The first instalment of self-assessment payments under the new Inland Revenue Act (Act No. 24 of 2017) falls on 15th August 2018, if the tax payer’s year of assessment ends on 31st March, 2019. This article explains certain important aspects, in relation to self-assessment payments, under the new Inland Revenue Act.
Tax payment procedure -
Chapter VIII of the Act provides for the income tax payment procedure applicable to taxable periods, commencing on or after 1st April, 2018.
Accordingly, the tax imposed under S.2 (of the New Act), shall be payable under three methods as given in S.82.
Tax payable by withholding. This procedure has already commenced, from 1st April, 2018.
Tax payable by instalment. This is the self-assessment.
Tax payable on assessment. This procedure may commence later.
Tax payable by instalment (self-assessment) - Who is liable ?
Any ‘person’ (an individual or entity) who or which has ‘taxable income’ for the year of assessment and who has not paid the total amount of tax payable under withholding or on assessment, shall be liable to pay the full tax or balance tax payable for the year, under the instalment payment scheme, unless any WHT paid was final tax under S.88.
The first question is whether the person concerned has ‘taxable income’ for the relevant taxable period ?
A rough calculation of taxable income for a year of assessment may be made using the following information. Gross income with specific inclusions from each source (employment, business, investment and other sources) after deducting exempt income (Third Schedule for the Act), exclusions permitted, and exemption under section 9 of the Act and allowable expenses under the Act (Sections 10 to 19). The resulting amount may be the Assessable Income.
From the Assessable Income, deduct Qualifying payment relief, and other personal reliefs (only applicable to individuals) as permitted under the Fifth Schedule to the Act. Any balance amount will be the taxable income and the tax payable has to be calculated using the relevant tax rates given in the Act. If any tax credit is due under the Act, such amounts can be deducted. Any person’s self-assessment installment will be 1/4 of tax payable for the year after considering any tax credit due for the relevant payment period.
New features of self-assessment system -
Although, the self-assessment system was in operation in Sri Lanka for the last five decades, the compliance of tax payers’ was very poor. It’s true that the major portion of income tax revenue came from the self-assessment, but the number of tax payers contributed was very small. Not only the system was defective, but the efforts taken by the IRD to increase the coverage of compliant tax payers was in - effective.
Certain measures have been included in the New Act to remedy this situation. However, the results will depend on proper implementation.
Submission of a ‘Self-Assessment Return’, for the whole year on or before the payment of the first instalment - (S.91) - The format of this return has now been published by the IRD. In this return which is applicable to the current year (from 01.04.2018 to 31.03.2019) the assessable income, taxable income and tax payable should be estimated. Each quarter’s payment should be 1/4 of such estimated tax payable. It is not the tax on each quarter’s income. This self-assessment return can be amended with the permission of the CGIR, but the amendment will be effective prospectively.
Exclusions -
However, this return may not be required from tax payers specified by the CGIR under S.92.
But in such cases the CGIR shall make an estimate of tax payer’s tax payable for the year, which may be based on the tax payable for the previous year with an uplift. This estimate of the CGIR shall be served on the tax payer. Although a timeline has not been specified, this estimate may be accompanied with the Notice of specification issued under section 92(I). The relevant tax payer shall make instalment payments accordingly.
Any late payment will attract interest at 1.1% per month which will be compounded monthly. Because of this interest chargeable (a compulsory charge which cannot be waived off or reduced) a tax payer may think twice before avoiding self-assessment payments. Defaulter will have to pay such interest without any assessment from the IRD.
Different due dates - Due date of the instalment payment may be different depending on the closing date of account by the tax payer.
If the usual date (31st March) is applicable or statement of account is irrelevant, their year of assessment ends on 31st March each year. Such tax payer should pay his instalments of 1/4 tax for the current year of assessment, under self-assessment, as follows -
On or before 15th August of the year of assessment.
On or before 15th November of the year of assessment.
On or before 15th February of the year of assessment.
On or before 15th May of the next year of assessment.
Under the new law there is no final payment. Therefore, the full tax payable should be paid in four instalments on the current year basis.
If the accounting period ends on any other date other than 31st March, then the instalment payments should be made as follows -
On or before the 15th day after each three month period commencing at the beginning of each accounting period,which is considered as the beginning of the year of assessment and the final (fourth) instalment on or before the 15th day after the end of the accounting period.
Eg: If the accounting period is January to December -
On or before 15th April - 1/4 of the tax for January to December
On or before 15th July - 1/4 of the tax for January to December
On or before 15th October - 1/4 of the tax for January to December
On or before 15th January (next year) - 1/4 of the tax for January to December
(iv) Power to the CGIR to specify by a Gazette Notification, the following - (S 90(4)
That a particular class of persons shall pay tax in instalment as determined by the CGIR.
That a particular class of organized association or recognized occupational group shall collect from its members the instalment payments due from them.
Terms and conditions applicable to such collections.
Terms and conditions regarding accounting to the CGIR by the relevant association or group.
Transitional Provisions
Section 203(5) of the New Act has provided for a “simple method” to calculate the amount of the instalment for the first year of assessment. But the relevant period has been mentioned as “the first year of assessment commencing on or after 1st April, 2017”. This creates a number of problems -
whether this provision is applicable to the Y.A. 2017/18 as well ?
whether this provision is applicable only to the first year of assessment under the New Act which is 2018/19 ?
whether this provision is applicable to any first year of assessment (first time tax payer) after 2017/18 ?
Whatever the answer to the above problems, for the first year of assessment, instalments can be calculated on the basis of tax payable for the previous year of assessment increased by 5%. But the problem is the inability to ascertain the tax payable for the P.Y. by 15th August of the current year !
Further, this provision says if any person had no tax payable in the previous year, he need not pay the quarterly instalment for the current year. Accordingly, such person will have to pay current year’s tax on assessment.
What will happen to the late payment interest payable ?
Gazette N. 2064/53 dated 01.04.2018, issued by the Minister of Finance -
The Minister has made some regulations under S.194 of the New Inland Revenue Act. A large number of exemptions, concessions, tax rates, losses and qualifying payment allowances, which were enjoyed under the Repealed Act have been permitted under the New Act, even though there were no enabling provisions in the New Act. It may be important to check whether these regulations are within the powers given to the Minister under S.194 of the New Act!
The writer is a Tax and Investment Consultant and a Lecturer on Taxation