Strategic Tax Planning for Sri Lankans in 2024: A Comprehensive Guide

As we approach the dawn of 2024, individuals and businesses in Sri Lanka are gearing up for a new fiscal year. Effective tax planning is crucial for optimizing financial health and ensuring compliance with the latest regulations. This article aims to provide a comprehensive guide on how Sri Lankans can strategically plan their taxes from January 1, 2024, onward.

Let's break down some key concepts related to income and taxation!

Income and Taxation

?? Employment Income: Employment income refers to the money an individual earns through their employment or work. ?? This includes salaries, wages, bonuses, commissions, and other benefits received as compensation for services rendered to an employer.

?? Business Income: Business income is the profit earned by a business entity. It includes revenues from sales of goods or services minus the expenses incurred in operating the business. ?? Business income can be earned by individuals running sole proprietorships, partnerships, corporate entities, or individual service providers (ISPs).

?? Investment Income: Investment income is generated from investments, such as interest from savings ?? accounts, dividends from stocks, capital gains from selling assets like real estate or stocks at a profit, and rental income from properties.

?? Other Income: A person’s income from other sources for a year of assessment is the person’s gains and profits from any source of any kind; however, it does not include ?? profits of a casual and non-recurring nature.

?? Income Tax: Income tax is a tax imposed by the government on an individual's, business's, or entity's income. It is typically calculated as a percentage of the income earned. The tax revenue?? generated from income tax is used to fund various government programs and services.

?? Taxable Income: Taxable income refers to the portion of an individual's or entity's income that is subject to taxation by the government. This income includes various sources such as wages, salaries, bonuses, rental income, business profits, capital gains, and interest. In most ?? tax systems, certain deductions and exemptions may be applied to arrive at the taxable income, reducing the overall tax liability. Tax rates are then applied to the taxable income to determine the amount of tax owed.

?? Non-taxable income: Non-taxable income is income that is not subject to taxation by the government. This category typically includes certain types of income that are considered exempt from ??income tax. Common examples of non-taxable income may include certain government benefits, gifts, and inheritances up to a certain threshold, life insurance proceeds, child support payments, and certain types of retirement income (government pension, / EPF). Individuals need to be aware of the specific rules and regulations governing non-taxable income in their respective jurisdictions.

?? Exempt Income: Exempt income is a specific category of income that is explicitly excluded from taxation. This exclusion is often granted for public policy reasons, and the types of exempt income can vary across jurisdictions. In some cases, income may be exempt because it serves a particular?? social or economic purpose, such as income from certain charitable activities, specific types of investments, or any service rendered in or outside Sri Lanka to any person to be utilized outside Sri Lanka, where the payment for such services is received in foreign ??currency and remitted through a bank to Sri Lanka on or after January 1, 2020. Exempt income is usually defined and detailed in tax laws, and individuals or entities earning exempt income are not required to include it in their taxable income calculations.

?? Filing and Payment: ??

1. Individuals: ???? Sri Lankan residents are required to file an annual tax return. The tax year generally runs from April 1st to March 31st. Self-employed individuals and those with additional income sources must file a return and settle any outstanding tax liability.
2. Businesses: ???? Companies must file annual tax returns within a specified period after the end of the financial year. Advance tax payments may be required during the year, and any balance is settled when filing the final return.

?? Penalties for Non-Compliance: Non-compliance with tax ??laws in Sri Lanka can result in penalties. Late filing, underreporting income, or providing inaccurate information can lead to fines and other consequences.

?? Changes and Updates: Tax laws and regulations may change, and it's essential for individuals and businesses to stay informed about ? updates. The Sri Lanka Inland Revenue Department typically communicates changes through official channels.

??How is Income ?? Tax Deducted?

Governments use the revenue generated from income taxes to fund public services, infrastructure, social programs, and other government expenditures. The specific rules and rates for income taxation vary by country and jurisdiction. It's essential for individuals and businesses to understand and comply with the tax laws in their respective locations. Following are the common income tax deductions.

1) For Individuals:?

?? Pay-As-You-Earn (PAYE): In many countries, individuals working for an employer have income tax deducted at the source. This is known as the PAYE system. Employers deduct a certain percentage of an employee's income before paying their salary. This withheld amount is then remitted to the government on behalf of the employee.

?? Self-Assessment: For individuals who are self-employed or have additional sources of income, they often need to file annual tax returns, reporting their total income and calculating the tax owed. They may make periodic estimated tax payments throughout the year.

2) For Businesses and SMEs:

?? Corporate Income Tax: Businesses, including small and medium-sized enterprises (SMEs), are subject to corporate income tax. This tax is levied on the net income of the business, which is the total revenue minus allowable business expenses. Businesses typically file annual tax returns and pay the corporate income tax accordingly.

?? Withholding Tax: In some cases, businesses are required to withhold taxes on certain payments made to others. For example, businesses may need to withhold taxes on payments to non-resident contractors or on interest and dividend payments.

?? Value Added Tax (VAT) or Goods and Services Tax (GST): In addition to income tax, businesses may also be subject to indirect taxes like VAT or GST, which are imposed on the sale of goods and services.

Getting a Taxpayer Identification Number (TIN)?

Obtaining a Taxpayer Identification Number (TIN) is a crucial step for individuals and entities engaging in various financial activities, such as paying taxes, importing/exporting, or availing services from the Inland Revenue Department (IRD). The process can be facilitated through IRD e-services, and the following outlines the required supporting documents based on different categories.

?? Taxpayer Identification Number Registration:

As of January 1, 2024, any individual meeting the following criteria must register with the Sri Lanka Inland Revenue Department and obtain a Taxpayer Identification Number (TIN):

1. Individuals aged 18 years or older as of December 31, 2023.
2. Individuals who turn 18 years old on or after January 01, 2024, regardless of whether they have taxable income, after reaching the age of 18 years.

It is mandatory for individuals falling under these categories to ensure compliance with the registration process and obtain their Taxpayer Identification Number (TIN) from the Sri Lanka Inland Revenue Department.

For Individuals:

• National Identity Card (NIC) for Sri Lankans / Valid Passport for Foreign Nationals
• Business Registration Certification (if a Proprietorship is to be added)
• Utility Bill, Statement of Bank Account, or passbook/ Grama Niladhari Certificate for locals/ Local address proof for foreigners (If the address is different from NIC)

For Partnerships:

• Partnership Registration and Certification
• NIC (Sri Lankans) or Valid Passport (Foreign Nationals) for all partners

For Registered Companies (Private Limited, Company Limited by Guarantee, Foreign Company, Limited Company, Unlimited Companies, Offshore Companies):

• Certificate of Incorporation (Form 2A/2D/42/41 etc.)
• Form 01/05/40 certified by Registrar of Companies.
• All Form 20s are certified by the Registrar of Companies.
• NIC (Sri Lankans) or Valid Passport (Foreign Nationals) of all directors
• Form 13 certified by Registrar of Companies (If applicable)
• Form 18 is certified by the Registrar of Companies if Form 20 is obtained to recognize the director’s signature.
• Articles of Association
• Registration certificate issued by the Board of Investment and the relevant agreement

For Other Entities:

• A letter of request by the head of the institution
• NIC (Sri Lankans) or Valid Passport (Foreign Nationals) and the letter of appointment of the signatory
• Minutes of the AGM / Executive Report (if applicable)
• Registration certificate
• Confirmation of the branch issued by the head office (For Branches only)
• Act/Gazette for the establishment (For Government and Semi-Government Institutions only)
• Joint Venture agreement and copies of TINs of the partners (For Joint Ventures only)
• Power of attorney for the signatory (For Joint Ventures and for Foreign companies, if applicable)
• Project agreement, cabinet approval, etc. (For Projects only)
• Trust deed and NIC (Sri Lankans) or Valid Passport (for foreign nationals) of the Trustees (For trusts)

You can get more guidelines for Taxpayer Registration from the following PDF File: Taxpayer Registration Guidelines

Also, here you can learn how to register as a taxpayer: Taxpayer Registration

Significant Changes in Sri Lanka Tax Rates??

The Inland Revenue Department (IRD) of Sri Lanka has officially released the Inland Revenue (Amendment) Act No. 45 of 2022, a legislation approved by parliament on December 9, 2022, and subsequently certified on December 19, 2022. Concurrently, the IRD has issued notifications to taxpayers, offering a comprehensive overview of the substantial modifications brought about by the Act. Additionally, the notices guide the amended personal income tax tables established under this legislation. The changes are effective from January 01, 2023. Key highlights of the significant changes encompass the following:

?? Changes in Reliefs – Individuals

?? Income Tax Rates Applicable to Individuals (Residents and Nonresidents)

?? Income Tax Rates Applicable to Persons Other Than Individuals

??Tax Proposals in The Budget of Sri Lanka 2024

?? The main tax proposals and administrative measures were presented by Finance Minister Ranil Wickramasinghe during the 78th Budget of Sri Lanka on November 13, 2023. Below is a breakdown and analysis of the key points mentioned:????

?? Tax Identification Number (TIN)

• The TIN certificate becomes mandatory for various activities, such as opening a bank current account at any bank, obtaining approval for a building plan by the applicant, registering a motor vehicle or renewing a license by the owner, and registering land or title to land by the buyer
• Guidelines for TIN submission are to be issued by the Commissioner General

?? Income Tax Treatment on Salary Arrears and VAT

1. A change in the tax treatment of salary arrears to alleviate excessive tax liabilities for employees, with effect from January 1, 2024.
2. Value Added Tax (VAT)

• A proposed amendment will grant the Commissioner General the authority to define the format of tax invoices.?
• Additionally, the term "taxable period" in Section 83 of the VAT Act will be explicitly defined, ensuring a uniform return filing frequency for all taxpayers.
• A gazette notification is set to be issued to enforce the VAT rate increase from January 1, 2024.
• The registered individuals are encouraged to adopt Point of Sale (POS) machines for automated invoicing and sales recording, facilitating VAT collection in the supply of goods or services.

?? Submission of Documentary Evidence

• Strict timelines for submitting documentary evidence during tax audits or reviews.
• Non-submission within specified periods (6 months from the original date of the evidence request for those available in Sri Lanka and 9 months for others) may result in disallowance during hearings at the Tax Appeals Commission. Relevant amendments will be made to the relevant provisions of the Tax Appeals Commission Act, No. 23 of 2011.

?? Tax Payable by Withholding

• A specific tax return obligation will be implemented for the deduction of a 2.5% withholding tax imposed on the sale price of gems auctioned by the National Gems and Jewellery Authority. Exemption under the Inland Revenue Act will be granted based on the submission of the required return information.
• Additionally, withholding tax certificates issued by the withholding agent in accordance with Section 87 will be provided to the withholdee at no cost or payment.

?? Income Tax on Unit Trusts and Unit Holders

• The existing tax treatment for unit trusts will persist, contingent upon adhering to mandatory obligations outlined by the Commissioner General. These obligations include furnishing information, such as income details, exempt amounts, and withholding tax information, to each unit holder before the 30th of August following the assessment year.?
• Failure to comply with these requirements by the specified date will result in the classification of the non-compliant unit trust as one that does not engage in eligible business activities.

?? Excise Department Measures

1. Implementation of an online license issuance system for a customer-friendly and efficient regulatory environment.
2. Formation of a committee to assess security features and the management system, addressing concerns such as counterfeit stickers.
3. Introduction of a revamped excise licensing system to:

• Streamline guidelines for various license types.
• Adjust maximum limits for specific licenses to tackle the irrational distribution of? ? liquor outlets leading to 'Dry Areas.'
• Introduce flexible opening hours to deter illicit liquor sales and maintain industry discipline.
• Revise regulations related to tourism promotional activities.
• Establish an appropriate policy for soft liquor licenses.
• Uphold industry discipline to the highest standard.
• Establishment of a Design and Monitoring Unit and a Risk Management Unit within the Excise Department.
• Implementation of Key Performance Indicators (KPIs) related to core administration functions.

4. Revision of the toddy tender system to increase government revenue while discouraging the illicit toddy industry.

5. Introduction of administrative fees for services provided by the Excise Department.

6. Implementation of networking and information-sharing initiatives with stakeholder institutions.

?? Policy Proposals for the Excise Department

• Implementation of Sri Lanka Standards (SLS) for toddy and all locally manufactured liquor types to uphold product quality, catering to both local and international markets.
• Adjustments to excise license fees, aligning with the current demand for these licenses.
• Promotion of investments in novel liquor products with a focus on foreign markets.
• Inclusion of selected locally produced liquors in duty-free shops.
• Launch of the 'Revenue Administration System for Excise Department' (RASED) by October 2024, aiming to enhance efficiency, productivity, and minimize risks of wastage and corruption in excise revenue management.
• Encouragement of research and development, product innovation, diversification, quality enhancement, and initiatives promoting export orientation and import substitution within the liquor industry.
• Reinforcement of tax collection and enforcement measures in the Beedi industry.

?? Sri Lanka Customs

1. Develop sophisticated software for enhancing risk management capabilities at Sri Lanka Customs.
2. Project goals include:

• Improving risk assessment for revenue risks.
• Enhancing operational efficiency in customs clearance processes.
• Ensuring compliance with regulations.
• Creating a sustainable and adaptable software system for future needs.

3. Establish a mechanism to prevent mis-invoicing and upgrade the ASYCUDA system.

4. Introduce Key Performance Indicators (KPIs) related to core administration functions within Customs.

?? Prosecution Actions and Clarity Improvements

• A unique penal provision will be established to initiate legal proceedings against individuals who fail to submit the necessary tax returns and information as mandated by tax authorities.

?? Clarity of Certain Provisions will be Improved

• Amendments will be made to sections 18, 67, and 163 to enhance the clarity and application of these respective provisions.

?? Strategic Tax Planning for Sri Lankans in 2024

?? As mentioned earlier in this article, effective tax planning is crucial for optimizing financial health and ensuring compliance with the latest regulations. Now, we'll explore the strategic ways to plan your taxes starting on January 1, 2024.????

? Stay Informed about Tax Law Changes

One of the first steps in effective tax planning is staying abreast of any changes in tax laws. Governments often introduce amendments to taxation policies, affecting individuals and businesses. Keep an eye on announcements from the Inland Revenue Department or seek advice from financial experts to ensure you are well-informed.

? Evaluate Income Sources and Deductions

Understanding your sources of income is vital for proper tax planning. Identify various revenue streams and evaluate their tax implications. Additionally, explore potential deductions and exemptions applicable to your specific situation. This could include allowances for education, medical expenses, or other deductible items outlined in the tax code.

? Leverage Tax-Advantaged Accounts

Sri Lanka offers various tax-advantaged accounts, such as the Employees' Provident Fund (EPF) and the Personal Foreign Currency Account (PFCA). Evaluate these options and consider contributing to them to benefit from tax advantages while securing your financial future. Understanding the contribution limits and eligibility criteria is essential to making the most of these accounts.

? Explore Investment Opportunities

Investments play a crucial role in tax planning. Evaluate the tax implications of different investment options, such as fixed deposits, government securities, and the Colombo Stock Exchange. Diversifying your portfolio can provide tax advantages while helping you build wealth over time. Consult with a financial advisor to align your investment strategy with your tax planning goals.

? Capitalize on Tax Credits

Tax credits can significantly reduce your tax liability. Sri Lankan tax laws may provide credits for specific activities, such as research and development or solar panel energy-efficient investments. Identify eligible activities and take advantage of available credits to optimize your tax position.

? Plan for Retirement

Retirement planning is not only about securing your future but can also offer tax benefits. Contributing to retirement savings schemes can provide deductions and exemptions, reducing your taxable income. Develop a retirement plan that aligns with your financial goals and takes advantage of available tax incentives.

? Seek Professional Guidance

Navigating the complexities of tax planning can be challenging. Consider seeking advice from tax professionals or financial advisors who can provide personalized guidance based on your unique financial situation. Professional assistance can help you make informed decisions and optimize your tax strategy.

Wrapping Up

??Effective tax planning is a dynamic and ongoing process that requires attention to detail and a proactive approach. By staying informed, evaluating income sources, exploring investment opportunities, and leveraging available tax incentives, Sri Lankans can strategically plan their taxes for the fiscal year 2024 and beyond. ???? Remember that seeking professional advice is a valuable step to ensuring your tax strategy aligns with your financial goals.

Hope you found this article insightful!?????

What's your take on the Sri Lanka tax changes? Let us know your ideas for planning our taxes in 2024!??