Unfair taxation on entrepreneurs versus large companies
The new Inland Revenue Act ( IRA) could badly affect individual Sri Lankans or rather those involved in business like in agriculture for instance.
While they are taxed at 24 per cent for running a business, the same business performed by a company is taxed at only 14 per cent, a tax expert noted.
Kapila Athukorala, Partner/ Head of Tax and Advisory, Kreston MNS & Co (Chartered Accountants), Sri Lanka mentioned this to the Business Times (BT) on the sidelines of a recent tax seminar held at the BMICH Colombo and organised by Kreston MNS & Co. He also made a presentation on the IRD, its advantages and disadvantages.
He also stressed the importance of every employee subject to tax having now to file a Primary Employment Declaration form.
He told the BT that under the Act all companies are classified under three tier structures, viz. 13 per cent, 28 per cent and 40 per cent. There are some companies, some essential sectors of the economy they are identified under 14 per cent taxable over-rate.
Examining these, he found some disadvantages to the individual as the same lower tax rates are not applied if one does business activity as an individual.
Mr. Athukorala believed some correction is necessary as this would discourage individuals from engaging in agriculture, particularly since the majority of the entrepreneurs in this country are individuals.
While the country has about 80,000 companies, there are more than a million entrepreneurs. “So, you have to give some encouragement to this sector,” he said.
He told the BT: “Even SMEs are taxed at a lower rate if it is a company, but if the same business is done by an individual that lower tax rate is not available.”
In his presentation, Mr. Athukorala said under the new law there are four sources of income – Employment Income; Business Income; Investment Income – example – Dividends, Interest, Annuities, Rent, Royalties, etc and other income. Significant compliance requirements, he said, are: Tax payable in installments and Return filing; Withholding from Investment Returns; Withholding from service fees; Obligations of withholding agent and with holdee and Penalties for non-compliance.
In employment income, key changes are in the maximum rate that has increased to 24 per cent from the current rate of 16 per cent level. Income slabs have expanded and liability threshold increased from Rs. 750,000 per annum to Rs. 1. 2 million annually.
Giving examples, he said a monthly employment income of Rs. 100,000 is exempt from tax. Thereafter a tax rate of 4 per cent is imposed in the income range of Rs. 100,000 to 150,000, going up to 24 per cent when income reaches Rs. 350,000 annually.
Under employment income, new exclusions are reimbursement or payment of medical, dental or health insurance expenses on equal terms to all full time employees, among others.
In the case of second employment, income such as directors’ fees is taxed at 10 per cent for the first Rs. 50,000 per month and the balance at 20 per cent.
In the case of business income, Mr. Athukorala said that business includes a prospective business but excludes employment. New inclusion to business income is gains from realisation of capital assets and liabilities of the business such as sale of a land used in the business; and considerations received for accepting a restriction on the capacity to conduct the business such as amount received from a competitor for not engaging in a prospective business.
The presentation was followed by a panel discussion which included Rajendra Theagarajah, Managing Director/ CEO, Cargills Bank Ltd; Ms Priyanka Disabandara, Deputy Commissioner Secretariat, Department of Inland Revenue and Chandima Ridrugim Group Director, The Capital Maharaja Organisation. Mr. Athukorala was the presenter in the panel.