All you need to know about one-off 25% Surcharge Tax

With widespread discussion on the recently gazetted one off 25% surcharge tax on profits made by companies for the financial year 2020/21,  the Daily FT spoke to KPMG Principal – Tax and Regulatory, LLB, Attorney at Law, FCMA (UK) Suresh R.I. Perera, to get more clarity on the new tax. 

Here are excerpts. 

Inland Revenue Head Office

Suresh Perera

Q: Surcharge Tax Bill has been published in the Gazette. When would this tax be operative?

 The Surcharge Tax Bill was published in the Gazette on 7 February. 

So, in terms of Article 78 of the Constitution, it could be placed in the Order Paper of the Parliament only after seven days. 

Once it is placed in the Order Paper within one week any citizen may file a petition in the Supreme Court challenging the Bill. 

As per Article 121 , “citizen” includes a body, whether incorporated or unincorporated, if not less than three-fourths of the members of such body are citizens.  

If the Bill is challenged, the proceedings cannot commence in the Parliament until the Determination of the Supreme Court has been made within a statutorily provided time period of three weeks.

Thereafter, the Bill (with amendments if any) must follow the normal Parliamentary procedure for enactment of a Statute such as the three readings and then finally the certification by the Speaker. 

Once the Bill becomes Law, it will be applicable for the Year of Assessment 2020/21 i.e. the year of assessment commencing from the 1 April 2020. 

As per the provisions of the Bill by 31 March, the Surcharge Tax Return is to be filed and the first payment should be paid to the Commissioner General of Inland Revenue (CGIR). 

The second and the final payment should be made before 30 June.

Q: Who is liable for this Surcharge Tax of 25%?

 In general, we can say that it is on individuals, partnerships and companies who have taxable income over and above Rs. 2 billion for the Year of Assessment (Y/A) 2020/21.  

In case of group of companies if the aggregate taxable income of holding company and subsidiaries exceed Rs. 2 billion for the Y/A 2020/21, then each of those companies are liable to pay 25% of their taxable income, although when taken in isolation the taxable income of each single company is below the Rs. 2 billion threshold.

In case of BOI companies, where the tax holiday period is expired and income taxes are being paid as per the BOI agreement, surcharge tax is to be levied on profit before tax as per the audited financial statement and the Surcharge Tax also should be adjusted. 

Q: Are there any exemptions granted?

There are no specific exemptions mentioned in the Bill and at the same time there is no provision for the Minister to specify exemptions also.

 

Q:Are Provident Funds, Pension Funds , Retirement Funds, Superannuation funds liable to pay the Surcharge Tax?

As per the strict legal interpretation of the provisions in the Bill, if the above Funds have recorded more than Rs. 2 billion taxable income for the Year of Assessment 2020/21 there is a liability. 

However, it is interesting to see whether there will be an amendment to change this position. 

Is this a deliberate policy decision or an inadvertent result due to the oversight of the drafter of the Bill? 

An in-depth analysis reveals that this Surcharge Tax Bill is modelled almost similar to the Super Gains Tax (SGT) which was introduced by the Finance Act of 2015. 

In the Finance Act 2015,  the definition of the ‘company’ for the purpose of the SGT  was referred to the Inland Revenue Act No. 10 of 2006 

S.12 of the Finance Act 2015 (Super Gains Tax)

“Commissioner General”, “company” and “year of assessment” have the same meanings, respectively assigned to those expressions under the Inland Revenue Act, No. 10 of 2006;

S.217 of the Inland Revenue Act No. 10 of 2006 

“company” means any company incorporated or registered under any law in force in Sri Lanka or elsewhere, and includes a public corporation; 

The drafters of the Surcharge Tax Bill simply adopted the drafting in the super gain tax. 

In doing so, the drafter referred to the definition of the ‘company’ for the purposes of Surcharge Tax to be the definition in the Inland Revenue Act. 

However, he failed to realise in 2018 there was an overhaul of the Inland Revenue Act and a new Inland Revenue Act was introduced and that the definition of the term ‘company’ is much wider  in the Inland Revenue Act No.24 of 2017 when compared to the Inland Revenue Act of No.10 of 2006. 

S.6 of the Surcharge Tax Bill 

“Company” shall have the same meaning assigned to such expression under the Inland Revenue Act, No. 24 of 2017;

S.195 of the Inland Revenue Act No. 24 of 2017

“company” –

(a) means a corporation, unincorporated association or other body of persons;

(b)includes –

(i)a friendly society, building society, pension fund, provident fund, retirement fund, superannuation fund or similar fund or society; and

(ii)……

(c)……….

(d)……….

In the final analysis whether it is deliberate policy decision to include Provident Fund, Pension Funds etc. or an error on the part of the drafter could be deduced by observing whether at the Committee Stage, an amendment would be introduced to exclude such Funds. 

Q: Is the dividend liable for Surcharge tax?

The policy makers have attempted to provide some sort of relief for the gains and profits from dividends received from a subsidiary company by a holding company, by excluding such dividends from the taxable income of such holding company. 

However, the rationale for relief for multiple taxation of dividends is restricted only from dividends from subsidiaries and does not extend to dividends received from associate companies which have been subjected to surcharge tax on its own as well as dividends received by an individual.

Q: What is the time bar period for raising Surcharge Tax assessments?

 Return filed by the taxpayer is considered a self-assessment, the Inland Revenue Department can raise Assessments such as default assessment, amended assessment or additional assessment. 

However, the Assessment should be issued prior to 31 December 2024. 

In the context of reference by incorporation of several chapters of the Inland Revenue Act of 2017 into the surcharge tax bill, it will be interesting to see the interaction between the time bar provisions in the Inland Revenue Act and the time bar specifically stipulated in the Surcharge Tax Bill. 

Q: What are the consequences of non-payment of the surcharge tax and the failure to file the Return?

Consequences applicable to default of income tax payments and failure to file the Return will be equally applicable for Surcharge Tax too. 

Q: Could there be consequences on the Directors of a company for any defaults?

 The administration provisions of the Inland Revenue Act have been incorporated by reference in S.5 of the Surcharge Tax Bill. 

The impact stemming from two distinct provisions of the Inland Revenue Act No. 24 of 2017 would be equally applicable for non-compliance in relation to Surcharge Tax as well. 

Namely, S.146 (Liability and obligations of representatives) and S.149 (manager of entities) would have direct implications on Directors. 

Q: Will there be an appellate procedure for challenging the Assessments raised in relation to Surcharge Tax?

 Since the procedure in the Inland Revenue Act No. 24 of  2017 has been incorporated by reference, the first stage would be requesting an ‘Administrative Review’ at the CGIR level and thereafter the process of appealing to the Tax Appeals Commission and on a Question of Law appealing to the Court of Appeal and thereafter to the Supreme Court would be the ordinary procedure. 

But one should not discount the opportunity to refer matters to Courts via writ jurisdiction process too.  

Q: Is there scope for public and private rulings in relation to surcharge tax?  

 Since Chapter IX of the Inland Revenue Act No. 24 of 2017 has been incorporated by reference in the Surcharge Tax bill, the relevant provisions pertaining to public rulings and private rulings in the Inland Revenue Act No. 24 of 2017 will be applicable to the Surcharge Tax too. 

Q: Would the surcharge tax be a deductible expenditure for income tax? 

 The Bill specifically states that the surcharge tax will not be deductible for income tax purposes.  

Further, Surcharge Tax cannot be deducted for the purposes of Value Added Tax on Financial Services as well.