Taxation and Business Strategy
Taxation and Business Strategy tests how Sri Lankan tax rules affect transactions, financing, location and compliance. The exam expects legal application, not avoidance slogans.
Core rules
- The Inland Revenue Act No. 24 of 2017 taxes profits and income, provides capital allowances and governs losses, withholding and international transactions. Apply the Act and current administrative guidance.
- Tax planning arranges genuine commercial transactions to reduce tax legally; evasion involves concealment or false reporting and attracts penalties.
- Capital allowances replace accounting depreciation for tax. Deductibility depends on the expense being incurred in producing income and not being specifically disallowed.
- VAT is an indirect tax: output tax less input tax, with registration and invoice rules. It is not business income or expense.
- Transfer pricing requires arm’s-length terms for cross-border related-party transactions; the general anti-avoidance rule can counter arrangements lacking commercial substance.
Worked example
A company expects annual accounting profit before tax of LKR 2,000m and tax depreciation of LKR 1,000m. At a 30% corporate rate, taxable profit is LKR 1,000m and tax is LKR 300m. Without the allowance, tax would be LKR 600m, so the cash tax saving is LKR 300m. If the asset is purchased instead of leased, compare the present value of the tax shield and lease payments, not just the headline tax rate.
Traps
Deducting accounting depreciation instead of capital allowances; treating VAT collected as revenue; ignoring withholding tax on payments; assuming a loss is automatically available; and proposing a structure without commercial substance.