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Understanding Basis of Deduction for Tax Purposes in Sri Lanka

This document outlines the key aspects of the basis of deduction for individuals and businesses in Sri Lanka. It details the requirements for valid receipts, the treatment of trade losses, and the specifics of deductible interest payments for loans related to construction or business acquisition. The text also discusses the nature of annuities, calculation of trade losses according to tax regulations, and the rules surrounding unabsorbed losses and carry-back of losses. Understanding these elements is crucial for effective tax planning and compliance.

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Understanding Basis of Deduction for Tax Purposes in Sri Lanka

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  1. 11.03 Basis of Deduction • A valid receipt of full particulars has to be obtained for payment (Cash basis) • If Total Sun Deductible > Statutory Income, the excess is treated as trade loss • No deduction is allowable in respect of sums payable by a person out side Sri Lanka to another person out side Sri Lanka

  2. 11.03 Basis of Deduction • Interest: • Should be paid for a loan obtained for either • Construction /acquisition of a building after 01.04.2004 (for residential purposes) • Purchase of a site for construction of any building after 01.04.2004 (for residential purposes) • For any trade, business, profession or vocation (E.g. Acquisition of business)

  3. 11.03 Basis of Deduction • Interest: (Contd..) • Interest has to be paid on legal or contractual obligation to a licensed bank, finance company or any other person who declares such interest as his income. • 11.04 Annuity • Is a fixed sum payable annually either perpetually or any lesser period • Should not be of a capital nature

  4. 11.04 Annuity (Contd…) • It has to be paid under an order of court by way of alimony or maintenance (in case of divorce). It may also be on a duly executed deed of separation. • 11.09 Loss from Trade, Business, Profession or Vocation • Should be calculated according to tax regulations (not book losses) • Losses can be claimed if instead of a loss there was a profit, such profit would have been assessable

  5. 11.09 Loss from Trade, Business, Profession or Vocation (Contd…) • Losses has to be absorbed (deducted) up to 35% of the Total Statutory Income. But the TSI will not include: • For a person other than a company – Interest & Dividend subjected to a tax of 10% • To any person – Any reward, share of fine and interest on compensation subjected to a tax of 10%

  6. 11.09 Loss from Trade, Business, Profession or Vocation (Contd…) • Following losses are not deductible • Capital losses • Loss incurred in the disposal of shares, rights or warrants

  7. 11.11Unabsorbed Losses • Any unabsorbed loss can be carried forward for the next Y/A and so on. • But there are some time limits • No limit for Capital Allowances. Loss from leasing. Horse racing, FCBU losses • Losses cannot be carried forward if control changes of the business

  8. 11.12 Carry-back of losses: • - When a person ceases to carry on a trade, business, profession or vocation, after getting the consent of the CGIR he can carry back the loss for 3 preceding year of assessments. (Current + 3 Years) • From 01.04.2004 the setting off is limited to 35% of TSI • If the entire loss cannot be set-off through carry back?

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