The government has surreptitiously re-introduced the capital gains tax (CGT) under the new Inland Revenue Act, which was passed in Parliament last week, but it will not apply on the gains made from share sales of listed companies.
According to the new Act, which will replace the existing income tax law of the country, CGT will apply at the rate of 10 percent on the gains on realization of an investment asset.
However, the definition of ‘investment asset’ could lead to implementation challenges as it encompasses host of asset classes from stocks, bonds, real estate and retirement savings accounts etc. although the government maintains that CGT will not apply on stocks.
“We will have to iron out these issues before next April when the new law will come in to effect”, said a tax expert requesting anonymity.
Although the original intention of the government was not to tax listed shares, a person who drafted this section of the bill at the Inland Revenue Department had included investment shares as liable for CGT, a person familiar with the matter told Mirror Business.
There are two types of shares listed in a stock exchange— trading shares where the whole purpose is to buy and sell and the investment shares which are held for the long-term.
“Capital gain is calculated as the difference between the consideration received and the cost of the investment asset at the time of realization”, KPMG Sri Lanka said in a tax alert issued after the bill was passed in parliament last week.
The cost of an investment asset held as at September 30, 2017 is equal to the market value of the asset at that time, the draft law states.
Although the Sirisena-Wickremesinghe government planned to bring in CGT from as early as 2015 to support the country’s shallow coffers, the tax was formally included in the 2017 budget effective from April 1, 2017.
The tax was intended to apply on immovable properties less than 10 years old exempting the stocks and inherited wealth transfers.
However, the draft law also provides for the ascertainment of a deemed gain, “in circumstances, other than on death or on transfer of ownership of an asset by an individual to an associate or charitable institution, where a transfer has taken place for no consideration”, KPMG said.
Tax due on gains from realization of an investment asset needs to be settled within one month after realization of such asset.
The new tax law will come into effect from April 1, next year.