Key insights to individual taxation

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

Q: Are there any tax planning techniques that could be used by individual taxpayers during the next few weeks before the end of the Year of Assessment?

 There is a distinct measure that anybody can use to be tax efficient in relation to the Year of

Assessment 2021/22. As we all know the Year of Assessment (Y/A) 2021/22 is coming to an end on 31 March 2022. Most of the individuals get activated in relation to Y/A 21/22 only in November in order to file the Return of Income before the deadline of 30 November.

But then it’s too late to carry out any planning measures to save the taxes. 

Due to the recent tax revisions that were introduced, every individual is now entitled to an expenditure relief of Rs. 1.2 million for any year of assessment i.e. there is opportunity for anyone to deduct Rs. 1.2 million by way of relief in arising at the taxable income and thereby reduce the tax liability for the year.

However, in order to enjoy the total benefit, actual expenditure up to Rs. 1.2 million incurred during the 12-month period starting from 1 April 2021 to 31 March 2022 should be available for the individual. 

The specified expenditure that could be used to enjoy the 1.2 million deduction are;

• Health expenditure including medical insurance 

• Educational expenditure incurred locally for the person or his/her children 

• Housing loan interest 

• Contribution to the local pension schemes subject to the rules

• Expenditure for purchase of listed company shares or treasury bills and bonds 

So, if any taxpayer does not possess any payments referred to under a, b, c, d, and e above to cover up the Rs. 1.2 million incurred after 1 April 2021, he/she still has the opportunity to cover the gap and utilise the quota of Rs. 1.2 million deduction by investing in listed company shares/treasury bills/bonds during the next few weeks before 31 March 2022.

At present, the sales proceeds from listed shares are totally exempt from income tax, therefore sales proceeds will not attract any tax in the hands of the taxpayer. 

Q:In addition to Rs. 1.2 million expenditure relief, are there any other reliefs that an individual could make avail of to reduce the tax liability for a Year of Assessment?

Yes, definitely. Given the current context, a very relevant relief that could be utilised is the qualifying payment relief available for installation of solar panels. Many individual taxpayers are not aware of this relief available for solar panels. Any taxpayer is entitled to obtain a tax deduction of Rs. 600,000 for each Y/A in relation to the expenditure incurred for installing solar panels on his premises and connected to the national grid. The points to note are that the total expenditure could be deducted spread across a few years up to a maximum of Rs. 600,000 each year. 

Also, if a bank loan is obtained to fund the solar panel acquisition expenditure, the total amounts paid to the bank in respect of the loan obtained could be deducted as part of Rs. 600,000- allowed deduction. 

I think it will be a welcome move if the Government expands the scope of the tax deduction not only to cover the expenditure incurred for the acquisition of solar panels but also to extend it to the installation of solar batteries which are available in the market nowadays which is a solution for the current electricity crisis.

This solar tax relief may be an invaluable tax relief in the context of the Government indicating that going forward it will be promoting electric vehicles. So, taxpayers would have the opportunity of charging electric vehicles using the power generated by solar panels.

In addition, in case of an individual who has rent income, the Inland Revenue Act provides a 25% rent relief. The personal relief of Rs. 3 million is available to an individual other than to a non-resident, non-citizen. 

Q: What are the key tax points a person who is in employment should be aware of?

 A person in employment who receives salaries including bonuses for the year plus the other income (such as dividend, interest, rent etc) below Rs. 3 million is not exposed to income tax and need not worry about filing an income tax return. However, if the income exceeds the threshold of Rs. 3 million for the year of assessment then the person is obliged to register with the Inland Revenue Department and file an annual income tax return on or before the 30 November. In addition, something that most of the individual taxpayers ignore is the requirement to file a ‘statement of estimated tax payable’ (SET form) on or before the 15 August. Both these documents are considered tax returns under the Inland Revenue Act and failure to file by the due date can attract a penalty up to Rs. 400,000.

The significant point to be borne in mind is that if a person has only employment income and he has requested the company to deduct the taxes and remit to the department under the Advanced Personal Income Tax (APIT) scheme, still the person has to register with the Inland Revenue Department and file the SET form and the income tax return. On the other hand, if the person has interest income, say from bank deposits and/or treasury bills and bonds in addition to filing the aforesaid returns, the person has the obligation to pay taxes on the interest or any other income quarterly on self-assessment basis. i.e 15 August, 15 November, 15 February and 15 May in a year of assessment. 

Where a person has requested the bank to deduct taxes under the Advance income tax (AIT) scheme, the AIT certificates issued by the bank should be submitted to the Inland Revenue Department along with the Return of Income together with the Advanced Personal Income Tax (APIT) certificate issued by the employer on or before the deadline of 30 November. 

Q: Can an individual request for an extension for payment of the quarterly instalments and for filing the income tax return?

 The Inland Revenue Act includes a provision that allows a taxpayer to request for an extension of the time for payment of tax beyond the date on which it is required to be paid under the law. However, the Commissioner General must specify a form in order to make this application. Such form is still not specified after almost four years of introduction of the new Inland Revenue Act. 

The Law further allows a taxpayer to request for an extension of the due date for filing the tax Return.

Q: In case of an employee, in addition to the salary, benefits such as medical insurance, travel allowances are given. How would these benefits be taxed?

 Any allowance given in cash will be taxed as profits from employment. In case of discharge or reimbursement of a person’s dental, medical or health insurance expenses, if such benefit is granted to all full-time employees on equal terms, it can be excluded from profits of employment and will not attract taxes. 

Q: Are meals provided by the employer considered as profits from employment and liable for tax?

 There is a specific provision in the Inland Revenue Act to exclude any payments or benefits accruing to employees on a non-discriminatory basis and is unreasonable or administratively impracticable for the employer to keep account for or to allocate to an individual. Under this provision Meals, tea, coffee offered by the employer to the employees could be excluded from the profits from employment and hence will not lead to any income tax in the hands of the employee. 

Q: You explained the tax deduction available for the housing loans and loans for purchase of solar panels. What is the tax impact if a person purchases a vehicle by taking a vehicle loan from a bank?

 If the vehicle is purchased by an individual who is in employment for his travelling purposes, the interest paid on the car loan is not deductible against his/her employment income. In addition, he/she cannot claim capital allowance on the vehicle since the Tax Law does not permit it. 

However, if the individual is engaged in a business and the vehicle purchased is a commercial vehicle such as a lorry as opposed to a travelling vehicle such as a car, both interests paid to the bank on the loan and capital allowance on the cost of the vehicle at the rate of 20% for a year can be obtained as a deduction in calculating the taxable income of the year.

Q: Do individuals have to pay capital gains tax (CGT)?

 Yes. CGT is a transactional tax, in relation to investment assets owned by a person and realised during the year. The definition of investment asset is provided in the Inland Revenue Act. In general, assets such as land, building, shares, securities would be considered an investment asset and this would lease land or building also. The CGT rate is 10% and it would require a filing of a separate CGT Return within 30 days from the end of the month in which the transaction occurred. As per the new rule, in case of land and building, the higher of the assessed value (by a professional valuer reflected in a valuation report) or the amount received/receivable by the person is considered the ‘consideration’. However, the law also provides the discretion to the tax officer also to determine the tax consideration. 

The cost would be the value as at 30 September 2017. The difference between the consideration and the cost would be the gain that would be subject to 10% tax. 

Exemptions are granted from CGT for realisation gain on listed securities as explained earlier. 

An individual who is a tax resident is entitled to an exemption for a gain made on realisation of an investment asset up to Rs. 50,000 and where the total gains made by the resident individual from the realisation of investment assets in the year of assessment does not exceed Rs. 600,000 subject to conditions. 

Further gain made on sale of a house which is the individual’s principal place of residence, provided it has been owned by the individual continuously for three years and lived in by the individual for at least two years of those three years before the realisation, would be exempt from capital gains tax.

Q: Can an individual claim income tax deduction for payment of residential utility bills such as electricity, water, etc.?

Against employment income no expenses are deductible for income tax purposes. Therefore, an individual filing an income tax return cannot get the income tax deduction for the utility bills paid for his/her house solely used for residential purposes. As per S.10(1)(b)(i) of the Inland Revenue Act, domestic expenses are not tax deductible. If a premises is used as a place of business, by a person engaged in a business, the Utility bills paid for the premises could be deducted as an expense incurred for the production of income from that business for which the premises is being used.