The impact of non-availability of Direction procedure for Investment Returns
As per the Section 84 of the Inland Revenue Act No. 24 of 2017, interest, discounts , rent etc. are subject to withholding tax at the rates given below.
Investment Return | Withholding Tax Rate |
Interest or discount | 5% |
Interest to a senior citizen | 5% on amount exceeds Rs.1,500,000 |
Rent paid to a resident person | 10% |
Partner’s share of any partnership | 8% |
Sale price of Gems sold at an auction | 2.5% |
In all other cases (e.g. . Dividend, Royalty, winning from lottery etc.)
| 14% |
Accordingly above withholding tax percentage should be deducted at the time of making such payments. Further the taxpayer is not entitled to request a direction for above investment returns under the Act.
Ex: A resident individual receives a rent income of Rs.200,000 per month for renting out his property for a business purpose. As per the New Inland Revenue Act, he will receiving only Rs.180,000 per month after deducting the withholding tax of Rs.20,000 per month. Therefore per annum Rs.20,000*12=240,000 will be deducted as withholding tax.
Let’s calculate his income tax liability assuming that he is having only the rent income.
| Total Income (Net of 25% for repair allowance)-Rs.200,000*12*0.75-Section 52 | Rs.1,800.000 |
| Less: Tax Free Allowance | (Rs.500,000) |
| Taxable Income | Rs.1,300,000 |
Tax Liability First Rs.600,000*4%=24,000 Nect Rs.600,000*8%=48,000 Next Rs.100,000*12%=12,000 | |
| Total tax | Rs.84,000 |
As per the calculation his total tax liability is only Rs.84,000 where as Rs.240,000 has been deducted as withholding tax which is more than the actual tax liability. If direction procedure is available for the investment returns, tax payer would have been able to pay only the liable tax.
Now the tax payer has to claim WHT paid through the return and wait for the refund from Inland Revenue Department.
