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Inland Revenue Act of Sri Lanka and Role of Tax Accountants

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Inland Revenue Act of Sri Lanka and Role of Accountants

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Description

Inland Revenue Act No.24 of 2017 is limited to four main sources of income (Employment, Business, Investment and Other income) with dominant principle. Most of the passive income are covered under investment income. To make more practical and also to go parallel with accounting treatments, some of the nominal sources which recognized in Inland Revenue Act No.10 of 2006 (i.e. Net Annual Value and Occupiers Income etc.) has been removed and new sources (i.e. Realization Gain on Capital assets/Capital Gain and Natural Resource Payments etc.) has been introduced.
Method of Accounting for income tax purpose from each source of income has been discussed in Section 21 of Inland Revenue Act No.24 of 2017 to streamline the tax system by complying with accepted accounting standards i.e. Sri Lanka Financial Reporting Standards (SLFRS) which comply with International Financial Reporting Standards (IFRS).

Section 21 of Inland Revenue Act No.24 of 2017 read as follows.
1. Unless otherwise provided by this Act, the timing of inclusions and deductions in calculating a person’s income shall be made according to generally accepted accounting principles.
2. An individual shall account for income tax purposes on a cash basis in calculating the individual’s income from an employment or investment.
3. An individual or entity conducting business shall account for income tax purposes on an accrual basis.
4. A person shall account for income tax purposes the income from sources other than the sources referred to in subsections (2) and (3) on either a cash or accrual basis, whichever properly computes the person’s income.
5. Subject to subsections (2) and (3), the Commissioner-General may by written notice require a person to use a particular method of accounting or may approve an application of a person to change the person’s method of accounting. The Commissioner-General shall be satisfied that the new method is necessary to properly compute the person’s income.
6. Where a person’s method of accounting changes, adjustments shall be made in the year of assessment following the change so that no item is omitted or taken into account more than once.

In addition, following provisions emphasis the methods of recognition of income for tax purpose.
Section 22 – Cash basis accounting
Section 23 – Accrual basis accounting
Section 24 – Reverse of amounts including bad debts

Section 120 of Inland Revenue Act No.24 of 2017 [As amended by Inland Revenue (Amendment) Act No.10 of 2021] provide guidelines for keeping Accounts for tax purposes and maintain Records for tax purposes.
Further, Section 190 of Inland Revenue Act No.24 of 2017 discussed on ‘Impeding tax administration’ and through Section 190A ‘Punitive provision’ for fraudulently prepared or certified documents has been introduced.
According to the Inland Revenue (Amendment) Act No.09 of 2021, “E-Filing” is mandatory for all Companies to file their tax returns and use of Tax Identification Number (TIN) in all tax and tax related transactions from 01st April 2021. Revenue Administration and Management Information System (RAMIS) of Inland Revenue Department (IRD) improved with technical and legal provisions to further strengthening the tax administration.
IRD facilitated to enhance self-compliance and strengthen tax audits while introducing punitive legal provisions to ensure the tax agents (private tax consultants and auditors) representing the tax payers and prepares and certifies fraudulent tax reports on financial benefits consequence including being barred from practicing. In this context, Section 190A has been introduced to IR Act in the proposed amendment and with the implementation of such provision future role of tax agents will be censorious in SL tax system. Therefore some cases has been initiated by Accountants, Auditors and Tax Consultant individually and through their professional bodies against proposed changes under section 190A.

Instructions for Assignment
1. You are required to analyse the “Role of Tax Accountant/Tax Agent/Tax Consultant” as explained in Inland Revenue Act No.24 of 2017 and its amendment Act No.09 of 2021 by highlighting methods of “Recognition of Assessable Income from each source of income” explained in Section 21 to 24 and other relevant sections of Inland Revenue Act No.24 of 2017 comparing with “Role of Accountant” which recognized in Accepted Accounting standard (SLFRS).
2. Your answer should be supported with ‘quotations’ taken from relevant sections of IR Act and also from relevant judgments available in case laws on recognition of income from each source of income by individuals or entities for tax purpose.

Additional information

Table of Contents

1. Introduction

2. Section 21 to section 24 of Inland Revenue Act (IRD act)

3. Role of Tax accountant

3.1. Employment income
3.2. Profit from trade business, profession and vocation
3.3. Investment income
3.4. Income from other sources

4. Conclusion

5. References
Preview

1. Introduction

Inland Revenue Act no 24 of 2017 considered four main categories of income namely employment income, Business income, investment income and other income. In order to make more practical the taxable profit, some of the provision have been removed from the Inland Revenue act no 10 of 2006. There are major sections which are directly applicable with calculation of taxable profit. Section 21, section 22. Section 23 and section 24 are some of those provision. Section 120 of the act provide clear guideline as to how to maintain the accounts for tax purpose and how to furnish the documents. In this report it is going to be analyzed the role of tax accountant/ tax agent/ or the tax consultant as explained in the Inland Revenue act and its subsequent amendments. Inland Revenue Department provides clear guild lines has to how to determine the assessable income from each source. Hence this report elaborates the role of tax accountant as prescribed by the Inland Revenue Act in comparison to financial accountant.

2. Section 21 to section 24 of Inland Revenue Act (IRD act)

Section 20 Changes in the year of assessment
As per the section 20 of the Inland Revenue act says person’s income must be calculated based on the generally accepted accounting principles unless otherwise mentioned in the act. According to that person employment income must be calculated based on the cash basis. Therefore, role of tax account is to consider the employment income based on the cash basis regardless the period for which the income was received. In other words, prepaid employment income or employment income receivable do not take in to account when considering the employment income under tax basis. At the same time income generated from the investment must be considered on cash basis under tax based accounting. However accrual basis of accounting is considered by the accountant when preparing the financial statements. Hence there is a difference between the basis of calculating the employment income and investment income. Due to this reason, amount of income derived from each method are different from one to another. Considering the business income, both tax accountant and financial accountant follow the accrual basis of accounting when calculating the business income (Parliament of the Demographic Socialist Republic of Sri Lanka, 2017).

Section 21 Method of accounting
According to section 02 of Inland Revenue act there are two method of calculating the income same as with financial accounting. However, in financial accounting mostly accepted basis of calculating the income is accrued basis of income. With reference to the cash basis of account, income received or the amount is made available for the person must be considered as the income. With reference to the expenditure, expenses paid are considered to calculate the income. Furthermore, amount reinvested, accumulated and capitalized also considered as the income under cash basis accounting. With reference to the accrued basis of income amount which is receivable by the person is considered whether it is received for paid. With reference to the payments or the expenditure under accrued basis accounting amount which is payable must be considered as the expenditure whether it is paid or not (Parliament of the Demographic Socialist Republic of Sri Lanka, 2017).

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