All you need to know about Employment Tax

In our latest series on “taxation explained”, KPMG Principal – Tax and Regulatory Suresh Perera, LLB, Attorney at Law, FCMA (UK) shares key insights to Employment Tax.

Suresh Perera

 

Q: What are the pros and cons of an employee requesting the company to deduct tax from the salary as opposed to opting to pay tax on a quarterly self-assessment basis?

 In practice employees find it easy to go under the Advanced Personal Income Tax (APIT) scheme, since the employer deducts the due taxes at the point of remitting the monthly salary to the employee. 

However, in case of an employee who has expenses that would qualify under the expenditure relief of Rs 1.2 Mn or any expenses that would qualify as qualifying payment relief, under the APIT scheme, those deductions cannot be adjusted monthly. 

If an individual is following the self-assessment payment scheme, then he/she has the opportunity of deducting the reliefs available and paying the exact amount of the estimated tax payable and there will not be any overpayment. However, if a person is under the APIT scheme, since the employer is obliged to deduct taxes from the amounts the company is paying as profits from employment, there will be an overpayment of taxes during the year by the employee. Such overpayment must be requested as a refund at the point of filing the Return of Income by the individual on or before the 30th of November. The process of obtaining tax refunds could take a long time and this may be an opportunity cost for the employee. 

Therefore, payment on self-assessment basis may have a cashflow advantage to the employee if they have deductions covered by the expenditure relief (i.e health expenses including contribution to medical insurance, educational expenses, housing loan interest, private pension schemes, investment in listed shares and debt securities such as treasury bills and bonds) 

Q: What are the primary & secondary employment declarations to be furnished by an employee? 

 The ‘primary employment declaration’ is where an employee has to provide a declaration to his company in the prescribed form electing his category of employment (whether primary or secondary). The declaration form also allows the employee to provide consent for tax deduction under the APIT scheme.

The reason for the declaration of primary employment is that for tax purposes, the employer would apply Table 1 which takes into account the tax relief of Rs 3 million available to an individual.

An employee will always have only a single primary employment.

So, where an employee states that the employment should be treated as his secondary employment, the second employer will have to apply Table 7 for APIT calculation where the Rs 3 million tax relief is not taken into consideration. 

The declaration must be signed and dated by the employee and the employer and may relate to one or more years of assessment.

As per the Guide issued by the Inland Revenue Department (IRD), an employee may withdraw the declaration provided by him only at the end of the Year of Assessment (Y/A) (unless the employment contract ceases). However, the declaration can be provided in between a Y/A. 

Q: Are gifts or vouchers received from the company by an employee liable for tax?

 This is a very common practice that we see in companies. Some companies give gift vouchers as a part of the salary package and some others provide gift vouchers on top of the normal salary. To understand and analyse the income tax impact one has to go to tax fundamentals coming from the Inland Revenue Act. 

As per the Inland Revenue Act No. 24 of 2017 (IRA 2017), unless a specific exemption is provided in tax law, all the profits from employment received from an employer is liable to income tax. Profits from employment could either be cash or in kind. That means benefits given by a company in addition to the salary, which is a very common practice adopted by many companies. So in case of gift vouchers given, the market value of the gift voucher, that means the face value will be subject to the income tax. 

Q: How is the tax office looking at low interest or no interest loans given by a company to an employee?

Low interest or no interest loans are given mostly by banks to its employees. Whether there is a benefit to the employee and whether this benefit should be taxed has been a highly discussed area in the past and there have been many different positions taken by the tax office from time to time. 

In the Inland Revenue Act of 2006 (the previous Act), there was a specific exemption introduced in the year 2015 on the benefit from provision of any loan by the employer free of interest or at a subsidized rate of interest, if such loan is provided not out of funds borrowed for that purpose.

Under the IRA 2017 effective from 1st April 2018, the tax office considers the difference between the market rate of interest and the concessionary low interest rate offered as a benefit from employment.

The Commissioner General of Inland Revenue (CGIR) issued a draft circular on how the benefit should be valued and it provides a formula for the same. As per this formula, 50% of difference between concessionary rate and the market rate specified annually by CGIR is considered as employment benefit and the employee should pay income tax on the same. For the Y/A 2018/2019 market rate specified by CGIR is 9.08% per annum. However, the rate was not specified for the subsequent Y/A.

Q: Should an individual pay tax on investment income such as interest, dividends and rent on cash basis when the money is received or on accrual basis? 

Individuals should account for investment income such as interest, dividends and rent on a cash basis as per Section 21 of the IRA 2017. Even for employment income, as per the Law, cash basis should be followed. In case of business income derived by an individual, it should be accounted on accrual basis. 

Q: What are the methods available for an individual to pay income tax? 

 The individual can make online transfers (OTPP) via designated banks only. The Inland Revenue Department has issued a notification that Bank of Ceylon, People’s Bank, Commercial Bank of Ceylon PLC, Sampath Bank PLC, National Saving Bank, and Hongkong & Shanghai Bank as the designated Banks.

Further over the counter payments could be made via Bank of Ceylon, Nations Trust Bank, National Development Bank and Union Bank of Colombo.

Whether the individual is making an over-the-counter payment or OTPP, he should obtain a Document Identification Number (DIN) from the IRD prior to processing payments.