Tax experts say effective awareness campaign by the department of Inland Revenue and the Government is necessary, if not there will be uncertainty in the air which does not augur well for the economy.
“There are too many teething problems and misconceptions which can kill the effectiveness of the Act. This should not go too far,” they say.
By clearing certain misconceptions in media reports regarding tax on foreign remittances under the New Inland Revenue Act (IRA) Partner Ernst & Young Duminda Hulangamuwa said foreign remittances by Sri Lankan workers abroad will not be taxed and will continue to be exempted. Hulangamuwa said those providing professional services to outside parties will be taxed at 14 percent. Individuals earning up to US$ 100,000 will be exempted. With regard to double taxation agreements need not be ratified as it is already been ratified.
Sri Lanka has singed bilateral Investment Protection Agreements with 28 countries and bilateral Double Tax Avoidance Agreements with 38 counties.
The Capital Gains Tax (CGT) will be applicable to land and shares in private companies and not in shares of listed companies in the Colombo Stock Exchange.
CGT, a tax on the realization of investment assets was reintroduced in the IRA No. 24 of 2017 and will come into effect from April 1, 2018. CGT will take into consideration cost that were incurred on buying, improving and selling assets and reduces those values from the overall amount. Capital assets comprise land, buildings, machinery and shares. Profits will be taxed at 10 percent which will come into effect from April 1.
Senior citizens have been exempted from taxes but if their interest exceeds Rs. 1.5 million per annum it will be subject to a 5 percent Withholding tax.
‘It would be ideal if we could achieve a 60:40 Direct to Indirect tax ratio by five years time,’ tax experts said. However they said it is not an achievable target.
He said the current ratio of 20:80 will most likely remain given the income tax revenue of the country which was about 17.6 percent of the governments total tax revenue of Rs. 1.749 trillion last year. The budget forecast is that income tax ratio will go up to around 18.5 percent in the new Act
“I feel the direct to indirect tax ratio will be at around 18: 82,” Hulangamuwa said.
Tax experts are of the view that the middle income group will be the most affected by the new tax system. Those who depend on employment income of the middle class will be the most affected while the low income class will be the least affected.
“The tax liability of those earning an income up to Rs. 300,000 a month will go up by around Rs.10,000 as they will be taxed on a higher rate,” Hulangamuwa said.
Direct taxation in Sri Lanka is low compared to Malyasia which is 72 percent, India 57 percent and 33 percent in Bangladesh.
Tax experts said the issue with indirect taxes is that even the high income earners pay the same taxes as the low income earners.
Principal – Tax and Regulatory, KPMG Suresh Perera said the new Act has positives and negatives. “While it may be considered positive in relation to individual taxation one could not say the same in relation to the export industry in comparison to the export policy of the country and does not augur well with the exporters. There are too many teething problems that have to be resolved by the relevant authorities.”
There should be more awareness campaign carried out by the department of Inland Revenue and Government if not there will be uncertainty in the air which does not augur well for the economy, industry and foreign investors.
There are too many teething problems which can kill the effectiveness of the Act. There is uncertainty in relation to the losses brought forward under the previous regime with the profits of the new Inland Revenue regime, the legality of the double tax treaties the country has entered in to, the fate of the unabsorbed capital allowances in business, the ability to claim the notional tax credit and withholding tax credit available under the old regime, the legality of the existing tax holidays both under the inland revenue and the other regime such as BOI and SDP, the experts said.
Due to the elimination of plethora of income tax exemptions on persons, activities and streams of income, introduction of tax on realization of assets and liabilities, reduction of tax deductible amounts along with the wide powers given to the Commissioner General for the administration of the income tax, one could expect there may be an increase in the collection of direct taxation in the long run even though it won’t happen immediately.