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Executive Level
Fundamentals of Taxation & Law
Instructions to candidates
(1)

Time allowed: Reading and planning 15 minutes


Writing
3 hours

(2)

Total: 100 marks

(3)

Part A Taxation (40 marks)


Section 1: Question 1: 5 multiple choice questions (MCQs) all questions
are compulsory
Question 2: 5 short answer questions all questions are
compulsory
Section 2: 1 question compulsory
Part B Legal Fundamentals (60 marks)
Section 1: Question 4: 5 multiple choice questions (MCQs) all questions
are compulsory

K
E
3

Question 5: 5 short answer questions all questions are


compulsory
Section 2: 4 questions answer any 3 questions
(4)

Answers to all the questions should be in the answer booklet/s given to


you.
Answers to Question 1 and Question 4 - the most suitable answer (A, B, C
Part A
or D) should be entered in the answer booklet against the relevant
question number.

(5)

Begin each answer in Section 2 on a separate page in the answer booklet.

(6)

All answers should be in one language and in the medium applied for.

SEPTEMBER
2015

Part A
Taxation
Total marks for Part A is 40 marks.
A minimum score of 20 marks for this part is needed to pass the subject.

SECTION 1
All questions are compulsory.
Total marks for Section 1 is 20 marks.
Recommended time for the section is 36 minutes.
Question 01
You are required to choose the most appropriate answer.

1.1.

Which of the following persons will not be considered as a resident for income tax
purposes?
A.
B.
C.
D.

1.2.

(Total: 10 marks)

Sinha (Pvt) Limited which has its registered office in Colombo 4.


Mr. Jeremy who has been in Sri Lanka for 200 days from 1 April 2014 to
31 March 2015.
Chips (Pvt) Limited which is a company incorporated in Singapore. It does
business through the internet with customers in Sri Lanka.
City Hotel (Pvt) Limited which is incorporated in the Maldives. The control
and management of the company is carried out in Sri Lanka.
(2 marks)

Pavana (Pvt) Limited (PPL) has received a net interest of Rs. 9,000 from fixed
deposits at Suhada Bank.
Which of the following options correctly shows the tax implications on such interest
income?

A.
B.
C.
D.

Amount considered as
statutory income of PPL
Gross interest
Gross interest
Net interest
Net interest

Withholding tax (WHT) deducted by the


bank
Can be claimed as a tax credit by PPL
Cannot be claimed as a tax credit by PPL
Can be claimed as a tax credit by PPL
Cannot be claimed as a tax credit by PPL
(2 marks)

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1.3.

The following statements are given for your review:


(i) Business includes the letting or leasing of any premises by a company.
(ii) Child includes an illegitimate child.
According to the definitions provided in the Inland Revenue Act No. 10 of 2006,
which of the above statements is/are correct?
A.
B.
C.
D.

Both (i) and (ii) are correct.


Both (i) and (ii) are incorrect.
Only (i) is correct.
Only (ii) is correct.
(2 marks)

1.4

Sumudu Enterprises is a registered person for Value Added Tax (VAT), and it
manufactures furniture. For the quarter ended 30 June 2015, the total value of its
supplies was Rs. 2,300,000 and input tax to be claimed was Rs. 84,000.
VAT payable is computed as;
A.
B.
C.
D.

Rs. 2,216,000
Rs. 192,000
Rs. 169,000
No VAT is payable since total value of its supplies is less than Rs. 3,750,000
which is the current threshold.
(2 marks)

1.5.

The Nations Building Tax (NBT) return for the quarter ended 31 March 2015 should
be submitted to the Department of Inland Revenue;
A.
B.
C.
D.

on or before 30 April 2015


on or before 20 November 2015
on or before 30 September 2015
on or before 20 April 2015

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(2 marks)

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Question 02
You are required to provide short answers/calculations to all questions with
attention given to action verbs.
(Total: 10 marks)
2.1.

List four (04) main taxes administered by the Department of Inland Revenue.
(2 marks)

2.2.

The following details are related to a company selling electrical equipment in Sri
Lanka for the year of assessment 2014/15:

Profit from business adjusted for income tax purposes is Rs. 950,000
Dividend received is Rs. 90,000 (withholding tax has been deducted)
Donation made in money, to an approved charity which provides
institutionalised care for the sick is Rs. 50,000
Brought forward losses adjusted for tax purposes are Rs. 150,000

Calculate the statutory income, assessable income and taxable income for the year
of assessment 2014/15.
(2 marks)
2.3.

Mihikatha Mahima (Pvt) Limited pays taxes on profits and income. If a voluntary
distribution is made above a certain minimum amount, the company is not required
to pay tax at 15% on its distributable profit for the year of assessment 2014/15.
In order to avoid paying the above 15% tax,
(a) State the minimum amount of gross dividends that should be distributed, as a
percentage of the distributable profit.
(b) State, before when the gross dividends should be made.

2.4.

(2 marks)

Kamal has submitted his return of income for the year of assessment 2013/14 on
28 November 2014. All assets have been disclosed in his return of income to the
best of his knowledge. However, a tax audit is carried out on his business.
Identify before when an assessment could be issued by the Assessor/Assistant
Commissioner rejecting his return of income submitted for the above year of
assessment.
(2 marks)

2.5.

An employee of a firm has only following sources of income:


Employment income - on which PAYE tax has been deducted correctly.
Interest income from a fixed deposit - from which withholding tax has been
deducted by applying the appropriate rate.
State, with reasons, whether he is required to file a return of income.

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(2 marks)
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SECTION 2
Compulsory question.
Total marks for Section 2 is 20 marks.
Recommended time for the section is 36 minutes.
Question 03
Ruwan (MBBS, MD), is a medical doctor attached to a private hospital in Sri Lanka (his
main employer). He has another contract of employment with another private hospital
(second employer) to work three nights per week in the emergency treatment unit. Apart
from that, he does his private practice (medical dispensary) till 9.30 p.m. at a rented
premises for another three days a week. The following information is available for the year
of assessment 2014/15.
(1) (i) Employment income from the main employer

Basic salary: Rs. 135,000 per month.

Ruwan uses his own vehicle for official travelling as well as private travelling.
Reimbursement on private travelling during a month is approximately
Rs. 40,000. The total of such reimbursements for the above year of assessment
was Rs. 480,000.

His residential telephone bill and mobile bill are also reimbursed. Such
reimbursements made to him during the year of assessment were Rs. 38,000.

As per the hospital service contract, Ruwans spouse and two of his family
members are entitled to obtain medical treatment from the hospital. At the end
of the year of assessment, the cost will be reimbursed subject to a maximum
amount of Rs. 200,000.
During the year of assessment, his wife was hospitalised, and the total bill was
Rs. 314,000. Other than that, no other medical treatment was obtained from
this hospital.

Contribution made by the employer to a provident fund which is a fund


approved by the Commissioner General of the Inland Revenue was Rs. 194,400.

PAYE deduction made by the main employer during the year of assessment was
Rs. 91,000.

(ii) Employment income from the second employer

Each month Ruwan was paid more than Rs. 80,000 for the work done at night in
the emergency treatment unit. During the year of assessment he was paid
Rs. 924,000 after deducting withholding tax.

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(2)

The following is a summary of the income statement and other information of the
medical dispensary prepared for the year ended 31 March 2015.

Receipts
Receipt from sale of blood pressure meter
Salaries paid to a dispenser (wife)
Foreign travel (Note 1)
Cost of drugs
Rent
Stationery
Purchase of medical equipment (Note 2)
Water
Electricity
Other expenses (Note 3)
Net profit

Rs.
3,733,000
2,000
3,735,000
175,000
177,000
370,000
360,000
35,000
75,000
36,000
240,000
490,000
1,777,000

Note 1
Ruwan participated in a medical seminar held at the University of Chittagong in
Bangladesh. The cost related to the airfare was Rs. 54,000. The cost of
accommodation and other expenses were Rs. 123,000. Profit and income
adjusted for tax purposes of the dispensary for the previous year of assessment
was Rs. 1,872,000.

Note 2
The cost of purchase of medical equipment includes Rs. 21,000 spent on the
purchase of a new blood pressure meter. This new pressure meter was
purchased within two weeks from the date of sale of the old blood pressure
meter which was purchased in 2003 for Rs. 8,000. No depreciation allowance
was claimed on the old blood pressure meter.
There are no other qualifying assets on which allowances are claimable.

(3)

Note 3
Other expenses are allowable for tax purposes.

Ruwan has made the following payments during the year of assessment:

Rs. 230,000 as interest on a loan taken for the wedding of his daughter. Capital
repayment of this loan was Rs. 360,000.

Rs. 80,000 has been paid as a premium on his life insurance policy and
Rs. 75,000 has been paid on a medical insurance policy obtained for an incurable
disease.

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(4)

Self-assessment payments made for the year of assessment 2014/15 were


Rs. 20,000.
Required:
Compute the gross income tax liability, balance tax payable/(refund due) by/to
Ruwan for the year of assessment 2014/15.
(Total: 20 marks)

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Part B
Legal Fundamentals
Total marks for Part B is 60 marks.
A minimum score of 30 marks for this part is needed to pass the subject.

SECTION 1
All questions are compulsory.
Total marks for Section 1 is 30 marks.
Recommended time for the section is 54 minutes.
Question 04
You are required to choose the most appropriate answer.

4.1.

Which of the following conditions is not required, for a custom to be recognised as


a source of law by the courts of Sri Lanka?
A.
B.
C.
D.

4.2.

(Total: 10 marks)

It must be ancient, well-established and enjoyed for a long and unbroken


duration.
It must be passed by Parliament as a subordinate legislation.
It must be certain and there should be no doubt about its acceptance as a
custom.
It must be reasonable, and not opposed to sound legal principles.
(2 marks)

Which is the correct statement, in relation to the Sale of Goods Ordinance No. 11 of
1896?
A.
B.
C.
D.

An agreement to sell goods can never become a contract for the sale of such
goods.
Placing an order with an artist to draw your portrait is a contract for work
and material.
For a sale of goods contract to be valid, it must compulsorily be in writing.
Future goods must be in the possession of the seller when he enters into a
contract of sale.
(2 marks)

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4.3.

Liability of the State for acts done by its agents is covered by the State (Liability in
Delict) Act, No. 22 of 1969.
Out of the following acts done by an agent of the State, which one is the State liable
for?
A.
B.
C.
D.

4.4.

An act by the agent in the execution of a judicial process.


When a function is conferred on an agent by a written law and
that agent commits a delict while performing such function.
Any act by a member of the armed forces of the State, whilst being on duty.
Any act by an agent in relation to a postal article.
(2 marks)

A hirer has certain obligations under a hire-purchase agreement.


Which of the following is not an obligation of a hirer?
A.
B.
C.
D.

4.5.

To comply with the hire-purchase agreement.


To give information to the owner, as to the whereabouts of goods.
To terminate the hire-purchase agreement, at any time.
To take care of the goods.

(2 marks)

Theft refers to the act of taking another persons property without that persons
permission or consent, and with the intent of depriving the rightful owner of it.
Which of the following is not a defence in law, for theft?
A.
B.
C.
D.

The person who stole did so in good faith, believing that the property was
his.
The thief was in a state of intoxication.
The theft was an inevitable accident.
The thief had the intention to return the property back.
(2 marks)

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Question 05
You are required to write short answers to all questions with attention given to
action verbs.
(Total: 20 marks)

5.1.

Acceptance is an essential element of a valid contract. For an acceptance to be


treated as valid in the law of contracts, it must comply with certain rules.
State four (04) such rules applicable to a valid acceptance.
(4 marks)

5.2.

Davidson sold 5 sets of televisions (TVs) to Bubsy for Rs. 200,000.


Bubsy seeks your views, on the terms, in relation to the title of the TVs, which are
implied under the Sale of Goods Ordinance No.11 of 1896.
Explain three (03) such implied terms including as to whether each term is a
condition or a warranty.
(4 marks)

5.3.

The Board of Investment (BOI) in Sri Lanka was established by the Board of
Investment Law No. 4 of 1978.
List four (04) of the main functions of the BOI.

5.4.

(4 marks)

One of the more popular methods of Alternate Dispute Resolution practiced in Sri
Lanka is Mediation.
Summarise the process of Mediation.
(4 marks)

5.5.

The Intellectual Property Act No. 36 of 2003 provides for the registration of an
Industrial Design.
State:
(i)
the purpose,
(ii)
manner of recording, and
(iii) the validity period, including renewals, of such a registration.

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(4 marks)

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SECTION 2
Three out of four questions should be answered.
Total marks for Section 2 is 30 marks.
Recommended time for the section is 54 minutes.
Question 06
Frooty has entered into a written contract with Cookies Hotel to supply its entire fruit
requirement for the period June 2015 to December 2015.
Fruits for June and July were supplied satisfactorily. However in August, Frooty was unable
to supply the required quantity. Further, some of the fruits supplied by Frooty in August
were of a poor quality.
To make matters worse, the hotel found out that at the time of entering into the fruit supply
contract, Frooty had provided false information, to convince the hotel that he had the
ability to meet the required fruit demand.
Required:
Explain from the above scenario, three (03) violations under the law of contracts and
the remedies available in law to Cookies Hotel as the innocent party, for each such
violation.
(Total: 10 marks)

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Question 07
Bunty and Chandy are two of the four partners of a partnership business.
Bunty, is in charge of all the purchases of the partnership.
Chandy, is in charge of the sales division of the partnership.
In recent times, the partnership business has been experiencing problems. Some of these
instances are given below.
Instance 1
One day in July 2015, Bunty purchased a large quantity of goods from a supplier. As a token
of appreciation, this supplier gave some complimentary gifts to Bunty. This was not
brought to the notice of the partnership by Bunty.
Thereafter Bunty prepared some false bills for a portion of these complimentary gifts and
included these bills as purchases of the partnership. He gave the rest of the complimentary
gifts, to his children.
Instance 2
In early August 2015, Chandy collected an advance payment of Rs. 700,000 from Dandy, a
regular customer of the partnership. This advance was in relation to an order placed by
Dandy, with the partnership.
On his way back to the firm, Chandy was pick-pocketed, and as a result he lost the entire
collection of Rs. 700,000.
Dandy is of the view that Chandy is individually liable for the loss of this advance payment.
Required:
(a)

Identify the manner in which Bunty has breached three (03) of his duties as a
partner towards his fellow partners and the partnership.
(6 marks)

(b)

Explain to Dandy whether it is the partnership or Chandy individually, that can


be held liable for the loss of the advance payment of Rs. 700,000.
(4 marks)
(Total: 10 marks)

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Question 08
(a)

Anton, a shop owner, purchased 150 packets of milk powder from Titus.
Before purchasing, Anton tested the sample shown to him and thereafter, upon
being satisfied with the test results, he placed an order for these 150 packets of milk
powder.
Subsequently, Brenda bought one of these milk powder packets from Antons shop.
To her horror, Brenda found wheat flour in the milk powder packet instead of milk
powder.
Required:
Explain the legal principles of this scenario, from the point of view of both Anton
and Brenda.
(5 marks)

(b)

Wilfred operates a garment manufacturing business and has insured the garment
stocks stored in his factory, against theft.
In filling the insurance proposal form he disclosed all the material facts requested
from him. However when filling this form, he did not disclose the fact that he was
convicted in the past, for using this same factory premises to store illegal explosives.
His reasoning was that he was never asked about his past, and if asked he would
have declared about his past conviction.
Later, thieves broke into the factory and stole the garment stock. Now Wilfred
intends to make a claim on this insurance policy.
Required:
Explain with reference to a decided case, whether Wilfred can successfully
make a claim on this insurance policy.
(5 marks)
(Total: 10 marks)

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Question 09
(a)

Sunil has received a cheque for Rs. 100,000 in his name, from one of his debtors.
This cheque contains a general crossing, and further the words or bearer have
been stricken off.
Sunil goes to Hardys hardware shop to purchase some bags of cement, which are
required for the house he is constructing. The bill given by Hardy also amounted to
Rs. 100,000.
Suddenly Sunil realises that he has run out of cash and has no time to go to his bank.
Therefore Sunil wishes to settle Hardys bill, by giving him the cheque received from
the debtor.
Required:
Explain to Sunil the legal provisions applicable in this scenario, and the steps he
should follow to validly hand over the cheque to Hardy.
(5 marks)

(b)

Edgar was employed as a machine operator at a tea factory. The management of the
tea factory intends to reduce its factory staff due to a drop in business.
Poor Edgars services too have been terminated.
[You may assume that Edgar was in Scheduled Employment as per the
Termination of Employment of Workmen (Special Provisions) Act No. 45 of 1971]
Required:
Explain the validity of the termination of services of Edgar by the management
of the tea factory in terms of the above mentioned Act.
(5 marks)
(Total: 10 marks)

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