In calculating the income from a business or investment for a year of assessment, expenses incurred during the year, in the production of income from the business or investment, are permitted to be deducted.
Capital allowance for depreciation of assets acquired/constructed is granted based on the number of years applicable to the relevant depreciable asset as follows:
Depreciable assets Number of years Computers and data handling equipment, together with peripheral devices 5 Buses and minibuses, goods vehicles; construction and earthmoving equipment, heavy general purpose or specialised trucks, trailers, and trailer-mounted containers; plant and machinery used in manufacturing 5 Railroad cars, locomotives, and equipment; vessels, barges, tugs, and similar water transportation equipment; aircraft; specialised public utility plant, equipment, and machinery; office furniture, fixtures, and equipment; any depreciable asset not included in another class 5 Buildings structures and similar works of a permanent nature 20 Intangible assets, excluding goodwill 20 or the actual useful life
The allowance for depreciation for capital assets (e.g. plant and machinery) and qualified buildings constructed/acquired before 1 April 2018 can be computed and deducted as per the respective provision of the Inland Revenue Act No. 10 of 2006.
Capital allowance is not granted on the acquisition of goodwill.
Formation or liquidation expenses of a company
Expenses incurred in the formation or liquidation of a company are not allowed in computing the taxable income, as such expenses are not incurred in the production of income during the year.
Interest paid or payable on borrowings for purposes of business are deductible, subject to the thin capitalisation rules (see the Group taxation section).
Bad debts and doubtful debts
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A sum equal to the bad debts incurred in any business or investment that have become bad debts during the period for which the profits are being ascertained is allowed for tax purposes.
In the case of a bank or a financial institution, deductibility of a specific bad debt provision as may be specified by the Commissioner General of Inland Revenue (CGIR) would be allowed.
Relief is available as a deduction from taxable income for contributions in money to an approved charity, provided the charity is established for the provision of institutionalised care for sick or the needy, and contributions in money or in kind to the government of Sri Lanka. The deduction for the former is subject to a ceiling of one-fifth of the taxable income of the company or LKR 500,000, whichever is less. In the case of the latter, there is no limit to the deduction; however, and any un-recouped excess of such contributions over the taxable income cannot be carried forward and deducted from the following year’s taxable income.
Investment and other allowances
Any balance allowance as at 31 March 2018 deductible from assessable income under the Inland Revenue Act, No. 10 of 2006 can be deducted in accordance with provisions of the new Inland Revenue Act No. 24 of 2017 (subject to conditions) from the year of assessment 2018/19.
Finance lease allowances
Any profit, loss, receipt, or payment of a finance lease agreement entered into prior to 1 April 2018 can be computed in accordance with the respective provisions of the Inland Revenue Act, No. 10 of 2006.
According to the provisions of Inland Revenue Act No. 24 of 2017, payments made under finance lease agreements entered into after 1 April 2018 shall be treated as interest and a repayment of capital under a loan made by a lessor to lessee, and accordingly interest payments on a finance lease are deductible in arriving at the profits and income, while capital allowances are claimable on leased assets by the lessee.
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Termination gratuities paid to employees on cessation of business and contributions made by an employer to an employee’s account with a pension, provident, or savings fund or savings society approved by the CGIR are deductible.
Royalties and ground rents
Any royalty or ground rent payable is deductible, subject to the general rule of being incurred in the production of income during the year.
Interest, fines, and penalties
Interest, fines, and penalties paid or payable to a government or a political subdivision of a government of any country for breach of any written law are not deductible for tax purposes.
Sri Lanka income tax payable and taxes or other levies specified by the CGIR are not deductible.
In ascertaining the total income liable to CIT from the financial accounts filed by a company, the following deductions, including any expense of a capital nature (other than repairs and improvement expenses subject to certain restrictions, research and development (R&D), and agricultural start-up expenses), are not be allowed:
- Domestic expenses incurred by the person.
- Income tax payable.
- Interest, fines, and penalties payable to a government or a political subdivision of a government of any country for breach of any written law.
- Expenditure to the extent incurred by a person in deriving exempt amounts or final withholding payments.
- Retirement contributions, unless they are included in calculating the income of an employee or consist of a contribution by an employer to a pension, provident, or savings fund or a savings society that is approved by the CGIR, subject to any specified conditions.
- Dividends of a company.
- Outlays or expenses for entertainment.
- An amount that a person has transferred, in one’s financial accounts, to a reserve or provision for expenditures or losses not yet incurred but expected to be incurred in a future year of assessment.
- Amounts incurred on lotteries, betting, or gambling, other than amounts incurred from conducting a business of lotteries, betting, or gambling.
- Taxes or other levies specified by the CGIR.
Also, no deduction is allowed where a person is required to withhold tax from certain payments until the tax withheld has been paid to the CGIR.
Net operating losses
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In calculating the income from a business for a year of assessment, the following shall be deducted:
- an unrelieved loss of the person for the year from any other business, and
- an unrelieved loss of the person for any of the previous six years of assessment from the business or any other business.
However, the loss can be deducted only in calculating income taxed at the same rate, a lower reduced rate, or exempt amounts.
Unrelieved losses from a business may be deducted in calculating income from an investment, whereas unrelieved losses from an investment can be deducted only in calculating income from an investment.
Any balance loss as at 31 March 2018 shall be deemed to be a loss incurred in the year of assessment 2018/19 and be deductible in accordance with provisions of the new Inland Revenue Act No. 24 of 2017 (within six years without being subject to the 35% of the statutory income limitation but subject to other restrictions).
A gain from the realisation of an investment asset cannot be set off against any loss on the disposal of another investment asset.
Payments to foreign affiliates
Any payment made to an affiliate is allowed for tax purposes, provided such payment is in the nature of revenue and is incurred in the production of income.