YOUR WALLET AND HAWK EYE; IMPACT OF MANIFOLD REGIMES ON THE EMPLOYMENT GAINS IN

Rochelle Ariyawansa

Attorney-at-Law, LL.B. (Hons), University of Jaffna

dimensions: (a) horizontal equity, A. Introduction i.e., similar treatment of persons

The functions of a tax system placed in similar circumstances,

involve several aspects. First, the and (b) vertical equity, i.e.,

primary function of a taxation different treatment of persons

system is to raise revenue for the with different taxable capacity.

government for its public Thirdly, the fiscal system is also

expenditure as well as for local employed for social purposes such

authorities and similar public as discouraging certain activities

bodies. Its efficiency is therefore which are considered

primarily judged by whether this undesirable.1

function is performed adequately Domestic tax system has the strings of and satisfactorily. The second control where the financial stability of function is to reduce inequalities a State is considered. The income and through a policy of redistribution expenditure generated are the basic of income and wealth. The equity forces of an economy however the principle in taxation implies that revenue generated would be the should be imposed in deeming factor creating the accordance with the ability to pay sustainability. principle. This has two

1D.D.M Waidyasekera- former Commissioner and Perspectives- No.25 Working Paper of of Inland Revenue, Secretary of 1990 Institute of Policy Studies of Sri Presidential Taxation Commission, present Lanka/2016/page 1 editor of the institute of policy studies of Sri Lanka/Taxation in Sri Lanka: Current Trends

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The Inland Revenue Act No.24 of 2017 It is the author’s understanding that

(hereinafter at times called as the the public lacks the knowledge as to

‘Act’) provides with the legal authority how their salary and all the other to charge, levy and collect gains from employment being taxed. on the gains and profits of every Therefore the objective of this paper is person, on a year on year basis with to give a comprehensive overview on effect from 1st of April, 2018 in relation manifold tax regimes in consideration to four main sources of income of employment gains. namely, employment income, business income, investment income and other income. B. Stage of Employment

Under the charging provision section Engaging in an employment and 2, income tax is payable by a person. receiving a salary is the most common A person is defined as an individual or method of generating income. Such an entity, and includes an executor, employment income concerned, the non-governmental organization and involvement of diverse taxes could be charitable institution.3 An entity identified in stages of Employment and means a company, the charging Post-employment, specifically as to provision is found in Chapter I of the terminal benefits2, compensation Act,4 and is the central provision from received directly from the Employer or which the rest of the provisions through the Department of Labour, considered as branches. Generally, and compensation from the Labour income tax is payable on taxable Tribunal. income; and final withholding

2Employee’s Provident Fund (EPF), 4 S. 2(1) of the Act Employee’s Trust Fund (ETF), Gratuity 3S. 195(1) of the Act

2 payments. Calculation of an employment from their activities individual's gains and profits from whereas the contractor will derive employment for a year of assessment income from business. The rules for will be described in Chapter III of the calculating these types of income are

Act. different and, no deductions are

permitted in calculating income from

Generally, employment involves employment, section 10(1) (a) since, provision of labour for gain. The employees have few expenses, but an definition of "employment" in section independent contractor providing

195 to the Act essentially refers to the services may have substantial general law concept of employment. expenses for which relief is granted.

This general law concept is extended to include past and prospective Tax liability arises on total employment and so amounts received remuneration received by an either before or after employment may employee, during the year of be required to be included in income assessment5 in money or otherwise and an employee means any from employer or others for services individual who earns remuneration in rendered, if not specifically exempted. money or otherwise, for the present or The Remuneration liable to tax past services performed by such includes; 6 individual.

i. Salary, wages, leave pay,

It is important to properly classify a overtime pay, fees, pensions, person as an employee or an commissions, gratuities, independent contractor. The bonuses, and other similar employee will derive income from payments

5 Year of assessment is a period of 12 months 6S. 5(2) of the Act from 1st April to 31st March of every year

3 ii. allowance, including any cost In Wimalasundera J. Kanaga

of living, subsistence, rent, sabapathy vs. CGIR7 it was clearly

entertainment or travel observed what amounts to

allowance employment gains. iii. Payments providing discharge “………. the kinds of receipts with the item wages and going down to or reimbursement of expenses perquisite are receipts in respect of incurred by an individual or an a person’s service as employee. The associate of the individual statute requires that these receipts must be payments “which an iv. Payments for an individual's employee receives in the course of agreement to conditions of his employment” employment Having ascertained the component of v. Payments or transfers to remuneration liable, it is notable that another person for the benefit imposing taxes varies sector-wise. of an individual or an associate

person of the individual vi. The fair market value of Public Sector Employees benefits received or derived by

virtue of the employment by an The public sector is a portion of an

individual or an associate economic system that is governed by

person of the individual national, state or provincial, and local

governments.

It is stated to be the largest sector of The excluded gains and profits are any economy, whereby one can argue demonstrated under section 5 (3) to that it consists of national economy the Act. providing basic goods or services that

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4 are either not, or cannot be provided should withhold tax from an amount by the private sector. included in .

Every employer is required to deduct The section being linked with Section income tax from the gross 10 of the first schedule to the Act it is remuneration for every pay period of mentioned that with regard to both every employee who is liable to resident and non-resident employees income tax, at the time such such sums would be taxed at the rates remuneration is paid or credited.8 The Commissioner General publishes in pay period can be a month, week or Gazette. such other period in respect of which remuneration is calculated and paid Withholding by Employers by an employer to an employee, and Regulations by the Gazette No. accordingly, the tax should be 2064/60 dated 01st April 2018, came deducted and remitted monthly to the into operation at the same time as the Department of Inland Revenue. This is Act, No. 24 of 2017 specifies tax rates known as PAYE scheme.9The of the following.10 Commissioner General of Inland

Revenue specifies Tax Tables which are to be used in making such tax a. Tax Table 01 for regular profits deductions. from the employment of an

employee who is having one

Section 83 to the Act empowers the employment or any employee

Commissioner General to specify who has furnished a primary circumstances where the employers employment declaration11,

8 S. 83 of the Act link: 11In case of having two or more employment

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b. Tax Table 02 for payment deduction should be made

constitutes a Lump-sum monthly till end of the year of

payment12 assessment, using this table.

c. Tax Table 03 for once-and-for- f. Tax Table 06 for payment or all payment (Terminal reimbursement of the Benefits)13 employee's tax liability on his

d. Tax Table 04 for payment income from employment by

received by the non-citizens in the employer Sri Lanka g. Tax Table 07 for the e. Tax Table 05 for monthly remuneration of a chairman or regular profits of an employee a Director or a Non Execute from a primary employments Director of a Company who is less than Rupees 100,000 has not furnished a primary but the cumulative profits employment certificate, or in from the primary employment respect of remuneration of any up to any month in the year of employee employed under assessment exceeds Rupees more than one employer, or 1,200,000 due to payment of from the remuneration of higher remuneration in employee who are engaged in certain months14Tax more than one employment deduction should start from where such remuneration is the month in which the paid by any employer other cumulative profits up to that than the employer of primary month exceed Rupees employment. 1,200,000. Thereafter tax

12 Bonus, Incentives etc. 14Will be specifically addressed in a later stage 13 Will be specifically addressed in a later stage of this article of this article

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Employers are required to maintain An employee is obliged to furnish a

PAYE Pay Sheets for the purpose of declaration nominating the

PAYE Tax deduction in the prescribed employment as the employee's form, for each employee who is liable primary employment to an employer, to tax. These pay Sheets should be except any employee who is having maintained in addition to the normal one employment. Such an pay sheets maintained by the employment shall be considered as employer for recording purpose. primary employment of an employee

Annual Declaration of government for a year of assessment. There can’t sector should be furnished to PAYE be more than one primary

Branch not later than the 30th of April employment throughout the every year.15 respective year of assessment.16

Primary and Secondary

Employment

Paragraph 3 of ‘Withholding by If an employee has ceased the primary Employers Regulations by the Gazette employment during a year of No. 2064/60 dated 01st April 2018’ assessment and the employee has resorts as to the requirements and how another employment after the primary the tax liability is governed in employment has ceased, the employee accordance with the aforementioned must provide the employer of the tables where employee is employed other employment with a new under more than one employer. declaration and the withholding tax

15Morefully explained by the latter part to this 16Parah 3 (i) – (v)of Gazette No. 2064/60 dated article 01st April 2018

7 certificate17issued with respect to the employer other than the primary prior primary employment.18 employer the tax liability shall be

imposed as, on monthly remuneration

Where an employee ceases two or less than or equal to Rupees 50,000 more primary employments during a per month, at 10%; and Balance year of assessment, the employee may amount exceeding Rupees 50,000 per provide the new employer with month, at 20%.20 multiple withholding tax certificate and the employers shall act accordingly with respect to those Private Sector Employees multiple withholding tax certificates.19

Resident individuals are subjected to Secondary Employment refers to any income tax on their worldwide employment that is not the primary income while non-resident individuals employment of the employee. are taxed only on their income

generated in Sri Lanka.21 Rates for the deduction of tax from the regular profits from employment of An individual is charged on such any employee who has not furnish the person’s taxable income on primary employment declaration, or progressive rates based on the level of in respect of regular profits from income. employment of any employee employed under more than one The rates currently applicable are: on employer, where such regular profits the first Rupees 600,000, 4% of the from employment is paid by any taxable income; on the next Rupees

17Certificate being issued under paragraph 7 of 20 Table 07 at Gazette No. 2064/60 dated 01st April 2018 19Parah 4 (iii) of Gazette No. 2064/60 dated 21 S. 4 (a) & (b) of the Act 01st April 2018

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500,000, Rupees 24,000 plus 8% of Section 132 of the Act requires a the amount in excess of Rupees taxpayer to assess the tax payable by

600,000; on the next Rupees 600,000, himself and to file return23for the

Rupees 72,000 plus 12% of the excess taxable period. Self-assessment of 1,200,0000; on the next Rupees taxpayer can file a return declaring a

600,000, Rupees 144,,000 plus 16% of loss and be treated as he has assessed the amount in excess of 1,800,000; on his income. A return which includes the next Rupees 600,000, Rupees pre-filled information provided by

240,000 plus 20% of of the amount in Commissioner General of Inland excess of 2,400,000; and Rupees Revenue (CGIR) and electronically

360,000 plus 24% of the amount in computed payable amount of tax excess of Rupees 3,000,000 on any should be completed in writing or amount exceeding Rupees electronically as to be furnished.

3,000,000.22

As per section 85 (1) (a) to the Act

A resident of Sri Lanka for income tax coupled with paragraph 10 (c) (i) of purposes will be entitled to claim a the First Schedule service fees as to tax-free allowance of Rupees 500,000 teaching, brokering, endorsement, for each year of assessment. supply of any article on contract basis,

and any other prescribed by regulation

An individual who has profits from rendered to resident individual shall employment and is a resident or be taxed at 5% on amounts exceeding citizen of Sri Lanka is entitled to a Rupees 50,000 per month. further deduction of Rupees 250,000 as a qualifying payment.

22 First Schedule 1 (1) of the Act taxpayer to declare the amount he has earned. 23Can be a NIL return where no taxable income (Will be treated as having made an assessment) generated but the obligation lies on the

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Section 85 (1) (b) with paragraph 10 the Industrial Disputes Act No. 43 of

(c) (ii) of the First Schedule the same 1950 which has the jurisdiction to services rendered to non-resident reinstate the employee with or individual shall be taxed at 14%. without back-wages and in lieu to

compensate.25

Terminal benefits are subjected to C. Post Employment (Terminal income tax as per Section 1 (2) and Benefits and Compensation) (3) of the Act.

“When an employee’s employment a. Any sum paid in commutation of terminates, either as a consequence of dismissal, redundancy or pension, retirement, it is common that the b. Retiring Gratuity(Payable as per employer will pay a lump sum payment to the employee. These the Payment of Gratuity Act No. 12 payments may be referred to as a of 1983) golden boot or a golden c. Compensation for loss of office or handshake.”24 employment under a uniformly According to the paragraph above an applicable scheme recognized by employee is entitled to receive the Commissioner- General, retirement payments irrespective of d. Any sum paid at/after the the nature of cessation of such retirement from a provident fund services. approved by the Commissioner-

In any event of unjustifiable and General which does not represent unlawful termination an aggrieved employee’s contributions to the employee is entitled to go before the fund.

Labour Tribunal as per section 31B of

24ACCA Qualification Paper F6/Taxation on nt/dam/acca/global/PDFstudents/2012s/sa_ Termination mar11_f6irl_2.pdf> Payments

10 e. Any sum paid from a regulated Where the period of service is more

provident fund which does not than twenty years there is no liability

represent employer’s upto Rupees 5,000,000. Between

contributions to the fund before Rupees 5,000,000 and Rupees

01.04. 1958, where the interest 6,000,000, the excess amount of

has been accrued if the tax paid by Rupees 5,000,000 at 5%, and tax

the employer at 15% and interest payable for any sum exceeding

accruing thereon. Rupees 6,000,000 is Rupees 50,000 plus 10% on the amount in excess of f. Any sum paid from Employee’s Rupees 6,000,000. Trust Fund (ETF) established by

Employee’s Trust Fund Act No. 46 However, any income shall not be

of 1980 at/after the cessation of taxed if such sums have already been

employment.26 subjected to final withholding payments.27 In consideration of the above income

identified, where the period of service As it was mentioned earlier section 83

is twenty years or less, such sum would to the Act the Commissioner General

be taxed as, no liability upto Rupees has authority to specify circumstances

2,000,000, between Rupees where the employers should withhold

2,000,000 and 3,000,000, the excess tax from an amount included in

amount of Rupees 2,000,000 at 5%, taxable income. Section 10 of the first

and tax payable for any sum schedule it is mentioned that such

exceeding Rupees 3,000,000 is rates shall be gazetted.

Rupees 50,000 plus 10% on the Withholding by Employers

amount in excess of Rupees Regulations by the Gazette No.

3,000,000. 2064/60 dated 01st April 2018 refers

26As per section 8 under Schedule I taxable approved termination fund shall be taxed at income of an employee’s trust fund, an rate of 14% approved provident or pension fund or an 27 S. 5 (3) (a) of the Act

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to the Tax Table 03 for once-and-for- However 24%, would be the rate for

all payments which are Terminal tax deductions in the circumstances

Benefits.28 referred to in compensation for loss of

Tax is stated to be withheld at 10% office or employment under non

from pension, retiring gratuity, uniform scheme.

compensation for loss of office or In the case of uniform scheme once–

employment under a scheme which is and-for–all payments, deduction

uniformly applicable to all employees should not be made in the situations

and approved by the Commissioner where aggregate amount is Rs.

General of Inland Revenue. 1,000,000 where the period of service

or contribution is less than 20 years A scheme is uniformly applicable, and/or Rs. 1,500,000 where the where the Commissioner General is of period of service (or contribution) is the opinion that it is uniformly equal to or more than 20 years. applicable to all the employees.

Where the payment made by the D. Conclusion employer is in accordance with a

scheme which is uniformly applicable “Every worker and employer is directly affected by taxes on wages. to all the employees, or where the Taxation is one of the principal payment is made out of a Fund to ways we finance public services. It which the employer has made also helps us achieve important social objectives, such as contribution in accordance with a redistributing wealth to address scheme which is uniformly applicable inequalities.”29 to all the employees, then such a In light of the above it is to be scheme would be a uniform scheme. understood the significance of

28Parah2 (c) to the regulation ibid disposable income of workers and wage costs of employers 29Paturot Dominique, OECD Centre for and in OECD Administration/Taxing wages: how taxes affect the countries

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sufficient knowledge on the imposition Therefore, it will be the need of the

of manifold tax regimes under the hour to bring into the cognizance of

Inland Revenue Act. To be responsible the general public the provisions of the

and vigilant citizens such knowledge is Inland Revenue Act and other

mandatory. supportive legislation with a view of

promotion of adequate knowledge.

p/aid/5916/Taxing_wages:_how_taxes_affect_the_di sposable_income_of_workers_and_wage_costs_of_em ployers_in_OECD_countries.html>

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