his taxable income on the basis of the rates of income tax set out in the First Schedule to the Act.
(2) The rates of income tax applicable to resident individuals and to non-resident individuals are the same except in the case of a non-citizen employce who is deemed to be nonresident during the first three or five years, as the case may be, of his employment (see Chapter 3, paragraph 4(3)).
2. Rates of Income Tax (Y/A96/97)
(1) The rates applicable are:
on the first Rs. 35,000 of the taxable income 10% on the next Rs. 35,000 of the taxable income 15% on the next Rs. 35.000 of the taxable income 25% on the balance of the taxable income 35%
(First Schedule, Part- II) (2) The rate applicable to an employee referred to in Chapter
3, paragraph 4(3) is 15%.
(First Schcdule, Part III)
Note:
(i) Restriction on the rates applicable to capital gains-see
Chapter 7, paragraph 7; (ii) Certain lump sum receipts from employment are taxed on a different rate schedule (see Chapter 3, paragraph 3).
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46
3.
Table of Cumulative Taxable Income and Income Tax Payable
Year of Assesment 95/96
Rate on excess over
Taxable income Tax on lower amount lower amount RS. RS. % 0 - 35,000 Nil 10 35,000 - 60,000 3,500 20 60,000 - 85,000 8,500 30
85,000 - upwards 16,000 35 Y/ A 96/97 - see Table 1
Calculation of Income Tax - Example
1. Assume that your taxable income is Rs... 80,000. STEP 1 Ascertain the lower income figure nearest to (but not exceeding) your taxable income (see the cumulative table) i.e. 60,000 Note the tax applicable to this amount i.e. 8,500
STEP 2 Deduct from your taxable income (Rs.
80,009) the income figure in Step 1 (Rs.
60,000) i.e. 20,000 STEP 3 Take the rate corresponding to the income
figure in Step 1 i.e. 30% STEP 4 Compute the tax at this rate on the result
of Step 2 (30% of Rs. 20,000) i.e. 6,000 STEP 5 Tax payable by you is the sum of the results
in Steps 1 arid 4 (Rs. 8,500 + Rs. 6,000) i.e. 14,500
(2) If as a result of the inclusion of capital gain, part of the
income is taxed at higher rates than the relevant maximum
rate applicable to that capital gain, the tax payable is
calculated as follows:
(i) such part of the income which is taxed at rates higher than the relevant maximum late as is equal to the capital gain, is taxed at that relevant maximum rate, and
(ii) the balance is taxed at progressive rates
Assume that the taxable income of Rs. 80,000 includes a capital gain of Rs. 10,000. The maximum rate of tax applicable to that capital gain is 12%% as the period of ownership is 18 years. Now the tax payable is calculated as follows:

Taxable Income RS. 35,000 10,000 25,000 10,000
80,000
at 10% at 12A% at 20% at 30%
Tax Rs. 3,500 1,250 5,000 3,000
12,750
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Page 29
CHAPITER | 6
CALCULATION OF INCOME TAX - COMPANIES
48
1. Resident Companies
(1) The income tax to which a resident company (including
unit trust or mutual fund) is liable consists of .
(i) a tax at the rate of 35% on the taxable income of the
company, and (ii) a tax of 15% on the dividends declared out of the profits on which the taxahlc income is computed.
A quoted public company is not required to pay the refundable tax of 15% in respect of dividends declared to resident shareholders.
Note: A quoted public company means a resident company whose shares are quoted throughout the year of assessment or where thc company is incorporated during the year of assessment, from the date of incorporation to the end of the year of assessmcnt, in any official list published by any stock exchange licensed by the Sccurities Council.
(Section 163)
2. Non-resident Companies
The income tax to which a non-resident company is liable consists of -.
(i) a tax of 35% on the taxable income of the company, and (ii) a tax amounting to one-third of its remittances abroad or
one-ninth of its taxable income, whichever less.
(Section 34)
3. Advance Company Tax (ACT)
(i) Effective from the year of assessment 1988/89, every resident company is required to pay Advance Company Tax (ACT) on every qualifying distribution made, at the time of making such distribution, for which the shareholders are given credit. ACT paid by a company can be set

(ii)
(iii)
off against tax under Section 33(1)(a), 32F, 32H, 32K, 32M or 32N, falling due, under Section 97, but after the payment of ACT for that year, but such set off cannot exceed 50% of such tax payable by the company. Any excess of ACT which is not so set off cannot be refunded, but can be carried forward to the next succeeding year of assessment. ACT is, therefore, only an advance payment of corporate tax on the profits of the company.
(Section 33A) Qualifying Distributions A qualifying distribution is the whole or part of any gross dividend distributed - (a) by any resident company; (b) on or after April 1, 1988; (c) in the form of money or of an order to pay money; (d) out of the profits taxable at the appropriate rates specified in the Second schedule to the Act, Section 32F, Section 32H, Section 32K, Section 32M or Section 32N or under any agreement entered into with the BOI, under Section 17 of the BOI Law; (This restriction excludes from qualifying distributions, and therefore from the application of the imputation system, dividends paid out of capital gains, L.R.C. interest etc. which are taxable, not at rates specified in the Second Schedule, but at other special rates) (e) not out of profits for any period prior the April 1,
1988; (f) not out of exempt profits; and (g) not out of dividends received from another company. (See definition in Section 163)
Rates of ACT Any company (including a unit trust or mutual fund) on qualifying distribution made -
- out of profits taxable at 35% - 27% - out of profits taxable at 10% under section
32F or any agreement with BOI 5%
- out of profits taxable at 15% under
section 32H, 32K, 32M or 32N, or any agreement with BOI 8%
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50
(iv) Credit to resident shareholders other than companies.
Every resident person other than a company whose total statutory income for any year of assessment includes a dividend in relation to which ACT has been paid, is entitled to credit against the tax payable by him, for the amount of ACT attributable to such dividend.

CHAPTER 7
CHARITABLE INSTITUTIONS
1. Charitable Institution
(1) A charitable institution is one -
(i) established for a charitable purpose only, or (ii) engaged solely in carrying out a charitable purpose, (2) Charitable purpose means a purpose for the benefit of the public or any section of the public, falling within any of the following categories:
(i) the relief of poverty, (ii) the advancement of education or knowledge, (iii) the advancement of religion or the maintenance of religious rites and practices or the administration of a place of public worship, (iv) any other purpose beneficial or of interest to mankind, (Section 163)
2. Basis of Liability
Charitable institutions are liable to income tax, subject to the exemptions set out in paragraph 3, on income derived from the sources enumerated in Chapter 2.
Offertories, subscriptions and donations received by a charitable institution are not liable to income tax.
3. Exemptions
The following incomes are exempt from tax:
(1) The net annual value of a place of public worship
administered by a charitable institution:
(2) The net annual value of any premises owned and occupied
by such institution;
(3) The income from any property donated by royal grant before 2.3.1815 to a place of public worship administered by such institution which is applied for the purpose for which the grant was made;
(4) The profits of a business carried on by a charitable
institution if -- ممنx^ * 8

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52
(i) such profits are applied solely to a charitable purpose,
and (ii) the business is carried on in the course of carrying out a primary purpose of the institution, or the work in connection with the business is mainly performed by the beneficiaries of the institution, or (iii) such institution receives grants from the Government and is approved by the Minister, and the business is of a casual nature.
(Section 8(d))
4. Exemption Limit
A charitable institution is liable to tax only if its assessable income exceeds: Rs. 60,000 for the Y1A95/96, Rs. 100,000 for the Y| A 96/97.
(Section 30(2))
5. Rate of Income Tax
The rate of income tax applicable to charitable institutions:
10% of taxable income.
(Third Schedule)

CHAPTER 18
CLUBS, TRADE ASSOCIATIONS AND
CO-OPERATIVE SOCIETIES
1. Basis of Liability
(1) Clubs
(i)
(ii)
(iii)
(iv)
A club or a similar institution is liable to income tax on income derived from the sources enumerated in Chapter 2; Where a club or a similar institution receives more than three-fourths of its gross receipts (including entrance fees and subscriptions) from its members, it is liable to income tax only on its investment income (i.e. rents, interest, divideneds, net annual value etc.); Where a club or a similar institution receives less than three-fourths of its gross receipts from its members, it is treated as carrying on a business and is liable to income tax - (a) on its income from transactions both with
members and others (including entrance fees and
subscriptions), and (b) on its investment income; Sports clubs, sports controlling bodies and associations other than trade associations are governed by the above rules.
The net annual value of any building owned by such a institution, the primary object of which is the promotion of sport and used for such purpose, is, however,
exempt from income tax.
(Section 90(1))
(2) Trade associations -
(i)
A trade association or a chamber of commerce is treated as carrying on a business if more than half of its receipts by way of entrance fees and subscriptions are from persons who can claim these sums as deductions from their income. In such an event it is liable to income tax either -.

Page 32
54
(a) on its income from transactions both with members and others (including entrance fees and subscriptions), or (b) on its investment income, whichever is the grater. (ii) A trade association or a chamber of commerce which is not treated as carrying on a business is liable to income tax on its investment income.
(Section 90(2)) (3) Co-operative societies -
A registered co-operative society within the meaning of the Co-operative Societies Law, No. 5 of 1972, is exempt from income tax on profits arising to it from any business carried on by it, if such business has been gazetted as such by the Minister. (To date no such notifications have been
made).
(Section 8(a) (xxvi)
2. Rates of Income Tax
The rate of income tax applicable to clubs, associations and co-operative societies is 20% of the taxable income.
(Third Schedule)

CHAPER 19 RECEIVERS, TRUSTEES AND EXECUTORS
1. Liability of Receivers
A receiver is liable to pay income tax on the income of the properties subject to his control. A receiver includes any liquidator, and any assignee, trustee, or person having the possession or control of the property of any person by reason of insolvency or bankruptcy.
The rate of income tax applicable to a receiver is 35%.
2. Liability of Trustees
A trustee is liable to pay income tax on the income of the trust less the share of the income of the trust to which the beneficiaries are entitled.
(Section 60)
3. Liability of Executor
An executor is liable to pay the tax due from the deceased in respect of periods prior to his death.
In respect of periods subsequent to the death of the deceased, the executor is liable to tax only if the shares of income to which the heirs are entitled cannot be ascertained.
Where the executor is liable to tax in respect of periods subsequent to the death of the deceased, the rate of income tax is 35%.
(Section 62) An executor is required to furnish a return of the income of the estate administered by him. An executor includes an administrator or a person who takes possession of or intermeddles with the property of the deceased.
4. Liability of Heirs or Beneficiaries
lf the shares of income to which the heirs or beneficiaries are entitled can be ascertained, such shares will be treated as income of the heirs or beneficiaries and assessed on them.
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CHAPTER 20 TAX CONCESSIONS FOR AGRICULTURE
AND ANIMAL HUSBANDRY
56
. Tax Holiday
The profits and income of any new company, which is engaged only in carrying on one or more of the following undertakings and which is approved by the Minister of Finance, are exempt from income tax for a period offive years calculated from the date on which such undertaking commenced to carry on business;
(i) an undertaking for cultivating land with any plants other
than tea, rubber, coconut or paddy, (ii) an undertaking for animal husbandary, (iii) an undertaking for carrying on any of the above activities
and processing the product of such activity, (iv) an undertaking for the production, from any agricultural produce, of any commodity specified by the Minister.
Section 17A)
Under (iv) above — the following have so far been specified by Gazette Order: (a) dehydrated or pickled vegetables and vegetable juices; (b) starch from tapioca, (c) edible oils from any agricultural product other than
coconut oil and gingelly oil; (d) desiccated coconut which is manufactured using modern
continuous scale, automated process technology.
Exemptions
The following are exempt from income tax:
(i) Dividends paid by a company out of exempt profits - (see
Chapter 6, paragraph 3);
(ii) Any subsidy or grant paid from, by or under -
(a) the Capital Fund of the Sri Lanka Tea Board; (b) the Rubber Replanting Subsidy Fund; (c) the Coconut Cultivation Board; (d) the Cocoa Planting Subsidy Scheme;

(e) the Mill development Fund administered by the
Coconut Development Authority; (f) any other scheme for the planting or replanting of any
agricultural product.
(Section 13) 3. Deduction of Certain Expenditure
The following expenses are deductible in ascertaining the profits: (1) Expenses incurred on agricultural research for the develop
ment of the business; (2) Expenses incurred in opening up any land for cultivation or animal husbandary. These would include the cost of -
(i) clearing land of trees, shrub or undergrowth; (ii) filling up and draining marshy land; (iii) terracing; (iv) constructing fences;
(v) constructing access roads and tracks; (vi) constructing irrigation canals; (vii) sinking wells; (viii) preparation of land for planting, and
(ix) young plants. (3) Expenses incurred in cultivating that land with any plant
These would include the cost of:
(i) maintenance of immature areas, and (ii) replanting the land with the same or a different plant. (4) Expenses incurred in the purchase of livestock or poultry
to be reared on that land.
(Section 23(1) (1) & (m))
57.

Page 34
CHAPTER 21 TAX CONCESSIONS FOR FISHING
1. Tax Holiday
A five year tax holiday is available to a new company which is engaged only in carrying on an undertaking for ;-
(i) marine or inland fisheries, or (ii) marine or inland fisheries and processing the product of
such activity.
The exemption is available to a company if
(a) it is approved by the Minister by Order published in
the Gazette, and
(b) it is not formed by the splitting up or reconstruction of
a business already in existence.
The period of five years is calculated from the date on which such undertaking commenced to carry on business. (Section i7A)
2. Exemptions
The following are exempt from income tax:
(i) Dividends paid by a company out of exempt profits (see
Chapter 6, paragraph 3); (ii) Any subsidy or grant paid by the Ministry of Fisheries for the purchase of fishing boats, marine engines, fishing gear and other fishing equipment.
(Section 13)
3. Deduction of Certain Expenditure
The following expenses are deductible in ascertaining the profits:
(1.) Expenses incurred on any scientific, industrial or agricultural research for the development of the business;
(Section 23(1)(1))
(2) Expenses incurred in the purchase of any implement or
equipment for fishing;
(Section 23(1)(d))

(3) Expenses incurred on inland fishing projects in -
(i) the construction of tanks or ponds; (ii) the clearing and preparation of inland waters for the of
fish, and (iii) the purchase of fish for rearing.
(Section 23(1) (m)
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Page 35
CHAPTER 22 TAX CONCESSIONS FOR NEW COMPANIES UTILIZING ADVANCED TECHNOLOGY
1. Tax Holiday
A five year tax holiday is available to any company which is - incorporated on or after 1.4.95;
and - engaged in carrying on any
— industrial undertaking for the production or manu
facture of any goods or commodities, or - undertaking for the provision of any service, utilizing advanced technology; if
(i) it has, prior to the expiry of 2 years from the date of its incorporation, invested a minimum of Rs. 10 million in the purchase of plant, machinery, fixtures or equipment for the use of the undertaking;
(ii) within a period of 6 months from the date of commencement of business, it employs not less than 50 employees and continues to employ such number of employees during the period of tax holiday;
(iii) it is not formed by the splitting up, reconstruction or acquisition of a business previously in existence; and
(iv) it is approved by the Minister of Finance by notice published in the Gazette on or before March 31, 1997, on an application in that behalf, made on or before September 30, 1996.
The profits arising from the sale of capital assets will, however, not be exempt.
Tax holiday commences from the begining of the year of Assessment in which the company commences commercial operations.
11:1 Advanced Technology (Section 17J)
Advanced technology means technology -
(a) which introduces a new design, formula or process for the
manufacture of an article or in the provision of a service,

resulting in one or more of the following:
- higher productivity resulting in lower cost of
production,
quality improvement of product/service,
better utilization of raw material,
upgrading of technical skills,
minimises/controls pollution and/or wastage;
(b) for manufacture of new products using technology hitherto not applied in Sri Lanka (excluding technology involving only simple processing);
(c) for the local processing of raw materials which are currently imported in processed form, excluding simple types of processing;
(d) hitherto unutilised in Sri Lanka that would make use of local resources to provide public utilities and infrastructure service.
2. Exemption of Dividends
Dividends paid out of exempt profits by a company carrying on an undertaking referred to in paragraph 1 are exempt from tax.
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CHAPITER 23
TAX CONCESSIONS FOR EXISTING UNDERTAKINGS UTILIZING ADVANCED
TECHNOLOGY
1:
62
1.
. Tax Holiday
An undertaking for the production or manufacture of goods or commodities or for the provision of any service, which acquire and utilize advanced technology is entitled to an exemption of its profits attributable to new capital expenditure for a period of 5 years from the relevant date, if the following conditions are satisfied:-
(i) new capital expenditure of not less than ten million rupees is incurred within a period of twelve months from the relevant date for the acquisition and utilization of advanced technology;
(ii) the undertaking increases the number of employees by not less than 50 within 6 months from the relevant date and maintains such increased number until the tax holiday ends,
(iii) the undertaking is approved by the Minister of Finance by notice published in the Gazette on or before March 31, 1997 (on an application made in that behalf on or before
September 30, 1996):
(Section 17K)
Profits Attributable to new Capital Expenditure The quantum of profits attributable to new capital expenditure (i.e. the exempt part of profits) is computed as follows:
(i) Take profits of the undertaking (for the year in question)
and reduce it by the appropriate percentage given below:
Year of Assessment The per centum by which the profits should be reduced
The year of assessment in which the relevant date falls 10%
2. The next year of assessment 10%

3.
4.
5.
6.
12
13
The next year of assessment 12.5%
The next year of assessment 15% The next year of assessment 17.5% The next year of assessment 20%
(ii) Take the annual average of profits of the undertaking for
the 3 years preceding the relevant date.
(iii) The excess of (i) over (ii), subject to the following ceiling, represents profits attributable to new capital expenditure.
The ceiling - 120. NP
100 R -- N ,
where
N = New capital expenditure
P = Profits of the undertaking for the year in question (before reduction)
R = Capital expenditure incurred prior to the relevant date.
“Capital expenditure' means expenditure incurred in the purchase of plant, machinery, fixtures or equipment or any other assets (other than land or building).
"Relevant date" means a date selected by the undertaking and falling between November 1, 1995, and April 1, 1997.
“Advanced technology" see paragraph 1.1 of Chapter 22.
Applicability of other Tax Holiday Where for any year of assessment the tax holiday described above and the tax holiday under Section 17F are both applicable to any undertaking, then the exemption will be granted under that Section which is more advantageous to the taxpayer.
Exemption of Dividends Dividends paid out of exempt profits by a company carrying on an undertaking referred to in paragraph 1 are exempt from income tax.
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CHAPTER 24 TAX CONCESSIONS FOR EXPORTS AND THE PERFORMANCE OF SERVICES FOR PAYMENT IN FOREIGN CURRENCY
1. Concessionary Tax Rate
A concessionary tax rate is available to any person, for a specified period, in respect of "qualified export profits and income':
Qualified export profits Adjusted trade pro- Export turnover of and income (in relation fits from any specified that specified under
to any person and to = undertaking (for taking (for any year of assess- that YIA) X that Y1A) ment) Less-profits -
from the sale of Total turnover of (i) any gem or specified undertaking
jewellery and (for that YIA) (ii) any capital
asset
'specified undertaking' means an undertaking engaged in the export of any "non-traditional goods' or the performence of certain 'specified services' for payment in foreign currency.
"non-traditional goods' means the goods other than black tea in bulk, crepe rubber, sheet rubber, scrap rubber, coconut oil, desiccated coconut (other then desiccated coconut manufactured by using continuous scale automated process technology and marketed with a quality guarantee), copra, fresh coconuts and coconuts fibre.
'specified services' are the services of ship repair, ship breaking, repair and refurbishment of marine cargo containers, provision of computer software, computer programmes, computer systems or recording computer data, for payment in foreign currency.
Export turnover F. The total amount received or receivable by the specified undertaking from the export of non-traditional goods or the provision of

any specified service excludingany amount received or receivable from:
(i) the export of any gem or jewel
lery; and (ii) the salc of any capital asset.
Total turnover = The total amount received or receivable by the specified undertaking from any trade or business excluding any amount received or receivable from the sale of
(i) any gem or jewellery; and
(ii) any capital asset.
Notes: (1) The expression "qualified export profits and income' has no relevance in relation to 2001)(b) company during the period of its tax holiday.
(2) Profits from the export of gems and/or jewellery are exempt from income tax under Section (15m)/ 15(mm). (Section 32(q)
1:1 Specified undertakings which commenced business on or after
10.11.1993 Where the taxable income of any person for -
- any year of assessment falling within the period from April
1, 1994 to March 31, 2014
includes any
- qualified export profits and income from any specified undertaking which commenced business on or after 10. 11.1993,
then the tax on such qualified export profits and income is
computed
(a) at 15%, if such person is a company, and
(b) at progressive rates not exceeding 15%, if such personis an
individual
Notes: (1) The tax is computed in the same manner as the tax on
capital gains.
(2) In accordance with thc practice hitherto followed, the deductions, if any, (under sections 29, 30 and 31) in
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Page 38
arriving at the taxable income, will firstly be made from income other than qualified export profits.
(Section 32G, 32H)
Illustration X is an exporter who commenced business on 1.1. 1994. (i.e. after 10. 1, 1993).
His turnover and profits from the year of assessment 1994/95 are as follows:
1. Turnover
Rs. Export of non-traditional goods 3,000,000 Local sales 100,000 Sale of old machinery 150,000 Export of jewellery 200,000 Interest 68,000 3,518,000 2. Adjusted trade profits (includes Rs. 50,000 being
profits on sale of machinery) 1,050,000 Year of Assessment 1994/95 Total receipts 3,518,000 Less: Sale of machinery 150,000 Export of jewellery 200,000 Interest 68,000 418,000 Total turnover 3,100,000 Total receipts from export 3,200,000 Less: Fxport of jewellery 200,000 Export turnover 3,000,000
Qualified export
Ε t profits and income = Adjusted Profits x Export Turnover
Total Turnover
Less: Profits from the sale of jewellery and capital assets
3,000,000
3,100,000
= 1,000,000 x
= 967,742

Note: Profits from export of jewellery is exempt and, therefore,
does not from part of the edjusted trade profits. Case I X is a company
Rs.
Adjusted trade profits 1,050,000 Interest 68,000 Total statutory income 1,118,000 Taxable income 1,118,000 Tax on: qualified export profits
(15% of 967,742) 145,161 other profits (35% of 150,258) 52,590 Total Income Tax 197,751.
Case II X is an individual
- Interest paid on housing loan 40,000 - Capital repaid (loan) 90,000 Total Statutory Income 1,118,000 Less: Interest 40,000 Assessable income 1,078,000 Less: Allowance 42,000
Qualifying payment 50,000 92,000 Taxable Income 986,000
Taxable Income of Rs. 986,000 consists of -
(i) Rs. 967,742 being qualified export profits; and (ii) Rs. 18,258 being other profits. Tax: 1st Rs. 35,000
(i.e. Rs. 18,258 + Q.E.P. Rs. 16,742) at 10% - 3,500 Balance (Rs. 967,742 - Rs. 6,742) at 15% - 142,650
146,150
1:2 Specified undertakings which commenced business before
10.1.1.1993 Where the taxable income of any person for
– any year of assessment falling within the period from April
1, 1995 to March 31, 2015
includes any
- “qualified export profits and income' from any specified undertaking which commenced business before 10.11, 1993
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Page 39
then, the tax on such qualified export profits and income is
computed -
(a) at 15%, subject to Note (2), if such person is a company,
and
(b) at progressive rates not exceeding 15%, if such person is an
individual
Notes: (1) Notes (1) and (2) given under para 1.1 are applicable. (2) Export profits and income of a 2001)(b) company will be
- exempt upto the end of the tax holiday period, and
- taxable at 15% from the end of the tax holiday period upto March 31, 2015.
(Section 32J, 32K)
1:3 Dividends out of qualified export profits and income
(a) The following dividends forming part of the taxable income of a person (other than a company) are taxed at progressive rates not exceeding 15% -
(i) Dividends out of qualified export profits and income of a company paid during the period for which such profits are chargeable to tax at 15% or within one year thereafter;
(ii) Dividends, out of qualified export profits and income of a BOI company, paid during the period for which such profits are chargeable to tax at the rate of 15% or within one year thereafter;
(iii) Dividends, out of such dividends received as are described in item (i) or (ii), paid during the year of assessment in which such dividends were received or within one year from the end of that year of assessment;
(iv) Dividends out of such dividends —
- as are described in item (i) or (ii); - received through one or more intermediary companies, during the period for which the dividend referred to in (i) or (ii) are exempt or within two years thereafter;
and paid during the year of assessment in which such
68

1:4
1:5
dividends were received or within one year from the end of that year of assessment;
Section 32L(2)
(b) Any dividend received by a company in certain specified circumstances does not form part of its assessable income. Any dividend received by a company in other circumstances does form part of its assessable income. Where a company, receives in such other circumstances, any dividend paid out of profits taxable at 15% such dividend is taxable in the hands of the recipient company at 15%.
(Section 32L(3)) Supplies to exporters (indircct exports) Where any person or partnership carries on any undertaking for the production or manufacture and supply to any specified undertaking, of any:
- commodities for export, or - goods for the production, manufacture or packaging of
any commodity for export,
by such specified undertaking, then the profits and income from such supplies are taxed
(i) at the flat rate of 15%, if such supplier is a company,
(ii) at rates not exceeding 15%, in the same manner as the tax on capital gains, in the hand of the proprietor or partners, if such supplier is a proprietary concern or partnership.
Profits and income earned in foreign currency, on or after 01.04.1995, from services rendered outside Sri Lanka The profits and income earned abroad (in foreign currency) by any resident company or partnership from carrying on any profession or vocation, or carrying out any construction project are chargeable to tax at rates not exceeding 15%, as follows:
Where the taxable income of any company resident in Sri Lanka or of a partner of a partnership for any year of assessment commencing on or after April 1, 1995 includes any profits and income referred to in section 32N, then the tax on such profits and income is computed:
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Page 40
1:6
2:
2:2
70
(a) at 15%, in the case of a company; and (b) at progressive rates not exceeding 15%, in the case of an
individual (being partner of a partnership).
(Section 32N)
Emoluments and fees earned in foreign currency on or after 01.04.1995, from services rendered in Sri Lanka.
The emoluments and fees earned in foreign currency by any resident individual or partnership from any service rendered in Sri Lanka, for any person or partnership outside Sri Lanka in the course of carrying on any profession or vocation (but not in the course of employment) if such emoluments and fees are remitted to Sri Lanka through a hank, are chargeable to tax at rates not exceeding 15%.
(Section 32P) Tax Holiday and Exemptions Export Production Village Company (Tax Holiday)
The profits and income of any new Export Production Village, approved by the Minister of Finance, being a peoples company of which the shareholders are the Export Development Board and the producers of the products of that company and the products of which are exported, are exempt from tax for a period of five years, calculated from the date on which such company commenced to carry on business. Cultivation of crops and agro based industries undertaken by such companies for export qualify for this exemption.
(Section 17A)
Consignors The profits and income arising in Sri Lanka, to the consignor or consignee from the export of -
(i) any precious stones or metals not mined in Sri Lanka; (ii) any petroleum, gas or petroleum product, or (iii) such other products as may be approved by the Minister; which are brought to Sri Lanka on a consignment basis, and re-exported, without subjecting them to any process or manufacture, are exempt from tax.
(Section 15 (p))

2:3
2:4
2:5
2:6
Facilities for the Storage of Goods The profits and income arising to any person from an undertaking approved by the Minister, for the operation and maintenance of facilities for the storage of goods or commodities brought into Sri Lanka for re-export are exempt from taX.
(Section 15(s))
Profits and income earned by National Association of Sports The profits and income earned in foreign currency by any National Association of Sports from services rendered or from taking part in any sport, outside Sri Lanka are exempt from tax, if such profits and income, less reasonable overseas expenses, are remitted to Sri Lanka.
(Section 15 (cccc)
Emoluments Earned Abroad The emoluments earned in foreign currency by a resident individual from services rendered abroad in the course of any profession or vocation are exempt from income tax, if such emoluments (less reasonable personal expenses) are remitted to Sri Lanka.
(Section 15(c))
Exemption of Dividends Dividends paid by a company out of exempt profits referred to in this paragraph (paragraph 2) are exempt from income tax.
Deduction of Certain Expenditure Expenses incurred in travelling or advertising outside Sri Lanka, solely in connection with the promotion of the export trade of any article or goods or the provision of any services for payment in foreign currency, are deductible in ascertaining the profits. (However, in the case of tourist hotels, no travelling expenses incurred outside Sri Lanka, other than such expenses incurred in carrying out an approved programme, is deductible).
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Page 41
CHAPTER 25
TAX CONCESSIONS FOR HOUSING
1. Exemptions
(1) Net annual value
(i) The net annual value of one house owned by, and occupied by or on behalf of, an individual is exempt from income tax.
(Section 12(1)(a))
(ii) The net annual value of any house owned and occupied by an individual is exempt from income tax for the year of assessment in which the construction of that house was completed and for the next 6 years. Where the floor area of the house does not exceed 1,500 sq. ft., the exemption is available for a further period of 3 years.
(Section 12 (b) (2) Rent
Rent accruing from any house owned solely for residential purposes is exempt from income tax for the year of assessment in which the construction of that house was completed and for the next 6 years, if
(i) it is house to which the Rent Act applies; or (ii) its floor area (inclusive of the thickness of the walls)
does to exceed . (a) 3,000 sq. ft. if the construction of such house is
completed on or before 31.3. 1989, (b) 2,000 sq. ft., if the construction of such house is
completed on or after 01.4.1989.
Where the floor area of the house does not exceed 1,500 sq. ft., exemption is available for a further period of 3 years.
(Section 12(1) (b), (bb))
(3) Conversion into Residential Units
Where a house, the income from which is not exempt from
72

(4)
income tax, is converted into two or more residential units and each such unit is assessed separately for rating purposes, the income accruing from each such residential units is exempt from income tax -
(i) for the year of assessment in which the conversion was effected and for the next 5 years, if the floor area of that units does not exceed 1,000 sq. ft., or (ii) for the year of assessment in which the conversion was effected and for the next 3 years, if the floor area of that unit does not exceed 2,000 sq. ft.
(Section 12(1)(c))
Capital Gains The capital gains arising from the change of ownership of any house are either exempt or taxable at reduced rates:
(i) The following are exempt:
(a) Capital gains arising to an individual on the first sale or the acquisition by the State of any house constructed by him and which is used solely for residential purposes;
(b) Capital gains arising to an individual on the first sale or the acquisition by the State, after 01.4.1978, of any other house used solely for residential purposes;
(c) Capital gains arising to any person from the change of ownership of any house occuring not less than 25 years after its acquisition by such person.
(Section 14(a))
(ii) The following capital gains are taxed at reduced rates: The capital gains arising to any person from the change of ownership of any house, occurring: (a) between 2 years and 5 years after its acquisition by such person-taxable at a maximum rate of 25 per cent,
(b) between 5 years and 15 years aftre its acquisition by such person - taxable at a maximum rate of 17% per cent,
(c) between 15 years and 20 years after its acquisition
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Page 42
by such person - taxable at a maximum rate of 12%
per cent, (d) between 20 years and 25 years after its acquisition
by such person -- taxable at a rate of 5 per cent.
(5) Profits from the construction and sale of certain houses
Where an undertaking engaged in the construction and sale of houses is approved by the Commissioner of National Housing, 75% of the profits arising from the first sale of any house or flat, the floor area of which does not exceed 2,000 sq. ft., and the construction of which was commenced on or after 01.01.1977, is exempt from income taX.
(Section 21(2))
(6) Dividends
Dividends paid by a company carrying on an undertaking for the construction and sale of houses out of its exempt profits are exempt from income tax.
(Sce, Chapter 6, paragraph 3)
2. Relief for Investment
The following expenses are deductihle from the assessable income of a person as "qualifying payments':
(1) Any sum invested by a person in the purchase of ordinary shares, other than existing shares, in a company which carries on an undertaking for the construction and sale of houses, and which is approved under Section 31.
(2) (i) The repayment by an individual of capital of a loan obtained on or after 014. 1973 but on or before 31.3.1989 from the Government, a bank, a local authority or other approved institution for -
(a) the construction of a house, or
(b) the purchase of either the first house or the first site for the construction of a house, purchased on or after 01.04.1973.
(ii) The repayment by an individual of capital of a loan obtained on or after 01.4.1989 but prior to 01.4.94 from the Government, a hank, a local authority or other approved institution for -

(a) the construction of a house at a cost not exceeding Rs. 1,000,000 being the first house constructed after 1.4.78, or (b) the purchase of either the first house or the first site for the construction of a house, at a cost not exceeding Rs. 1,000,000 being the first house purchased on or after 1.4.1978.
(Section 31(2) (ee))
(3) Monthly payments made by an individual in respect of a house let on crafter 01.4.1973 on rent-purchse terms. With effect from 01.4. 1989, the consideration of the rent
purchase agreemerts should not exceed Rs. 1,000,000.
(Section 31 (2) (ee))
(4) (i) The amount spent by an individual in the construction of a house on or before 31.03. 1989 where such expenditure is not met out of borrowings from sources referred to in sub-paragraph (2). (ii) The amount spent by an individual on or after 0.4. 1989 but before 1.4.1994 on the construction of the first house, constructed on or after 01.04. 1978, at a cost not exceeding Rs. 1,000,000 where such expenditure is not met out of borrowing from sources referred to in sub-paragraph (2).
(5) (i) The amount spent by an individual for the purchase ot. or after 01.4.1978 but on or before 3.03.1989 of either the first house or the first site for the construction of a house purchased by him on or after that date where such expenditure is not met out of borrowings from sources referred to in paragraph (2). (ii) The amount spent by an individual for the purchase on or after 0.04.1989 but before 014. 994 of either the first house or the first site for the construction of a house at a cost not exceeding Rs. 1,000,000, being the first house or the first site purchased by him on or after 01.04.1978, where such expenditure is not met out of borrowings from sources referred to in sub paragraph (2). (6) The amount spent by an individual on the lease of any unit of residential accommodation constructed with the appro
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Page 43
76
val of the Urban Development Authority and forming part
of a registered condominum property, if
(a) the lease is for more than 50 years, and (b) the full consideration for such lease was paid at the
time the lease agreement was entered into.
With effect from 01.04. 1989, the consideration of the lease agreement should not exceed Rs. 1.000,000.

CHAPTER 26 TAX CONCESSIONS FOR GEM AND JEWELLERY TRADE
The following are exempt from income tax:
(1) The profits arising from -
(i) the export of gems and/or jewellery; (ii) the sale of gems to the State Gem Corporation; (iii) the sale of gems and/or jewellery for foreign currency by
any person authorized to accept foreign currency.
(Section 15)
(2) The dividends paid by a company out of profits which are
exempt from income tax under the foregoing paragraph.
(See Chapter 6, paragraph 3)
Note: Specific approval of the Minister is not necessary.
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CHAPTER 27
TAX CONCESSIONS FOR NON-RESIDENTS OPERATING YACHTS AND PLEASURE CRAFT
The profits of any undertaking for operating yachts and pleasure craft registered with the Director of Merchant Shipping are exempt from income tax if such undertaking is .
(i) carried on by individuals who are not citizens of Sri Lanka or by a company the shares of which are owned entirely by individuals who are not citizens of Sri Lanka or by nonresident companies; and
(ii) approved by the Minister of Finance.
(Section 8(e))
78

CHAPTER 28
TAXATION OF FOREIGN EMPLOYEES
1. Exemptions
(1) The official emoluments, arising in Sri Lanka, and other income arising ahroad of the following persons are exempt from income tax:
(i) the diplomatic reprsentative in Sri Lanka of a foreign
Government and certain members of his staff;
(ii) any official of the UNO who is not a citizen of Sri
Lanka;
(iii) any employee of the Asia Foundation who is not a
citizen of Sri Lanka;
(iv) any expert, adviser, technician or official who is
(ν)
brought to Sri Lanka by the Government of Sri Lanka through - (a) any specialised Agency of the UNO, (b) the Point Four Assistance Programme, (c) the Colombo Plan Organization, (d) the Asia Foundation, or (e) a similar organization approved by the Minister;
and whose salary is either
(i) not payable by the Government of Sri Lanka,
ΟΥ (ii) payable out of funds provided by way of grant or other similar assistance (other than by way of a loan) to the Government of Sri Lanka by such Organization etc.;
(Section 9(1)(f))
any individual who is employed by the World Tourism Organization, the International Irrigation Management Institute, the Colomho Plan Bureau, the Asian Development Bank, the World Bank, the International Committee of the Red Cross, or the World Conser
tion Union. Vation Union (Section 9(1) (h))
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Page 45
(2) Where, the assessable income of a non-citizen employee who is decimed to be non-resident during the first three years or five years of his employment in Sri Lanka consists solely of income from employment which docs not exceed Rs. 60,000 for the Y1A95/96 or Rs. 100,000 for the Y1A 96/97 such income is exempt from income tax. (see
Chapter 3, paragraph 4).
(Section 73(1A))
2. Concessionary Rate of Tax
80
A non-citizen employed in Sri Lanka is liable to income tax at a concessionary rate of 15% for a period of 3 or 5 years as the case may be (Ref. Chap. 3, para 4(3)) from the date of commencement of his employment in Sri Lanka. Any income arising abroad during this period is also exempt from income tax.
(See Chapter 15, paragraph 2)

CHAPTER 29
PAYMENT OF TAX BY SELF ASSESSMENT
AND FLING OF RETURNS
1. Payment of Tax
(1) Any person who is liable to income tax for any year of
(2)
assessment is required to make a self assessment of his tax and make payments of such tax in four quarterly instalments, on or before the dates indicated below:
1st Quarter – 15 August of that year of assessment. 2nd Quarter - 15 November of that year of assessment. 3rd Quarder - 15 February of that year of assessment. 4th Quarter - 15 May of the following year of assessment. (Section 97)
However, he may pay as quarterly instalment of tax for any year of assessment a sum which is not less than one quarter of the income tax payable by him for the preceding year and the balance, if any, before 30th September of the
following year of assessment.
(Section 125)
(3) (i) Payment of tax should be made to the respective banks
as mentioned in paragraph 5. (ii) Paying-in-slips made available for this purpose should be filled in quadruplicate when making paymet of tax. The relevant file number, the year of assessment, the quarters for which payment is made should be stated therein. (iii) Where all 4 quarterly instalments have been paid and any balance is payable in respect of an year of asssessment, the payment of such balance should be referred to as for the "Quarter ending-Final'. (iv) When payment of tax is made by cheque, or money order it should be drawn in favour of the Commissioner General of Inland Revenue and the file number, name and address should be stated on the reverse.
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2.
Furnishing of Returns A taxpayer iš required to furnish a Return for an year of assessment to the Unit or Regional Office dealing with his tax matters on or before 30 November, following the end of that year of assessment.
Where the necessary forms have not been issued, it is the taxpayer's obligation to obtain a form in order to furnish a return of his income and to make payments on or before the due dates.
It is important that every cage in the return form should be carefully completed giving full details of the particulars which are required.
Where regular accounts are maintained in respect of a trade, business, profession or vocation, the return should be based on the accounts. A provisional or an estimated return will not constitute a valid return where the regular accounts are maintained.
(Section 92)
Any assistance in this regard could be obtained from -
(i) the Assessor dealing with the file, (ii) the nearest Regional Office, or (iii) the Taxpayer Assistance Centre, Ground Floor, Inland
Revenue Building, Colombo 02.
Penalties (1) Tax in default and sums added thereto -
(i) Where any quarterly instalment (or part thereof) is not paid on or before the due date, the instalment (or the part) is deemed to be in default, and automatic penalties apply as follows:
(a) 10% of the instalment, if the instalment (or part thereof) is paid within one month of the due date, and
(b) a further 2% for every additional month, or part thereof for which the instalment (or part thereof) remains in default.
(ii) The total penalty will, however, not exceed 50 percent
of the tax in default.

(iii) No penalties will arise where a taxpayer makes payments in the manner described in paragraph 1(2). (Section 125)
(2) Penalties for failure to furnish return.
Failure to furnish a return within the prescribed time will render the person liable to a penalty not exceeding fifty thousand rupees which the Commissioner General is
authorised to impose.
(Section 96)
(3) Penalties for incorrect return
Heavy penalties are prescribed for non-disclosure of income and for fraud or wilful evasion. The penalty can be a sum not exceeding an aggregate of Rs. 2,000 plus a sum equal to twice the tax on the amount of the excess, for making an incorrect return.
(Section 124)
4. Direct Assessments
Where a taxpayer fails to pay his taxes or pays less than the proper amount, an Assessor will assess the amount of tax payable by him and give notice of such assessment.
The tax so charged together with the accrued penalties will be payable forthwith.
(Section 115)
5. Banks to which Payments of Tax should be made
(1) Taxpayers with Taxpayer identification Number (TIN)
Bank of Ceylon ... Metropolitan Branch
Inland Revenue Building.
- City Office,
Fort, Colombo.
- Central Market Complex,
Pettah.
- Prince Street Branch,
Sir Baron Jayatillake Mawatha.
- Unity Plaza,
Bambalapitiya
-- Nugegoda.
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Page 47
84
(2). Other Taxpayers (without TIN) whose files are in -
Any Metropolitan Branch (i.e. Metro A to H)
Bank of Ceylon,
Metropolitian Branch, Inland Revenue
Building. Hultsdorf, Maradana. Borella, City Office. Main Street, Pettah. Union Place, Ja-Ela, Gampaha, Kadawatta, Peliyagoda, Idama-Moratuwa, Dehiwela, Maharagama, Nugegoda, Wellawatta, Bambalapitiya and Kollupitiya.
Unit 3-Peoples' Bank (any branch)
The Regional
Anuradhapura, Bank of Ceylon
Badulla
Batticaloa
Galle
Office of
Anuradhpura Mannar
Trincomalle Vavuniya Kaduruwella
Badulla Haputale Moneragala
Bank of Ceylon
Kalimunai Batticaloa Amparai Akkaraipattu
Galle
Galle Bazaar Ambalangoda Bentota
Bank of Ceylon
Bank of Ceylon

Jaffna
Kalutara
Kandy
Kegalle
Kurunegala
Matara
Negombo
Nuwara Eliya
Ratnapura
Bank of Ceylon
Bank of Ceylon
Bank of Ceylon
Bank of Ceylon
Bank of Ceylon
Bank of Ceylon
Bank of Ceylon
Bank of Ceylon
Bank of Ceylon
Jaffna, Hospital
Street Jaffna, Stanley
Road Nelliyaddy Kayts Kilinochchi Chavakachcheri Point Pedro
Kalutara
Beruwala Horana
Panadura
Kandy Matale Kegalle Warakapola Yatiyantota Mawanella
Kurunegala Kuliyapitiya Alawwa
Matara
| Hambantota
Tangalle Negombo Chilaw Mirigama Puttalam Wennappuwa
Hatton Nuwara Eliya
Kahawatta Ratnapura. Ehiliyagoda
85.

Page 48
CHAPTER 30
THE PAY-AS-YOU-EARN SCHEME
1. Tie Scheme
Under the Pay-As-You-Earn (PAYE) scheme, income tax payable by an employee on his employment income is deducted by the employer at the time remuneration is paid. Tax so deducted each month represents the income tax payable on the employment income for that month. Employment income is thus taxed as it is earned.
(Section 98)
2. Deduction of Tax by the Employer
(1) The employer deducts the income tax payable on the employment income of each employee who is liable to pay income tax. Deductions are made on the basis of tax deduction tables furnished by the Department.
(Section 98)
(2) Tax is deducted from the remuneration of an employee
only if it is in excess of Rs. 12,000 per mensum or Rs. 144,000 per annum.
3. PAYE Tax Deductions as Withholding Tax
(1) The quarterly instalments of tax payable under the self assessment scheme by an employee who is in receipt of income, other than employment income, which is liable to tax will be arrived at after setting off the tax deductions made under the PAYE scheme.
(Section 111)
(2) An employee who derives income from othcr sources may make arrangements with his employer to deduct higher amounts of tax than those deductible under the PAYE scheme so that the total of the deductions made during an year of assessment covers his tax liability for that year.
4. Directions to Employers
An employee, from whose remuneration income tax is being

deducted in excess of the amount payable by him, may apply to the Commissioner General on a prescribed form available at the PAYE branch, requesting the Commissioner General to issue a Direction to his employer to reduce the tax deducted under the PAYE scheme.
(Section 101)
. Notice by Employer
Every employer who employs
(i) any individual receiving remuneration in excess of Rs.
8,333 per month or Rs. 100,000 per annum, or
(ii) any non-resident person receiving remuneration, for services rendered, in excess of Rs. 85 per month or Rs. 1,000 per annum,
is required to give notice to the Commissioner General of Inland Revenue that he employs such persons.
Any employer, who has not given such notice, is requested to give notice to
The Deputy Commissioner,
PAYE Tax Branch,
department of Inland Revenue,
1st Floor,
Inland Revenue Building,
Colombo 02.
so that arrangements could be made for deduction of PAYE Tax from such employee's remuneration.
An employer, who fails to comply, is subject to penalties and/or prosecution, in addition to being personally liable for the entire amount of the tax he fails to deduct from the remuneration paid to such employee.
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CHAPTER 31 APPEALS
Any person who is dissatisfied with the amount of an assessment may appeal to the Commissioner General stating precisely the grounds of such appeal. The letter of appeal against such assessment should be filed within 30 days after the date of the notice of assessment.
The letter of appeal should be accompanied by -
(i) a return if no return has bcen made, and (ii) a proof of the payment of tax payable on the basis of the return furnished for that year of assessment, together with the penalty under Section 125 accrued thereon upto the date of the notice of assessment.
There is provision for the admissimion of a late appeal if the Commissioner General is satisfied that owing to absence from Sri Lanka, sickness or other reasonable cause, a person was unable to
appeal against the assessment in time.
(Section 117)
The envelope containing the letter of appeal should be addressed to the Deputy Commissioner or the Assessor-in-charge of the relevant Unit or Regional Office of the Department of Inland Revenue from which the assessment originated.
All correspondence relating to assessments and appeals should bear the correct file numbers Taxpayer Identification Number (TIN).
The full tax is payable notwithstanding any appeal unless the Commissioner General has directed otherwise. If tax remains unpaid the automatic penalty will apply.
(Section 125)
Where a person is dissatisfied with the Commissioner General's decision on his appeal, he may in accordance with the provisions of the Act appeal to the Board of Review within the prescribed period. The Act also provides for an appeal, on a question of law, to the Court of Appeal and thereafter to the Supreme Court.
(Sections 118-122)
88.

CHAPTER 32 RECOVERY OF TAX
. Notice to Defaulter
A notice in writing is issued to every defaulter before action is taken for the recovery of any tax stating the particulars of such tax. Where a defaulter has not appealed against the assessment, he may within 30 days of the date of such notice make his objections to the recovery of tax.
This provision is intended to give a person who has not appealed against an assessment a last chance to have his assessment reviewed. He should therefore communicate with the Assessor as soon as he receives a notice of tax in default.
Section 12 . Seizure of Property (Section 128)
Tax may be recovered by seizure and sale of the movable and immovable property of a defaulter.
(Section 129) . Recovery through Magistrate's Court
The Commissioner General may file plaint in a Magistrate's Court seeking the recovery of tax in default. The tax in default may be imposed as a fine by the Magistrate. The defaulter of such fine may be sentenced to imprinsonment.
(Section 130) . Recovery Out of Debts
The Commissioner General may issue a notice on a person who owes or holds money for or on account of the defaulter or his agent. The person on whom the notice is served is required to pay to the Commissioner General any moneys which are in his hands or due from him or are about to be paid by him at any time within a period of 3 months.
(Section 131) . Information
Any clarification or information regarding any action taken for the recovery of tax may be obtained by contacting the Deputy Commissioner or the Assessor (Collection) of the relevant Unit or Regional Office.
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Page 50
CHAPTER 33
REFUND OF TAX
90
1. (1) A refund of an excess payment of tax for a year of assessment has to be claimed in writing within three years of the end of that year, where the excess payment has arisen in consequence of .
(i) the deduction of tax under the PAYE scheme, (ii) the deduction of tax at source from dividends, (iii) the deduction of tax from interest, royalties etc.,
(payable to a non-resident person), (iv) the payment of tax under the self-assessment scheme,
Ot (v) an error in the assessment or return (other than an error in the application or construction of any provision of the Act) such as an arithmetical error.
(2) Where a person who has paid tax by deduction could not have made a claim within the aforesaid three years, a claim may be made within one year from the end of the year of assessment in which such deduction was made.
(3) A return of income has to be filed when claiming a refund.
2. A refund arising in consequence of the reduction of an assessment on appeal will be made without any claim being made for it.
3. Interest is payable on refunds not made within a period of six
months at the rate of 1% for every month's delay thereafter,
(Sections 149 & 150)

CHAPTER 34 SEARCHES AND INSPECTIONS
There is provision for officers of the Department of Inland Revenue who are specially authorised by the Commissioner General to enter and search any building or place. These officers are empowered to do any of the following acts:
(i) examine any articles, books of accounts or other documents
found in such premiscs;
(ii) question any person found in such premiscs;
(iii) place marks of indentification on any such articles, books of accounts or other documents or make extracts therefrom;
(iv) seize and deliver to the Commissioner General any such articles, books of accounts or other documents or cause them to be guarded for effecting delivery.
Note: An "article' includes cash, foreign currency, a traveller's cheque, a letter of credit, gold, jewellery, a precious stone etc.
Officers on inspection will carry with them identity Cards and letters of authority issued by the Commissioner General. These documents will be shown to the persons in the premises before the commencement of the search.
Heavy penalties are prescribed if any person obstructs an officer in the performance of his duties.
(Section 161)
There is also a further provision in the law for the officers of the Department, authorised by the Commissioner General, to enter and inspect any place or building where any trade, business, profession or vocation is carried on or exercised by any person or partnership. These officers are empowered to -
(i) open and examine any receptable when any book of account, register, record or any other dogument is found in such premises or place and make an inventary of the articles found therein,
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Page 51
(ii) examine and take copies of, or make extracts from any book of
account register, record or other document, (iii) take possession of any book of account, register, record or
other document, (iv) count and make a record of cash found in such place or
building, m (v) require any person whom he finds in such place or building to give such information as is in his power to give with respect to matters under this act, (vi) question any person found in such place or building.
(Section 161 A)
92

CHAPTER 35 DOUBLE TAXATION RELEF
1. Double Taxation Relief Agreements are in force with the
following countries:
(1) Australia (14) Malasia (2) Bangladesh (15) Netherlands (3) Belgium (16) Norway (4) Canada (17) Oman (5) Denmark (18) Pakistan (6) Finland (19) Poland (7) France (20) Romania (8) Germany (21) Singapore (9) India (22) Sweden (10) Indonesia (23) Switzerland (11) Italy (24) Thailand (12) Japan (25) U.K. and (13) Korea (26) United Arab Emirates.
Relief provided under these agreements is based on the principles of tax credit and/or tax exemption.
(Section 82)
2. Relief is available to a person who is liable to pay tax both in Sri Lanka and in another Commonwealth country on the same income if
(i) he is not a resident of a country with which Sri Lanka has a
double taxation relief agreement, and (ii) that other country grants reciprocal relief.
The relief is equal to one half of the Sri Lanka tax or the tax payable in the other country in respect of the doubly-taxed income, whichever is lower.
(Section 83)
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CHAPTER 36 APPLICATION OF COMPUTER TECHNOLOGY
The Department of Inland Revenue had embarked on a computerisation programme in 1992 to transform the manual work processes into one based on Electronic Data Processing technology. The programme which commenced as a pilot project encompassing only the 500 largest taxpayers, has since then, been extended to cover the entire range of corporate taxpayers, all Employers who are required to deduct tax from employees under PAYE scheme and all taxpayers subject to the manufacturing Turnover Tax. All these taxpayers are assigned a Taxpayer Identification Number (TIN).
The TIN is assigned by the Inland Revenue Department according to the taxpayer category as follows:
Category of Taxpayer TIN
i. Individual National Identity Card Number 2. Company Registered A nine digit number derived from in Sri Lanka the company registration number
given by the Registrar of Companies 3. Others A nine digit number selected by
the Inland Revenue Department on a particular basis.
TIN of a person serves as a common number for all the following taxes viz. income tax, turnover tax, tax under PAYE scheme, National Security Levy and Save the Nation Contribution. (In the past taxpayers had different file numbers as well as separate administrative units which handled thesc taxes). To identify the relevant tax, there would be a sub code after the main TIN as illustrated below -
94.

Tax TN
Main TIN Sub Code
Income Tax . . . . . . . . . . . . . . 0000 Turnover Tax . . . . . . . . . . . . . 9901 - 9999 National Security Levy . . . . . . . . . . . . . . 8801 - 8899 PAYE a w e s w a w y a a e s a 001 - 0199 Save the Nation - Contribution s o a 0 e o e o e o u e s a 340 - 3499
The Inland Revenue Department has already established several units to deal with TIN Taxpayers as follows:
1. Data Processing and Revenue Accounting Unit (DP & RAU)
5.
Functions of this Unit include
— Registration and assigning Taxpayer Identification
Numbers (for every tax)
- Issue of all returns
- Receiving and processing all returns and remittances
- Issue of acknowledgements
- Checking returns for completeness
-- Data entry
- Walidation
- Issue of assessments, refund assessments and penalty
asSeSSments
- Revenue Accounting
. Large Taxpayer Unit (LTU)
This Unit deals with only the compliance aspects of the largest taxpayers (presently around 1000 in number).
Unit 4 Main functions of this Unit are the monitoring compliance and carrying out audit functions of all companies (other than those allocated to LTU).
Unit 5
All other TIN taxpayer files are deat with in this unit.
Unit 6 This unit performs only the audit functions of the large taxpayers (i.e. taxpayers allocated to LTU).
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TABLE 1. CUMULATIVE TAXABLE NCOME AND
NCOME TAX PAYABLE
(Applicable to individuals)
Y/A 1995/96 Taxable Tax on lower Rate on excess Income Amount over lower
Amount
Rs. Rs. % 0-35,000 Ni 10 35,000 - 60,000 3,500 20 60,000 - 85,000 8,500 30 85,000 - upwards 16,000 35 Y/A 1996/97
0 - 35,000 Ni O 35,000 - 70,000 3,500 15 70,000 - 105,000 8,750 25 105,000 - upwards 17,500 35
TABLE 2 RATES OF INCOME TAX - Y/A 1996/97
Individuals
On the first Rs. 35,000 of the taxable income 10% On the next Rs. 35,000 of the taxable income 15% On the next 35,000 of the taxable income 25% On the balance of the taxable income 35%
Resident Companies 35% Non-resident Companies
On taxable income 35% On remittances
if less than 1/3 of taxable income 33 1/3% of remittances if not less than 1/3 of taxable income 11 119% of taxable
income
96

Public Corporations and Business undertakings vested
in the Government
(i) On the taxable income (ii) On the balance profits after tax
payable under (i)
Partnreships
Charitable institutions
Co-operative societies
Mutual life assurance companies
Executors
Receivers
Trustees
Liquidators
Governments (other than those of Sri Lanka and
the U.K.) Hindu undivided familes
Clubs and associations
TABLE 3 RATES OF DEPRECATION
35%&
25% 35% 10% 20% 20% 35% 35% 35% 35%
35% 35%
20%
Plant, Machinery & Fixtures -
(i) 25% per annum on the cost
Motor vehicle
Lorry
Bus
Tractor
Trailer Office furniture (metal or wooden)
(ii) 33 1/3% per annum on the cost
All other plant, machinery and fixtures Computer Software
Buildings -
6 2/3% per annum on the cost of construction.
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LIST 1 NLAND REVENUE PUBLICATIONS
Year of Rs. Publication
Reports of Ceylon Tax Cases:
Volume 1 (Income Tax, Excess
Profits duty and Profits tax) 1960 28.00 Volume 2 (Stamp Duty and Estate
Duty) 1962 24.00
A Digest and Index of Ceylon Tax Cases 1964 15.00
Reports of Sri Lanka Tax Cases:
Volume 3 (Income Tax, Business Turnover Tax, Estate Duty,
Stamp Duty etc.) 1974 21.00 Manual of Turnover Tax Law 1988 50.00 Manual of Income Tax Law and Wealth Tax Law m 1990 50.00 Inland Revenue Act. No. 28 of 979 1994 140.00
(Incorporating Amendments upto 31st
December, 1992)
These publications are available for
sale at
The Taxpayer Assistance Centre, Inland Revenue Department, Sir Chittampalam A. Gardiner Mawatta, Colombo 2.
98

LIST 2 LOCATION OF ENLAND REVENUE OFFICES
Inland Revenue Head Office 11111, Sir Chittampalam A. Gardiner Mawatta,
Colombo 02.
Training Branch and
Library
Secretariat Branch
Information Branch
Stamp Duty & Estate Duty
Branch, Steno's Pool
Unit 2
Metro 'G' Branch
Metro 'E' Branch
Metro 'C' Branch
Large Taxpayer Unit, Data
Processing & Revenue Accounting Unit,
Unit 5
Goods & Services Tax
Branch
Floor No.
is
14
lecture Halls
General Office (Administration Branch) {Research and Policy Unit
Assessment Control
& Appeals Branch,
Computer Division
Unit 9 (Investigation Branch)
Unit
Unit 4
Metro 'H' Branch
Metro "D" Branch
Computer Development Unit
Legal, Clearance & Special Collection Branch, Unit 6 (due to be housed in 4th floor)
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Metro 'A' Branch
Accounts Branch
Turnover Tax (Manufacturing) Branch
Unit 3,
PAYE Branch, Withholding Tax Branch
Metro 'B' Branch
3 Metro 'H' Branch
External Audit Unit
2 Turnover Tax
(Metropolitan) Branch
Bank of Ceylon -
Mctropolitan Branch Typing Pool A, Typing Pool B, Supplies Branch
Ground
Tappal Branch,
Taxpayer Assistance
Centre
Stamp Impresser
Floor
REGIONAL OFFICES
Anuradhapura
Badulla
Batticaloa
Galle
Jafna
Kalutara
Kandy
Kegalle
Kurunegala
Matara
Negombo
Nuwara Eliya
Ratnapura
100.
Bank Site, Anu radhapura
17, Udayaraja Wecdiya, Badulla.
- 275, Boundary Road, Batticaloa.
- 41, Siri Dewamitta Mawatha, Galle.
- Stanley Road, Jaffna.
- 4, Galle Road, Kalutara-South.
Cargills Building, Dalada Weediya,
Kandy.
480, Kandy Road, Kegalle.
142/1, Bauddhaloka Mawatha,
Kurunegala
152, Beach Road, Matara.
- 2 A, Main Street, Negombo.
- 100, Badulla Road, Nuwara Eliya.
295, Main Strect, Ratnapura.

LST 3
WORK ALLOCATION OF COLOMBO METROPOLITAN BRANCHES
The Colombo Metropolitan Branches (the Metro Branches) deal with the tax files of individuals, partnerships and bodies of persons in Colombo. The allocation of work to each this Metro branch is on the basis of category number of tax files. The category number is a distinet number (the 1st number of a tax file number) which represents the nature of the principal income producing activity.
The categories ae allocated among the Metro branches as follows:
Unit/Branch Work Allocation
y (categories of tax files)
Metro A 19, 21, 22, 23, 24, 25, 43, and 87
Metro B 26, 31, 33, 34, 52, 53, 54, 55,56, 57, 78, 88, 89,90, 92,93, and 97
Metro C 41, 42, 45, 46, 47, 48, 49,
80 and 84
Metro D 66, 70, 85 and 86
Metro E 69, 77, 8 and 82
Metro F 71, 76 and 44
Metro G 58, 59, 60 and 79
Metro H 95
illustration:
File No. 78.19150-26 Category No: 78 This file is dealt with in "Metro B' branch.
0.

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LIST 4
INLAND REVENUE TELEPHONE NUMBERS
Inland Revenue Head Office
General (Extensions to all Staff Officers and Branches)
Commissioner General
Commissioner (Secretariat, Research &
Policy, Corporate Tax and GST)
Commissioner (Computer Services and
Compliance Enforcement)
Commissioner (Metropolitan Offices)
Commissioner (Investigation, Information, Training)
Commissioner (PAYE, Employment, Withholding Tax
and Save the Nation Contribution)
Commissioner (Outstation Regional Offices, Legal,
Clearance Unit & Special Collection)
Commissioner (Turnover Tax) Commissioner (Organisation)
Commissioner (Appeals and Assessment Control)
Commissioner (Stamp Duty)
Assessment Control Deputy Commissioner
Senior Assessor
Computer Development Deputy Commissioner
Senior Assesor
102
42124
320726
323964
421438
324610
435358
327353
345541
324568
328429
3284.3
328824
323352 33 1847
326017 33 1850

Data Processing and Revenue Accounting
Goods & Services Tax
Information
Investigation
Large Taxpayer Unit
Legal, Clearance and Special Collection
Metro A
Metro B
Metro C
Metro D
Metro E
Metro F
Metro G
Metro H
PAYE & Withholding
TaK
Deputy Commissioner
Senior Assessor
Deputy Commissioner
I)cputy Commissioner
Deputy Commissioner Senior Assessor
Deputy Commissioner Senior Assessor
Deputy Commissioner Senior Assessor
Deputy Commissioner
Deputy Commissioner Senior Assessor
Deputy Commissioner Senior ASSessor
Deputy Commissioner Scnior Assessor
IDeputy Commissioner Senior Assessor
Deputy Commissioner Senior Assessor
Deputy Commissioner Senior Assessor
Deputy Commissioner Senior Assessor
IDeputy Commissioner Senior Assessor
Deputy Commissioner
Senier Assessor
338.57
33 1856
342097
34.3176
43.809 32.7298
3291.16 33 1848
430804 430805
430813
328697 33 1859
430807 33 1849
320929 422477
328761 430808
324897 324054
43.6836 33 1845
43.809 328510
33.863 33 1864
440060
43.8092
103

Page 57
Secretariat
Research.& Policy
Stamp Duty, Estate Duty & Special Collection
Training
Turnover Tax
(Manufacturing)
Turnover Tax
104
Ieputy Commissioner Senior Assessor
Deputy Commissioner
Deputy Commissioner
Deputy Commissioner Senior Assessor
Deputy Commissioner
Scnior Assessor
Deputy Commissioner
(Metropolitan)
Senior Assessor
Unit 1 Deputy Commissioner
Senior Assessor
Unit 2 Deputy Commissioner
Senior Assessor
Unit 3 Deputy Commissioner
Unit 4 Deputy Commissioner
Senior Assessor.
Unit 6 Deputy Commissioner
Outstation Regional Offices Anuradhapura Deputy Commissioner
Senior Assessor
Badulla Deputy Commissioner
Senior Assessor
Batticaloa Deputy Commissioner Galle Deputy Commissioner
Senior Assessor
32.7872 34374
440045
325999
328298 34372
438058
328638
324796
422723
3284.19 329.505
422702 43081
324396
43082 32541
436859
025 - 552 025 - 230
055 - 2490 O55 - 34.04
065 - 2087
09 - 22.504 09 - 34900

Jafna
Kalutara
- Kandy
Kegalle
Kurunegala
Matara
Nuwara Eliya
Negombo
Ratnapura
Deputy Commissioner Senior Assessor
Deputy Commissioner Senior Assessor
Deputy Commissioner Senior Assessor
Deputy Commissioner
Deputy Commissioner Senior Assessor
Deputy Commissioner
Senior Assessor
Deputy Commissioner Senior Assessor
Deputy Commissioner
Senior Assessor
Deputy Commissioner Senior Assessor
02 - 2336 02 - 23362
034 - 222.6 034 - 2254
08.- 23526 08 - 22520
035 - 2493
037 - 22798 037 - 22797
04 - 22933 041 - 22893
OS2 - 2520 052 - 2812
O31 - 2071 O3 - 2061
045-2040 O45 - 3403
105

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