23rd March 2018
Part 01: Release of Inland Revenue Act Manual
Issue: The manual was widely expected to be released within the first two months of 2018 providing clarity on several provisions within the new Inland Revenue Act. However, given that this has yet to be released, it has put concern over the effective implementation of the Act from the 1st of April 2018.
Recommendation: We request that the manual be released as soon as possible. If a manual cannot be released prior to the 1st of April, we would appreciate if a draft copy of the manual be released for circulation with the private sector for comments.
Part 02: Concerns on Inland Revenue Act
- Issue: The gazette containing transitional provisions of the new Inland Revenue Act has not been published yet.
Recommendation: The gazette containing transitional provisions of the new Inland Revenue Act to be gazetted so that it provides clarity for the implementation of the new Act with effect from 1/4/2018.
- Issue: Uncertainty over the Concessionary rates under BOI
Recommendation: Should provide for continuity on: - Section 17A exemption – This is time bound and should provide for continuity including basis on which losses of such companies are allowed to be carried forward.
- Dividends declared by certain BOI companies – existing exemptions on pass through should be provided for. If not the shareholders downstream gets impacted on receipt of a dividend which is not in their control.
- Two qualifying activities in the same company – cumulatively exceeds 80% but neither individually does. Need to give the benefit of 14%. The intention of law is lost otherwise.
- Gross income should only include incomes which are included in taxable income. Local dividends which are neither included in business income or investment income should be excluded since it has no relevant in deciding rate of tax on a taxable income that does not include such dividend. Similarly gross income from exempt amounts should also be excluded. When it comes to sale of assets, it should be profits that should be included in gross income or would skew the results in particular years where a high value low profit asset is sold.
- Issue: Depreciation allowance
- Allow claim for remainder of life without change in year or basis
- To claim repair and improvement – allow the 5%/20% limit by ‘Tax Written Down Value’ of a class of assets for a specific year rather than on individual asset. It will be an administrative burden that does not fix any particular problem. Significant issue for industries in leisure etc. which invests in refurbishment on a regular basis.
- Issue: Construction of buildings on leased land and claiming of capital allowances
Recommendation: Amending to accommodate a building on a leased land, for it to be deemed to be buildings for purposes of claiming capital allowances rather than as an intangible asset. If not the investment in buildings in leasehold land will be excluded in computing eligibility to concessions available under the IRD Act. This would specially be of concern for companies which set up operations within BOI Zones since by default the land would be leased from the BOI. Similarly land leased from the Government to build hotels and or other large projects where investment in buildings could be a significant part of the cost.
- Issue: Appeals commission - The time of ninety days to finalize an administrative review (found in Section 140 - Appeal from Administrative Review) is inadequate.
- The current period of two years should be available. If not, very many of the appeals will get escalated to the Tax Appeals Commission.
- Similarly, time period of ninety days to finalize an appeal made to the Tax Appeals Commission found in Section 144 (Appeal from a decision of the Tax Appeals Commission) is inadequate. Recommend for a period of two years should be granted for this. If not, this will lead to more cases being transferred to Courts, which will further strain the Legal System in Sri Lanka.
- SMEs will find it difficult to afford legal costs, if tax disputes are expeditiously escalated to the Courts of Law. If a decision is not made by a Commissioner-General or by the Tax Appeals Commission within specified time (Section 139 and Section 144 respectively), then the Administrative Review or the Appeal, as the case may be, should be allowed in favour of the taxpayer as in the current Law of Inland Revenue Act (No. 10 of 2006).
- Issue: As per the New Act, December companies have to make their first payment instalment by April 15th, and Economic Service Charge (ESC) 1st instalment is payable on 20th July. ESC is deductible from the income tax instalments, but in this case, that is not going to be possible due to the ESC been paid 3 months later.
Recommendations: Guidelines has to be issues taking into account the practical issues faced by tax payer.
Part 03: Concerns on Revenue Administration and Management Information System (RAMIS)
- Issue: Need for streamlining the refund process. The current VAT law provides for automatic refund with assessment to recover if returns are disputed.
Recommendation: The RAMIS should be given effect to refund returns where there are disputes on certain areas but agreement on others. Refund should be released on undisputed amounts and appeal process to be continued only on the disputed areas. Same with regard to payable scenario. Should provide for partial settlements where there are no disputes and continue appeal only on areas of dispute.
- Issue: Hierarchy to set off credits/refunds should not be built into the system. Tax payer should be allowed to decide how they want to set it off.
Recommendation: Carried forward and set off refunds (even if not agreed with the IRD) should be provided for. In case tax payer is incorrect, there would be penalties and interest due so no real loss to the IRD.
- Issue: VAT refunds for Export Companies have not been refunded by the IRD since the implementation of RAMIS. Export companies have paid VAT upfront and suffering cash flow issues due to this delay from IRD. Refunds from January 2016 to date are held back at the IRD.
Recommendation: Fast track the release held back VTA refunds.
- Issue: Export companies are facing an issue with regards to SVAT. There was a transition provision granted when RAMIS was implemented, for the Registered Identified Suppliers (RIS) to submit their documents within 6 months. The current situation is that the Registered Identified Provider (RIP) i.e. the exporter has been penalised and IRD has stop issuing the SVAT voucher books, for the defaults of the RIS, where they have made late submissions. Further, the RAMIS system is showing mismatches for timing issues between RIS & RIP.
Recommendation: IRD should remove the 6 months open period for SVAT form submissions and have a monthly SVAT form submission mechanism in line with the monthly Return Submission, without penalising the Export companies (RIS’s).
RIS files quarterly Returns and RIP has to file Monthly Returns, therefore RIS does not comply on monthly timelines, which also contributes to this issue. Solution is to have everyone on quarterly returns.
- Issue: As per the VAT Act, credit notes can be claimed within 6 months, but the RAMIS system is designed where credit notes have to be claimed within the same quarter of the original invoice. Due to this system issue, the tax payer is held as non-compliant and IRD is unable to grant the permanent acknowledgement for Return submission.
Recommendation: This RAMIS system should be adjusted in line with the VAT act on the point of Credit Notes.