Does my wealth determine my tax liability?
Let me tell you one thing, no one in Sri Lanka is liable to pay income tax on owning properties such as cars, land, etc.There are only two cases in which a person is liable to pay income tax. These include:
01. a person (an individual or an entity) who possess a taxable income, and
02. an individual whose income is subject to withholding tax deduction.
In order to recognize a taxable income for a person, that person should possess an ‘assessable income’ for the year of assessment. Assessable income could be an income derived from salary (employment income), business, investment or other sources. Having confirmed that you possess the afore-mentioned assessable income, you may now question whether you should pay income tax. I would say no – because you must earn a ‘taxable income’. This means that you are not liable to pay income tax purely on the grounds of having an income. However, you must possess taxable income to become liable for income tax.
What is taxable income?
The taxability is dependent upon your identity as recognized by Sri Lanka’s tax laws. Thus the following persons are recognized as taxable persons and subject to pay taxes.
The definition for taxable income of an individual depends on the nature of taxable income. If the taxable person is an individual who is not an employee of an organization, but that person earns an annual income from sources other than employment exceeding Rs 500,000/-, then that person is a tax liable individual. For example, if your annual income is Rs 650,000/-, then yes, you are only liable to pay tax on Rs 150,000/-; that is after deducting Rs 500,000/- which is known as a ‘qualifying payment’ (personal relief). This personal relief is not given for a trustee, receiver, executor or liquidator and also cannot be deducted from the gain from investment assets realization.
Please note that the taxable income is not solely the gross income. Taxable income is the profit after deducting allowable expenditure. Thus above-mentioned threshold of Rs 500,000/- should be profit that you earned after deducting allowable expenditure. However, all personal expenses are not allowable expenditure and expenses related to investment income are also not deductible.
However, it differs for an employee who works for an organization. Then your taxable income is based on your salary, known as employment income, and it should be more than Rs 1,200,000/- per annum. In this case an employee is benefited with two qualifying payment deductions; namely Rs 700,000/- and personal relief of Rs 500,000/- totaling Rs 1,200,000/-.
A limited liability company
If a person(s) is running a business that has been registered as a limited liability company, then it is an entity (not recognized as an individual). Entity is liable to pay income tax if it has a taxable profit. In this case there is no minimum threshold of income; therefore even Rs 1/- of taxable profit is liable for income tax. Thus, entities are not allowed to deduct qualifying payments as provided in the case of individuals and employees.
Similarly, partnerships, trusts, unit trusts, NGOs, charitable organizations are recognized separately as tax payable persons (businesses) subject to taxable profit.
Withholding Tax (WHT)
Reintroduction of Withholding Tax (WHT) is a major issue among the public. Lack of awareness of the nature of WHT caused concerns for many because they thought taxes are payable on every single payment. As per the law, two types of income are subject to WHT deduction. These include:
- Service fees and contract payments
- Investment returns
Income of resident individuals from service fees and contract payments are subject to deduction of WHT. WHT is a tax paid by a person (individual/entity, etc.) on behalf of a resident individual who is a supplier of certain services such as consultancy, brokering, teaching, construction work, service professionals, etc.
WHT is a tax paid by a resident individual through a tax agent (a person) in advance before the annual (final) income tax is paid. It means that if your WHT has been paid/deducted by your service recipient, that paid amount can be deducted from your final tax that has to be paid in the year of assessment. WHT in this nature is only applicable to individuals who get paid more than Rs 50,000/- per month. However, this tax exemption (Rs 50,000/-) is not applicable to a landlord who rents out properties for commercial purpose.
However, if you are not a registered tax individual, then you are not allowed to deduct WHT that has been deducted by your service recipient from your final tax. It means that you need to pay income tax in the name of WHT even though you are not a registered tax individual.
The second category of WHT applies to the investment return of a person (individual/entity). You are subject to WHT if you are earning a return from your investment such as dividends, interest on fixed deposits, rental income from your property (rented out only for commercial purpose), royalty, lottery winnings, etc. In this case also, WHT is deducted and paid by the person who pays your income. This means that they deduct tax from your income and pay the balance to you.
It is worth to note that you are not liable for income tax if you own assets such as a car. You are principally liable for income tax if you are an individual who earns taxable income exceeding Rs, 500,000/- annually, or if you are an employee of an organization earning more than Rs 1,200,000/- annually, or running a business (entity) with a taxable profit. In addition to these categories, certain income of a person (individual/entity) is taxed in the name of WHT.