Master of Business Accounting/Finance Degree Examination

UNIVERSITY OF KELANIYA
Faculty of Commerce and Management Studies
2021/2022 Academic Year – Year 1 – Second Semester
Corporate Taxation
MBAC 52042
Date: Saturday 25th June 2022 No of Pages: 09

No of Questions: Four (4)

Instructions to Candidates

1. This examination is conducted as an online and open book examination.

2. This paper consists of two sections.

Section I – One (1) Question (Based on pre-seen provided prior to the examination is in
relation to this question)

Section II – Three (03) Questions

3. Time allowed: Reading & Planning: Fifteen (15) Minutes

Answering: Two (02) Hours and Thirty (30) Minutes
Final Submission: Fifteen (15) Minutes

4. Answer All Four (04) Questions.

5. Begin each answer on the space given in the Online Examination Platform.

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 Section I

Question No. 01

In addition to the information provided in the pre-seen in connection to Rajarata Tiles (Pvt)
Ltd, you are provided the following additional information for the year ended 31st March 2021.

i. Due to sudden lockdown process of country for Second wave of COVID -19, the manufacturing
process of the company has been stopped its activities for few days by following health
measures and stock of partly processed tiles become unusable. Cost of such raw materials has
been valued as Rs. 3,750,000/- and recorded in the cost of sales as provision for unusable stock.
ii. Gratuity paid for approved gratuity fund during the Y/A 2020/2021 was Rs. 12,400,000/-.
iii. Utility bills consists of Electricity, Water, Telephone and other bill payments of Factory and
Sales Centers. It is estimated that 40% total bill payments should be allocated for Island wide
Sales Centers and out of such amount 50% is related to sale of Barth ware items which belongs
to Rajarata Barth Ware (Pvt) Ltd.
iv. Operating Lease rentals consists of payment made to Motor Vehicle supplier who provided 10
Motor Lorries with drivers to transport and delivery of tiles amounting to Rs.24,000,000/- and
Balance for 03 Luxuries Motor Cars taken for three company Directors for Rs.12,000,000/- for
their official and private travelling.
v. To obtain cost effectiveness, Rajarata group having Central Marketing and Advertising Centre
under Rajarata Tiles (Pvt) Ltd. Marketing Expenses and Advertising Expenses charged to
income statement consists of actual expenses made for promotion of ‘Rajarata Tiles’ and
Rajarata Barth Ware’ brands locally and internationally. Rajarata Tiles (Pvt) Ltd has not
reimbursed any expense from Rajarata Barth Ware (Pvt) Ltd during Y/A 2020/2021 where
estimated amount is 50% of such expenses.
vi. The company has donated Rs.10,000,000 worth tiles during the Y/A 2020/2021, to
Maharagama ‘Apeksha Hospital’ with the approval of Minister of Health and Rs.600,000 worth
‘Grade 2’ tiles to ‘Sri Lanka Cancer Society’ The confirmation letters have been obtained from
Ministry of Health and also from Sri Lanka Cancer Society.
vii. According to the Statement of Financial Position prepared for 31st March 2021, the following
Capital assets available with the company which entitled to claim allowance for
depreciation/Capital allowances for the year of assessment 2020/2021.
Cost (LKR) Y/A purchase
Constructed Factory and Office Buildings 75,000,000 2018/2019

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 Machinery 50,000,000 2019/2020
Motor Lorries 40,000,000 2018/2019
Motor Cars 10,000,000 2019/2020
Furniture 10,000,000 2018/2019
Office Equipment 8,000,000 2018/2019
Computers – Finance Lease 5,000,000 2018/2019
Computers 6,000,000 2020/2021
Computer Software 6,000,000 2020/2021

viii. Actual life time of Computer Software is estimated as ten years by the company and
acceptable for tax purposes.
ix. Travelling and Transport expenses consists of actual expenses related to the business
of Rajarata Tiles (Pvt) Ltd.
x. Foreign travelling expenses incurred during the year was for visit to Australia, Europe
and USA to seek export market opportunities for ‘Rajarata Tiles’ and Rajarata Barth
Ware’ by two directors of company. As a result, both companies get export orders
during the year and such orders brought considerable amount of Foreign currency for
the country.
xi. Bad debts written off amount consists of Rs.12,000,000 for trade debts which identified
by the computer system of the company as over-aged receivables and balance for
irrecoverable staff loan given to one of the marketing officers who died of COVID -19
pandemic. Legal action has been initiated by company to recover both amounts.
xii. Provision for impairment includes Rs.15,500,000 for Individual impairments and
balance for collective impairment.
xiii. Building, Machinery and Vehicle Maintenance expenses includes only actual expenses
and no improvements or capital nature expenses.
xiv. Training expenses includes Rs.280,000/- paid for University of Kelaniya as a course
fee of Master of Business in Accounting programme for Mr.Kasun Weerasooriya who
is one of the directors of the group.
xv. Audit fee paid for auditing of accounts and Legal expenses for collection of bad debts.

You are required:

(a) To compute assessable income received from Business by Rajarata Tiles (Pvt) Ltd for Y/A
2020/2021.
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 (25 Marks)
(b) To compute assessable income received from Investment by Rajarata Tiles (Pvt) Ltd for Y/A
2020/2021 including Capital Gains.
(05 Marks)
(c) To compute the taxable income, income tax payable and balance income tax payable by
Rajarata Tiles (Pvt) Ltd for Y/A 2020/2021.
(05 Marks)
(d) Assess the tax implications and how to administer the recent past tax amendments in respect of
Rajarata Tiles (Pvt) Ltd which should be presented by the tax accountant to the next board
meeting.
(05 Marks)
(Total 40 Marks)

Section II

Question No. 02

You are provided with the following information of Ms. Sanaya Perera for the year of
assessment 2020/2021.

(a) Ms. Sanaya Perera is the head of marketing attached to FinLay Science (Pvt) Ltd which is
one of the leading medical equipment suppliers in the country since 2015. Additionally,
she is a chartered architect.
i. Ms. Perera received the following regular emoluments of her employment in
FinLay Science (Pvt).
Basic salary (Gross) Rs. 575,000
Professional allowance Rs. 85,000
Cost of living allowance Rs. 40,000

ii. In May 2020 she received a bonus of Rs. 1,200,000 which was distributed out of
the profits for the year ended 31st March 2020.
iii. Her residential telephone bill and mobile bill of Rs. 60,000 were reimbursed during
the year of assessment.
iv. Leave encashment entitle in respect of the year 2019 was Rs. 190,000 and it was
paid in July 2020

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 v. Two vehicles with an engine capacity of 2500 cc and 1800cc has been provided
with a driver and fuel.

vi. All regular benefits have been taken in to account for deducting the contribution to
the provident fund which has been approved by the Commissioner General of
Inland Revenue. The employee’s contribution is 8% and the employer’s
contribution to the fund is 12%.
vii. Ms. Perera is provided with a furnished residential apartment by the FIN Bank
PLC. Additionally, Rs. 50,000 per month has been added to her salary, being the
wages for security officer and domestic servant provided to the place of residence.
viii. Under an employment share option plan, an option has been given to Ms. Perera to
purchase 1100 shares at Rs. 120 each whereas the market value of a share is Rs.
160. She has exercised this option during this year of assessment.
Compute the assessable employment income of Mr. Sanjaya from FinLay Science (Pvt)
Ltd for the year of assessment 2020/2021.
(08 Marks)

(b) May 2021, Ms. Sanaya Perera received an offer as architecture from EcoBuild (pvt) Ltd a
construction firm operating for over 10 years in the country. In June 2022 Ms. Perera
accepts the offer as consultant architecture of EcoBuild (Pvt). Her monthly remuneration
package includes following.
i. Basic salary (Gross) Rs. 215,000
ii. Vehicle allowance Rs. 80,000
However, she declares that architecture is not her primary employment to the management of
EcoBuild (Pvt).
Compute the assessable employment income of Mr. Sanjaya from EcoBuild (pvt) Ltd for
the year of assessment 2020/2021.
(04 Marks)

(c) Mr. Sanjaya has received the following investment income during the year of assessment
2020/2021.
Dividend received Rs. 1,500,000
Interest income from fixed deposit Rs. 1,000,000
Rent income Rs. 3,000,000

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 Gain from disposal of an investment property Rs. 6,000,000 (Note 01)
Note 01: During the year Mr.Sanjaya has disposed of a block of bare land for a sum of
Rs. 6,500,000 which was kept by him as an investment property. The property was
acquired in the year 2012 for Rs. 2,500,000. The market value of the property as of
30.09.2017 was estimated to be Rs. 4,200,000. At the time of disposal, He had to incur
Rs. 150,000 brokerage charge and Rs. 50,000 advertising fees.

Compute the assessable investment income of Mr. Sanjaya for the year of assessment
2020/2021. (05 Marks)

(d) Mr. Sanjaya owns a Furniture Shop and he has earned an assessable business income (i.e.
after doing all necessary tax adjustments) from this business, Rs. 12,500,000 in 2020/2021
Y/A in addition to the income he received from the sources explained above (a), (b) and
(c).
Further, Mr Sanjaya is a partner of SNK & Co which is a partnership business engaged
in importing and distributing shoes from Thailand. During the year, as the share of income
from this business (including the salary, interest for capital and share of profit) Mr. Sanjaya
received Rs. 7,300,000. The partnership business has paid an income tax amount of Rs.
1,200,000 for the Y/A 2020/2021. SNK & Co consist of 3 partners including Mr. Sanjaya
and there are sharing profits equally.
Compute the total assessable income of Mr. Sanjaya for the year of assessment
2020/2021.
(05 Marks)
(e) Mr. Sanjaya paid Rs. 200,000 to an international school as the annual admission fee for his
son in March 2021. He has incurred an interest expense of Rs. 350,000 in 2020/2021 being
the interest for the housing loan he has obtained from the Sampath Bank.

Further, Mr. Sanjaya has donated a sum Rs. 150,000 in money and Rs. 50,000 worth of
furniture during the year of assessment 2020/2021 to an approved charitable institution
being an institution established for caring for sick and needy people . Further, he donated
Rs. 250,000 worth of medical instruments to a Covid 19 treatment centre established by a
government hospital. Mr.Sanjaya has not given consent to deduct Advanced Personal
Income tax (APIT) from his employment income to any of his employers.
Compute the total taxable income of Mr. Sanjaya for the year of assessment 2020/2021

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 (04 Marks)

(f) Compute the gross income tax liability and net income tax liability of Mr. Sanjaya for
the year of assessment 2020/2021.
(04 Marks)

(Total 30 Marks)
Question No. 03

Read the below summary and answer the questions given.

Fiscal deficit is a chronic problem for many countries including Sri Lanka. Although there are
several ways, tax revenue will be the best source to finance budget deficit which may consider
the adverse repercussions of alternative sources such as money creation and debt. Though the
increasing share of tax revenue in GDP is an instrumental objective of economic development
policy, Sri Lanka has not been successful in raising adequate tax revenue to meet its public
expenditure on public services, social services, economic services, etc.

Despite achieving middle-income status, Sri Lanka has been struggling with several chronic
issues pertaining to the country’s tax system. Sri Lanka’s tax to GDP ratio had fallen from 19%
in 1990 to 11.5% in 2019 (World Bank,2021), making it one of the lowest taxes to GDP ratios
in the globe. By 2020, more than 80% of the country’s tax revenue is sourced through indirect
taxes such as Value Added Tax (VAT) and tariffs imposed on goods. Such taxes are often
passed down to the consumers; meaning that people in every income bracket pay the same
amount of tax. This, coupled with the low-income tax rates and tax concessions had resulted in
a large portion of the tax burden being imposed on an average citizen while those who are in
the higher income brackets pay lower taxes relative to their income.

Therefore, it is important to emphasize the need of enhancing tax revenue while analyzing the
adverse repercussion of alternative deficit financing methods such as money creation and debt.

References:

• Umesh Moramudali (2022), Taxation in Sri Lanka: Issues and Challenges, Economy
for all, University of Colombo, Department of Economics, pp.93-119

• K. Amirthalingam (2013), Importance and Issues of Taxation in Sri Lanka, Colombo

Business Journal - Vol. 04 (1)

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 You are required to;

Explain the main issues that can be identified in the Sri Lankan tax system, with the
amendments introduced in the recent past, and what changes should be made to the Sri Lankan
tax system, in order to reduce the fiscal deficit and its dependency on money creation and debt?

(Total 15 marks)

Question No. 04

“Renown PVC Pvt Ltd” is a VAT registered company from 2008 and carries on the business
of manufacturing and selling of various types of PVC items in the foreign and local markets
under the brand name of “Renown PVC”. Since more than 50% sales of company consists of
exports and deemed exports, the Company has been granted deferment facility by the Director
General of Customs and also company is registered as Registered Identified Purchaser (RIP)
for Simplified VAT (SVAT) Scheme, in addition to the status of Registered Identified Supplier
(RIS).

Transactions for the taxable period commencing from 01.03.2021 to 31.03.2021 are given
below.

Sales & Income

i. Supply of manufactured PVC items on Tax Invoices under standard rate supply to the VAT
Registered local customers Rs.100,000,000/-.
ii. Supply of manufactured PVC items to VAT registered Projects under the tender agreements
on Tax Invoices Rs.50,000,000/-.
iii. Supply of manufactured PVC items under Commercial invoices to the Non-VAT Registerd
local customers Rs.43,200,000/-.
iv. Supply of manufactured PVC items to Registered Identified Purchasers (RIPs) who are
registered for Simplified VAT scheme under SVT invoices is Rs.60,000,000/-
v. Exports of manufactured PVC items on exports CUSDECs Rs.200,000,000/-

Purchases & Expenses

The value of purchases during the above taxable period is as follows. All the figures are given
exclusive of VAT where it is applicable.

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Import values for VAT purpose
i. Value of raw materials Imports under deferment facility is Rs. 40,000,000/-
ii. Value of raw materials Imports under upfront basis is Rs. 10,000,000/-
Local Purchases
i. Raw material Purchases from Registered Identified Suppliers under SVAT Invoices is
Rs.60,000,000/-
ii. Raw material Purchases from VAT registered persons on Tax/VAT Invoices is
Rs.75,000,000/-
iii. Raw material Purchases from Non-VAT registered persons on Commercial invoices
Rs.28,000,000/-

Expenses and Utility Bill Payments

Salaries & Wages Rs. 35,000,000/-
Telephone bills - Office Rs. 100,000/-
Mobile Bills Rs. 200,000/-
Electricity bills Rs. 4,980,000/-
Water bills Rs. 240,000/-

In addition to above expenses, during the above taxable period Company has incurred number
of expenses on Tax Invoices and claimable input tax on such invoices is Rs.6,400,000/-.

All credit vouchers relating to imports under deferment facility have been submitted to the
Director General of Customs.

All due credit vouchers have been received on suspended supplies and all due credit vouchers
have been given on suspended purchases.

Brought forward unabsorbed input tax from the previous taxable period is Rs.1,300,000/-.

You are required to compute,

(a) Total output tax,
(b) Total input tax,
(c) VAT payable or refund claimable,
by Renown PVC Pvt Ltd for the taxable period ending with 31st March 2021.
(Total 15 Marks)

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