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Summary of revenue and expenditure - Comparison ofgovernment revenue and expenditure for the last 4 years
Income tax - Proposals with significant impact to bothcorporate and individual taxes and rates
Value Added Tax - The VAT rate has been reduced from11% to 8% for manufacturing and increased to 12.5% forservice sector
Nation Building Tax - Rate increased from 2% to 4% andthe liable service expanded
Economic Service Charge – Payable on turnoverirrespective of profit or loss and carried forward reducedfrom 5 to 3 years
Customs and Excise Duty- Reduced from 4 to 3 bandsand changes to motor vehicle taxes and permits
Foreign direct investment - Abolishing Land Lease taxand restricted ownership permitted
Other taxes, levies and charges - Certain levies removedand new levies and charges
Public investment - Increased public sector investment touplift socio economic standards
Recap on key tax law changes in 2015 - This section listskey tax law changes made in 2015
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Page 1.1
Budget 2016OneSummary of revenue andexpenditure
The Hon. Ravi Karunanayake Minister of Financepresented the maiden budget of the United Frontled coalition government on the 20th of November2015. The budget was aimed at accelerateddevelopment, encouraging FDI, creating thenecessary conditions to promote local industry andthereby creating the environment for greateremployment opportunities. In this direction anumber of tax policies have been presented withthe aim of enhancing revenue of the government bytapping the sectors that are paying relatively lowerlevels of tax. The following table illustratesestimated revenues and expenditure of thegovernment for the ensuing year.
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Page 2.1
Budget 2016TwoIncome tax2.1 Corporate income tax
In his budget speech delivered in Parliament today the Hon. Minister ofFinance made the following proposals in relation to corporate income tax.
(a) Income tax rate changes – There will be two income tax ratesapplicable at 15% and 30% as follows.
v The higher rate 30% is applicable on the profits and income of thefollowing
Ø Betting and gaming
Ø Liquor
Ø Tobacco
Ø Banking and finance including insurance, leasing and relatedactivities etc.
Ø Trading activities other than manufacturing or providing ofservices
It is expected that the above rate will be applicable to companiesand not to individuals engaged in such trades in lieu of individualtax rate placed at a maximum rate of 15%.
Page 2.2
In addition, a Surtax will be imposed at the rate of 25% of theincome tax liability from the businesses of tobacco, liquor andbetting and gaming.
v The lower rate of 15% is applicable on all the other sectorswhich will mainly include all services, manufacturing andagriculture.
(b) Profit on sale of shares – Consequent to the proposal to abolish theShare Transaction Levy it is believed that the profit from the sale ofshares quoted in the Colombo Stock Exchange will now be liable toincome tax unless such gain is a capital gain.
(c) Deemed dividend – The minimum amount of dividend to bedistributed by quoted companies will be increased from 10% to 15%of the distributable profits.
(d) Life insurance business - The profits of a company engaged in thelife insurance business is the investment income of the life insurancefund less management expenses attributable to that business. It isproposed that for this purpose the management expenses will bedefined.
(e) Research and development expenses - The triple deduction forresearch and development expenses will be allowed, only if atechnology advancement and yield development is proved.
(f) Interest income - The exemption granted currently to any person orpartnership outside Sri Lanka on the interest income from foreignloans given to a person or partnership in Sri Lanka will be restrictedto the interest on loans taken from foreign banks or financialinstitutions.
(g) Dividends - Certain exemptions on dividends after the completion ofthe tax holiday period will be removed. It is expected that suchconcessions granted under certain agreements with the BOI willcontinue.
(h) Refunds - Currently any income tax refund claimed has to berefunded within a period of six months from the date of claim. If notrefunded so, interest at the rate of 1% of such sum will accrue. It has
Page 2.3
been proposed to make amendments so that the refund claim forany year of assessment commencing on or after April1, 2016,should be finalized within three years from the claim of such refundclaimed with the Return. If not finalized, the refund would be allowedto be set off against future tax liability.
(i) Approved Accountant - The definition of “Approved Accountant” forthe purpose of section 107 will be further revised to placerestrictions on those who can be included as approved accountants.
(j) Transfer pricing - Administration of the transfer pricing on domestictransactions will be simplified and the areas will be specified limitingthe scope. Penal provisions will be introduced to ensure properimplementation of ‘transfer pricing” regulations.
(k) Qualifying payment relief - It has been proposed to remove thequalifying payment relief granted under section 34 on theexpenditure associated with cost of acquisition or merger of banksor financial companies under the Banking and Financial institutionsconsolidation process. It is expected that any unclaimed amountsunder the above section will be permitted to be carried forward.
(l) Concessions
v Agriculture
Ø Development of seeds and planting martials by a company- A reduction of 50% of the tax payable on the profits fromthe locally developed seeds and planting materials for aperiod of 5 years. Up to year of assessment ending2015/16 profits from the above was exempted fromincome tax.
Ø Drip irrigation, greenhouse technology and high yieldingseeds - A reduction of 50% of the tax payable on theprofits from agriculture by a company using drip irrigationmethod, greenhouse technology and high yielding seedsfor a period of 5 years.
For this purpose greenhouse technology, drip irrigationand high yielding seeds will be defined.
Page 2.4
Ø Fruit and Vegetable Industry - A qualifying relief paymenthas been granted in addition to depreciation allowance onthe cost of acquisition of any machinery used for canningfruits and vegetables.
v Development of micro and SME sector
Ø The tax payable by Private Equity Funds or Venture Capitalcompanies on the profits earned by providing funds toupgrade SMEs registered with the SME Board of CSE up tothe trading level, will be reduced by 50% for a period of 5years.
Ø The creation of incubators for SMEs not by splitting orreconstruction of an existing SME by investing indesignated areas will be entitled to 50% reduction of thetax payable on profits of such activity for a period of 3years.
For this purpose ‘SME’ and the ‘identification of activitiesof Venture Capital companies and Equity Funds’ will bespecified.
v Incentive for Thrust Industries - The tax payable on the profitsfrom the manufacture of red clay tiles locally will be reduced by50% for a period of 3 years.
v Concessions to other sectors
Ø The profits from the following activities carried out by anyperson will be reduced by 50% for a period of five years.
§ an academic entity which offer internationallyaccredited courses or training programs aimed atgeriatric care or child care;
§ engaged in building housing facilities for the elderlypersons;
Page 2.5
§ construction and sale of housing units incollaboration with the Government, to officers of thegovernment sector.
Ø A reduction of 50% of the tax payable for a period of 5years from the commencement of the commercialoperations by any company specifically incorporated forMeeting, Incentives, Conferences and Exhibitions on theprofits from such activities.
Ø Modernising existing factories - The profits generated by acompany which is attributable to the expansion carried outby modernization of existing factories which is consideredbased on the employment generation within a period ofone year commencing from April 1, 2016, will be reducedby 50% for a period of for 3 years.
For this purpose the necessary criteria will be specified.
Ø Endowments towards R&D to qualify for 300% - The triplededuction currently available for R&D will be extended toendowments given to National Universities to engage inresearch.
Ø Purifying sea sand - The cost of acquisition of machineryused for purifying sea sand will be treated as a qualifyingpayment in addition to the depreciation allowanceclaimable on such machinery.
v Dividends exempted - Currently dividends paid to any personincluding non -citizens and foreign companies are subject toincome tax at 10% subject to certain exemptions. It has beenproposed to exempt form income tax dividends on investmentmade by non- citizens or foreign companies in listed sharesthrough inward remittances.
v Concession on investment in lagging region - In lieu of thepresent concessions under sections 59 I, 59J and 59K a 50%reduction of the tax payable by a new company not by splittingor reconstruction of an existing company set up in any laggingregion will be granted under the following conditions for a
Page 2.6
period of 5 years from the commencement of commercialoperations.
Ø a minimum investment of USD 10 Mn or 500 newemployment with new EPF numbers
Ø for manufacturing (other than liquor or tobacco) orprovision of services
The period will be extended to 8 years, if the new employmentexceeds 800 and to 10 years if the investment is for a themepark.
v Listing in any stock exchange - The current concession wherethe income tax payable is reduced to 50% for listing in CSEbefore 1st April 2017 will be extended as follows.
Ø 2 years for listing in CSE ; or
Ø 3 years for listing in any foreign Stock Exchanges
v Tea and rubber cultivation exempted - The profits and incomefrom the cultivation of tea or rubber which is currently taxableat 10% will be exempted for a period of two years in the case ofany plantation company, in which the Government has ashareholding commencing from April 1, 2016. It is not clearwhether this exemption will be extended to cover the profits andincome attributable to the manufacture of tea or rubber will alsobe exempted.
(m) Removal of miscellaneous exemptions - The following exemptionswill be removed:
v The profits and income arising or accruing to any person fromany undertaking for the construction of any Port in Sri Lanka.
v The profits and income arising or accruing to any person fromthe administration of any sports ground, stadium or sportscomplex.
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v The profits and income arising or accruing to any company,partnership or body of persons in a country outside Sri Lanka,from any payment made for the use of any computer software,by Sri Lankan Air Lines Ltd or Mihin Lanka (Pvt) Ltd, as a specialrequirement of such Airlines, if a Double Taxation AvoidanceAgreement providing relief for double taxation of such profitsand income is not in force between Sri Lanka and that countryor tax is not payable in such country on such profits and income.
v The profits and income from any service rendered by anyperson or partnership in any port in Sri Lanka in the course ofany business carried on within such port.
v The profits and income arising or accruing to any person fromany undertaking for the operation of any port terminal in SriLanka;
(n) Removal of institutional exemptions – The exemption on the profitsand income of the international intuitions will be restricted to anyprofits and income other than the profits and income generated bycharging any fee or contribution.
(o) Local institutions – The present exemption granted other than anygovernment department, foreign government, universities,corporate societies, Central Bank, charitable institutions andgovernment assisted schools.
2.2 Individual tax - The following proposals were made in relation toincome of individuals including employment income, self-employment and interest from deposits.
(a) The progressive tax rates applicable to individuals will beremoved by increasing the tax free allowance to Rs. 2.4 Mn peryear (Rs. 200,000 per month) and any balance will be liable atthe standard rate of 15%.
The following table illustrates the effect of the change made tothe personal income tax on a person whose taxable income(prior to the tax free allowance) is Rs. 10 Mn per annum.
Page 2.8
Description
Present ProposalTaxableincomeprior totax free
allowanceRs.’000
TaxRs.’000
Taxableincomeprior totax free
allowanceRs.’000
TaxRs.’000
Tax free allowance 500 - 2,400 -Balance 9,500 1,960 7,600 1,140Total 10,000 1,960 10,000 1,140
(b) The above tax treatment will also be applicable to bothemployees, subject to PAYE scheme and those self- employed.
(c) No deductions from statutory income except for losses from anytrade, business profession or vocation.
(d) Employees who under employment by more than one employerwill be taxed at 15% at a flat rate.
(e) Withholding tax on interest from deposits with banks andfinancial institutions will be abolished. However, interest incomewill now form a part of statutory income from interest and liableto tax if the total taxable income exceeds the tax free threshold.This will not include interest earned by senior citizens who willcontinue to be exempted from tax on interest income.
(f) Exemptions granted under section 8 for certain employmentincome will be restricted to the following.
v Retiring benefits and pension paid to governmentemployees out of the consolidated fund.
v Earnings from foreign employment if such earnings areremitted to Sri Lanka.
v Employees of diplomatic missions
v Release of provident balances at the point of retirement
v Compensation for loss of office subject to conditions.
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As a result of the above amendment one of the key exemptionsthat will be removed is the exemption granted up to Rs. 50,000per month for the use of a motor vehicle provided or anyallowance paid in lieu of that by the employer.
(g) The WHT rate applicable under section 95 for a person outsideSri Lanka will be limited to 15% or such other rate as specifiedunder a double tax agreement. It is expected that theamendments proposed to personal tax as above will also applyto partnerships as applicable.
Page 3.1
Budget 2016ThreeValue Added Tax (VAT)
3.1 Rate - It has been proposed to introduce 3 rate bands instead of theexisting 2 rate bands with effect from January 1, 2016. These wouldbe as follows:
(a) 0% (Zero rated) - will be applicable to export of goods andservices for foreign currency receipts. Although notspecifically mentioned it is assumed that all zero rated servicescurrently provided for under Section 7 of the VAT law wouldcontinue to be zero rated.
(b) 8% (Standard rate) - will be applicable on the manufacture andimport of goods. This is a reduction of 3% from the current11%. However it is proposed to limit the input tax claimable bymanufactures and importers which would likely result in ahigher pay out of VAT per period by such importers andmanufacturers. Details of such restrictions of inputs have notbeen elaborated.
(c) 12.5% (Higher rate) – will be imposed on the service sector.This is an increase of 1.5% from the existing 11% currentlyimposed on the service sector. Banking and financial serviceswould also be liable at the higher rate and it is assumed thatthe computation of financial services VAT would remainunchanged.
Page 3.2
3.2 It is assumed that the above rates would be applicable to all liablesupplies excluding the existing exemptions in the VAT law unlesssuch exemptions have been specifically removed as highlightedbelow.
(a) Exclusion from VAT - The wholesale and retail supply ofgoods which was liable to VAT subject to a threshold of Rs100 million has been excluded from the VAT net. VAT onthis sector was mainly introduced in the previous budgets totax super markets including items which were specificallyexempted.
The new proposal would result in the exclusion of this sectorfrom paying VAT with effect from January 1, 2016. Itshould however be noted that after the exemption appliesthe input VAT would not be allowable and would be a cost.As there is no transition provisions specifically included anyunclaimed VAT on inputs (eg closing stocks) is likely to be acost.
(b) Exemptions - There are no new VAT exemptions introducedin this budget. However the exemptions on the followingitems relevant to the telecom industry have been removedand will be liable to VAT at the point of import and at thetime of supply from January 1, 2016.
v Telecom equipment or machineryv High-tech equipment and copper cables for the
telecom industry.
3.3 Threshold - The turnover threshold to be liable to VAT is currentlyRs. 15 Mn per annum and Rs. 3.75 Mn per quarter. This is proposedto be reduced to Rs. 12 Mn per annum or Rs. 3 Mn per quarter.
Page 4.1
Budget 2016FourNation Building Tax4.1 Rate - The rate of NBT is proposed to be increased from the current
2% to 4% from January 1, 2016. This would result in manufacturesand service providers paying NBT on their sales at 4% and importerspaying NBT on liable imports at 4%. In the absence of any specificcomments on banking and financial services it is assumed the currentmethod of computation would apply and the value addition would beliable to NBT at 4%.
Wholesalers and retailers on the other hand would be eligible for theexisting exemption of 50% on their turnover (as per the existing law)resulting in the effective rate of NBT paid by them increasing from 1%to 2% as a result of the budget proposals.
4.2 Input tax - It is assumed that the input NBT currently granted tomanufactures would continue to be in effect together with theexisting exemptions available, other than those mentioned below.
4.3 Exemptions - There are no new exemptions proposed for NBT.However the following exempted items would be made liable to NBT at4% from January 1, 2016.
(a) Telecommunication Services(b) Electricity(c) Import and sale of Lubricants
This would result in the cost of such utilities increasing by 4%.
Page 4.2
4.4 Threshold - The general threshold is proposed to be reduced in linewith VAT where the threshold would be reduced from Rs. 3.75 Mnper quarter to Rs. 3 Mn per quarter.
The special threshold applicable to certain industries of Rs. 25 Mnper quarter is proposed to be removed other than for the business ofprocessing of any locally procured agricultural produce in thepreparation for sale.
As a result of the proposed removal of the Rs. 25 Mn threshold, thefollowing businesses would be liable to NBT from January 1, 2016 ifthe liable turnover exceeds Rs. 3 Mn.
(a) Operation of a hotel, guest house, restaurant or other similarbusiness
(b) Provision of educational services by any institution establishedlocally for that purpose
(c) Supply of labour (manpower)
Page 5.1
Budget 2016FiveEconomic Service Charge5.1 Chargeability to ESC - It has been proposed to re-introduce the
liability to ESC on the turnover of businesses of which profits areliable to income tax.
Currently, ESC is chargeable only on the turnover of businesses whichare under any tax exemption or which are incurring losses.
5.2 Threshold - Present maximum liability of Rs. 120 Mn per annumremoved. The liability threshold of Rs. 50 Mn per quarter remainsunchanged.
5.3 Rate - Present rate of 0.25% increased to 0.5%.
5.4 ESC carry forward - Currently the period for carrying forward of ESCwhich could be set off against income tax payable in any year ofassessment is 5 years.
It is proposed to reduce the period of carrying forward of ESC to 3years effective from April 1, 2016.
5.5 Exemptions - Turnover currently exempt from ESC remainsunchanged.
Page 6.1
Budget 2016SixCustoms and Excise Duty6.1 Strengthening and simplifying Sri Lanka Customs Administration -
The Government’s proposed initiatives to enhance Sri Lanka’scompetiveness and facilitate trade will be welcomed by the tradingcommunity, who will be keen to work with Sri Lanka Customs to meetall objectives:
(a) “Revamp” the Customs Ordinance to meet the needs of thepresent day requirements;
(b) A new valuation system to be introduced by January 1, 2016 tocurb under invoicing of motor vehicle spare parts, tiles, tyres,etc.;
(c) Electronic submissions of all import Customs declarations byJune 2016 with all relevant government agencies to be linkedonline by January 1, 2016;
(d) All regular importers to be registered with Sri Lanka Customsfrom January 1, 2016;
(e) Importation of used washing machines, TVs and mobile phones tobe banned from January 1, 2016;
(f) Incorporation of an International Trade Agency to implement aninternational trade policy. Additionally, it is proposed to enterinto Free Trade Agreements with countries such as USA, China,South Korea etc.;
Page 6.2
(g) Establishment of a “one stop-shop” to provide all necessarypermission, clearances and approvals at a single window platform– connecting relevant government agencies including theDepartment of Import and Export Control, Inland RevenueDepartment, Department of Commerce, Department ofAgriculture, Consumer Affairs Authority, etc.;
(h) Invite foreign Customs personnel to be located in Sri Lanka topre-clear export cargo;
(i) In future, duty free shops at ports and airports to be operated onjoint venture basis with local and foreign counter parts.
6.2 Changes to cross border duties and taxes (at the point of import) -The following changes to Custom Duty, CESS, Ports and AirportDevelopment Levy, Excise (Special Provisions) Duty and SpecialCommodity Levy are proposed to be gazetted with effect fromNovember 20, 2016.
(a) Customs Duty
v Change of the present ‘four’ band tariff structure [Exempt;7.5%; 15% and 25%] to Exempt, 15% and 30%.
v To harness the benefits from the Tourism Sector, it has beenproposed to open ‘duty free’ gem and jewelry shops at theairport.
v It has been proposed for the Central Bank of Sri Lanka tointroduce a scheme allowing 50 licenses for the purpose ofimporting gold free of all import duties.
v The import duties on printed books, magazines and journalsare proposed to be exempted from import duties.
Duty rates to be revised on the following items:
v Beedi leaves, Beedi, Garments, Foot-wear, Beer, Wine,Whisky, and Ethanol;
Page 6.3
v Agriculture machinery and equipment, dairy industrymachinery and equipment and fishing nets;
v Sports equipment and Musical instruments;
v Yachts, caravan carriages, surfing equipment and mini cruiseboats;
v Building Materials such as steel, tiles and sanity ware;
Proposed Customs Duty reductions under Preferential TradeAgreements
v Removal of certain items from the negative list of the BOI(tiles, ceramic and sanitary ware)
v Completion of Sri Lanka’s commitments on TariffLiberalization (Phase I) of the South Asian Free Trade Areaeffective from November 21, 2015.
v Fulfillment of Sri Lanka’s December 2015 target ofcommitments on the Tariff Liberalization (Phase II) of theSouth Asian Free Trade Area effective from November 21,2015.
(b) Excise Duty
v The liquor manufacturing License fee and duty rates isproposed to be revised.
v It is proposed that every tax-paid liquor bottle to be labledwith a full-proof sticker for the purpose of visualidentification.
v The excise duty rate, per proof litre, on Molasses, Palmyrah,Coconut and Processed Arrack has been increased to Rs.1,850, from the previous rate of Rs. 1,595.
v The excise duty rate, per proof litre, on Country made“Foreign” spirits has been increased to Rs. 2,030, from theprevious rate of Rs. 1,860.
Page 6.4
v The excise duty rate on Malt Liquor, of less than 5% strength,has been reduced to Rs. 160 per litre, from the previous rateof Rs. 190.
v The excise duty rate on Malt Liquor, of 5% and above, hasbeen increased to Rs. 315 per litre, from the previous rate ofRs. 245.
(c) Excise (Special Provisions) Duty
v The concessions and rates will be revised and subject to thegazette notice.
v An excise exemption will be provided for goods locallyassembled/manufactured, of HS Codes 84 and 85, with notless than 30% value addition.
(d) Port & Airport Development Levy (PAL)
v The current rate of 5% is proposed to be increased to 7.5%.
v The current rate of 5% on certain electronic and electricalitems is proposed to be reduced to 2.5%.
v The current rate of 5% on certain machinery is proposed tobe removed.
(e) CESS
v It is proposed to impose 10% CESS on the import ofJewellery in order to encourage the local industry.
v Also the “Export CESS” to be removed on pepper, cloves andnutmeg to encourage the exports of value added products.
(f) Special Commodity Levy
v It is proposed to increase the levy to Rs. 50/- on the importof fish and fish related products to promote the localindustry.
Page 6.5
v For the purpose of protecting the local confectionaryindustry, it is proposed to reduce the Special CommodityLevy on vegetable fat.
v Rates on certain other commodities are proposed to berevised.
(g) Other Import taxes on apparel and footwear
v The current composite tax imposed on the sale of garmentsin the local market by export oriented companies under theVAT Act, is proposed to be increased to Rs. 200/- per piece.No change is proposed on the sale of fabric and cut pieces.
v The same rate of Rs. 200/- per piece is proposed to beimposed on the sale of footwear in the local market byexport oriented companies.
v The sale of export quality products in the local market byexport oriented BOI companies will be restricted to 5% of thetotal turnover and will be subject to tax as mentioned above.Clarity is required in relation to the application of thisrestriction, to understand if it applies only for Garments andFootwear manufacturers, or for all manufacturers.
Page 6.6
6.3 Motor vehicle industry
(a) Valuation of motor vehicles for Duty - The Sri Lanka CustomsValuation Committee has recently introduced the following newvaluation system to address revenue leakages from under-valuation of motor vehicles imported to the country.
Type ofImport
Pricing Methodology Source
1 Japanese /Thai domesticmodelsimported toSri Lanka
Value to be based on thehighest specification modelpopularly imported to SriLanka.Manufacturer’s priceexcluding domestic taxes ofthe country of export.
Manufacturers’website and otherofficial publications.http://www.customs.gov.lk/news/Values%2017-11-2015.pdf
2 Vehiclesimported bybrand newdealers
Based on themanufacturers’ invoicevalue.
Invoice issued/certified by themanufacturer of thevehicle.
3 Commonvehiclemodelsimported bynew dealersand parallelimporters.
Manufacturers’ value givento new car dealers will beextended to parallelimporters.In case of conflict, values tobe issued by the Hon.Minister for a particularmodel.
Invoice issued/certified by themanufacturer of thevehicle. Alternatively,Minister to fix valuesin consultation withMinistry and Sri LankaCustoms.
4 Cars of originother thanmentioned inpoint#1above,importedexclusively byused carimporters.
Manufacturers’ value of thecountry of export.
Authorized website, orother authorizedpublished sources ofthe manufacturer.
Page 6.7
6.4 Excise Duty rates
(a) To strengthen the collection of duties, a simple unit rate of exciseduty is proposed, based on engine capacity (cubic centimeters).Also, changes are proposed to excise duty percentages payable oncertain vehicles.
(b) In order to promote a cleaner environment, the Government is in theprocess of initiating various measures. One such initiative proposedis the reduced excise duty rate of 2.5% for vehicles run entirely onsolar, hydrogen or helium.
It is expected that these changes will be effective immediately.
6.5 Concessionary schemes
(a) Concessionary permit schemes - It is proposed to abolish all vehiclepermits granted under different schemes. However, the governmentofficers are to be financially compensated for the benefit foregone.
(b) Concessionary scheme for export of reconditioned vehicles - Inorder to enhance motor mechanic related activities and the creationof new employment, it is proposed to grant 50% tax credit for theimportation of one motor vehicle for every 20 vehicles exported bythe same exporter under this scheme. However, the tax in respect ofwhich the credit is proposed to be given needs to be clarified.
Further, the private sector has been encouraged to seek possibilitiesof importing used cars for export after reconditioning.
6.6 Other Fees and Tariffs
(a) Motor Vehicle Entitlement Fee - The Motor Vehicle ImportRegistration License Fee was introduced on January 29, 2015 onimporters of motor vehicles for business purposes. For the purposeof mitigating undue advantage gained by certain importers, a newimport fee will be introduced.
The Motor Vehicle Entitlement Fee is proposed to be imposed asfollows:
Page 6.8
v Motor Cycle and Three Wheelers- Rs. 2,000/-;v Motor Cars- Rs.15,000/-;v Other Vehicles- Rs. 10,000/-;
This is proposed to be effective from January 1, 2016, payable tothe Commissioner General of Inland Revenue before opening theLetters of Credit.
(b) Motor Vehicle License Fee - The Motor Vehicle License Fee (RevenueLicense) will be revised with effect from January 1, 2016 as ameasure to enhance Provincial Council revenue.
(c) Unregistered vehicles - All unregistered vehicles to be registeredbefore March 31, 2016. Such vehicles could be registered by payingthe following fee to the Registrar of Motor Vehicles:
v Cars and Vans, Rs. 0.01 Mnv Other vehicles, Rs.0.75 Mn
(d) Emission Levy - A levy of Rs. 5,000/- is payable on every motorvehicle, which is over 03 years. This levy is payable to the DivisionalSecretariat at the point of renewal. The effective date of the levy is tobe notified.
It is also proposed to liberalize and make competitive the issuance oflicense, by allowing more players in the market.
(e) Luxury & Semi-Luxury Motor Vehicle Tax - The Luxury & Semi-Luxury Motor Vehicle Tax introduced by the Finance Act, No. 16 of1995 is proposed to be removed with effect from April 1, 2016.
(f) Vehicle Valuation Certificate Fees - From January 1, 2016 a fee onthe valuation of vehicles is proposed as follows, at the time ofobtaining a finance facility:
v Motor Cycle and Three Wheelers- Rs. 5,000;v All other vehicles - Rs. 25,000.
Page 7.1
Budget 2016SevenForeign Direct Investments (FDI)7.1 Tax concessions for new investments
(a) Currently income tax holidays are granted only to projects having theStrategic Development Project (SDP) status. SDP is generally given toprojects of national interest and which is likely to bring economic andsocial benefits to the country. Generally, FDI’s involving USD 100 Mnand above were granted SDP status.
(b) Going forward a “New Investment” Act will be introduced to grant taxconcessions and tax holidays for new investments. Tax concessionsand holidays will not be granted under the Strategic Development Acthereafter.
(c) The Strategic Development Project Act will continue to be effective forexisting companies that have availed the concessions under such Act.
(d) The criterion to qualify for a tax holiday under the New Investment Actis a moot point. The Hon. Minister has identified key thrust areas whichhas potential for investment. It is not clear at this point whether thetax concessions provided under the New Investment Act will be limitedto these key areas.
v Oil refineryv Renewable energyv Integrated car manufacturingv Manufacturing steel bridges for the regionv Fertilizer, manufacturing triple super phosphatev Satellite technologyv Aircraft repair and logistical supportv Integrated sugar industry
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(e) It is also not clear at this point whether the New Investment Act willgrant tax concessions and exemptions from indirect taxes such asVAT, NBT and import point taxes such as PAL and Customs duties.
(f) It is proposed to provide tax holidays and Government lands toinvestors who invest in lagging regions of the country.
(g) It is proposed to allow foreigners to borrow 40% of their investmentin condominiums from banks in local currency.
7.2 Administrative proposals
(a) Tax holidays will be granted, supervised and monitored by theMinistry of Finance. The Board of Investment (BOI) and the InlandRevenue Department will not grant any tax holidays other thanfacilitation and implementation of the concessions.
(b) An organization under the name of “Agency for Development” will beestablished. This agency is to replace the BOI, the ExportDevelopment Board and Sri Lanka Tourism Development Authority.
(c) The Agency for Development will ensure that applications for foreigninvestments are completed to commence business within 50 days.
(d) New Export Processing Zones will be set up. It is proposed to give themanagement of these Zones to private sector managementcompanies.
(e) Highly environmentally sensitive industries will be facilitated tooperate in specifically designated areas such as Puttalam,Hambantota and Kilinochchi.
7.3 Investing in listed companies
(a) It is proposed to exempt dividend income on investments made bynon-citizens or foreign companies in listed shares through inwardremittances. The withholding tax of 10% on dividends will not apply tosuch dividend income.
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(b) The Share Transaction Levy (STL) that is imposed on transactionscarried out through the stock exchange will be removed from January1, 2016. It is not clear at this point whether the income taxexemption given for the profits and income from the sale of shares onwhich the STL is paid will be correspondingly amended.
(c) Stamp duty on share certificates will be removed.
7.4 Foreign loans
(a) The exemption on interest income on foreign loans will be restrictedon the interest on loans taken from foreign banks or financialinstitutions.
7.5 Purchasing and leasing land
(a) Currently foreigners/foreign companies are restricted frompurchasing land with few limited exceptions. It is proposed to removethis restriction for certain identified projects.
(b) The land lease tax of 7.5% and 15% that is imposed onforeigners/foreign companies will be removed.
7.6 Exchange control
(a) The Exchange Control Act will be abolished and an investor friendlyForeign Exchange Management Bill will be introduced.
(b) Currently foreign investments (including share capital and loans)should be brought into Sri Lanka through the Securities InvestmentAccount (SIA). It is proposed to allow investors to bring in money toSri Lanka through any bank account existing in the formal bankingsystem.
7.7 Other proposals
(a) Introduction of a fee of USD 250,000 for resident visa for a threeyear period and USD 5 Mn for a permanent residence visa forforeigners, with approval of the Cabinet of Ministers.
Page 8.1
Budget 2016EightOther taxes, levies and charges8.1 Following taxes are proposed to be removed from the tax system;
(a) Share Transaction Levy (STL) - The prevailing STL of 0.3% on bothbuyer and seller on the turnover of every share trading transaction(conducted through the Colombo Stock Exchange) will be abolishedwith effect from January 1, 2016.
(b) Construction Industry Guarantee Fund Levy (CIGFL) - The CIGFLimposed on construction contractors ranging from 0.25% to amaximum rate of 1% will be abolished with effect from January 1,2016.
(c) Tourism Development Levy (TDL) - TDL of 1% imposed on institutionslicensed under the Tourism Development Act will be removed witheffect from 1 January 2016.
(d) Luxury and Semi-Luxury Motor Vehicle Tax - Annual Levy on Luxuryand Semi-Luxury motor vehicles will be removed with effect from 1April 2016.
Page 8.2
8.2 The Honorable Minister has also proposed to revise the followingtaxes and levies:
Tax/Levy Changes Effectivedate
Stamp duty Stamp duty applicable on sharecertificate will be removed.
January1, 2016
Stamp duty on credit cardtransactions (local usage) will beremoved.Stamp duty for foreign purchases willbe increased to 2.5%.Transfer of real estate assets to aListed Real Estate Trusts (REIT)(subject to conditions) will beexempted from Stamp duty.
Telecomm-unicationLevies
International TelecommunicationOperators Levy (ITOL) on incomingcalls will be increased from USDCents 9 to USD Cents 12
January1, 2016
Cess levied at 2% for internationaltransit traffic will be exempted.
MansionTax
Mansion tax on condominium units willbe removed.
Notspecified
The first installment is due forpayment on or before March 31,2016.
Betting &GamingLevy
The entrance fee of USD 100 forentering casino entertainment will beremoved.
January1, 2016
Annual levy on the business of playingrudjino will be reduced from Rs. 200million to Rs. 5 million.Annual levy on the business of casinowill be increased from Rs. 200 millionto Rs. 400 million.
Page 8.3
8.3 The Hon. Minister of Finance has proposed to impose the followingnew taxes, levies and charges:
Tax/Levy Changes Effectivedate
EnvironmentalFee
An Environmental Fee will be chargedat Rs. 50,000/- per tower per annum.
January1, 2016
Annual licensefee
Every company registered withRegistrar of Companies will be subjectto an annual license fee of;§ Private companies – Rs.
60,000§ Public quoted company – Rs.
500,000§ Other - Rs.100,000
Notspecified
Liquidation fee Rs. 250,000/- will be charged onVoluntary liquidation of a company.
Notspecified
Fee forbusiness
All business entities should beregistered with their respective localcouncils at a nominal fee of Rs. 100.
Notspecified
ResidenceVisa Fess
USD 250,000 for residence visa for 3yearsUSD 5 Mn for permanent resident visa
Notspecified
Charge on airtickets
A charge will be imposed on Airlineson the sale of international air ticketsat USD 2 per passenger.
Notspecified
Page 8.4
8.4 The Honorable Minister has proposed to revise the following taxes,levies and charges:
Tax/Levy Changes Effectivedate
Beedimanufacturinglicense fee
Will be increased from Rs. 1,500 toRs. 5,000.
Notspecified
EmbarkationLevy
Will be increased from USD 25 toUSD 30
Notspecified
Passport fee Will be revised as follows; January1, 2016Adult
(Rs.)Child(Rs.)
One day 10,000 5,000Normal 3,000 2,000
Dualcitizenship fee
Fee for dual citizenship is increasedfrom Rs. 250,000 to Rs. 300,000.
Notspecified
SAARC Visafee
Fee for SAARC Visa is increasedfrom USD 10 to 20.
Notspecified
Companyregistrationfees
This is proposed to be revised. Notspecified
Localgovernmentrates
Local government council rates onproperties will be limited to 15% ofthe annual value of commercialentities.
Notspecified
Page 9.1
Budget 2016NinePublic investmentsIn his budget speech, the Hon. Minister of Finance proposed the followingallocations of funds for socio economic activities identified by theGovernment.
Area Description ProposedAmountRs.’ Mn
Agricultureandaquaculture
Improving Seed Production 1,000
Rehabilitating Small Tanks and IrrigationCanals
2,000
Facilitating Local Milk PowderManufacturers
1,000
Enhancement of Fish Breeding Facilities 100Implementation of Rubber Master Plan 100Rehabilitation of Coconut Cultivation 250Strengthening Tea, Rubber and CoconutResearch Institutions
200
Strengthening Sugar and PalmyrahResearch Institutions
100
Branding of Spices 150Cinnamon Research, Development andTraining
150
National Science Foundation 50
Page 9.2
Area Description ProposedAmountRs.’ Mn
Infrastructure Building Warehouses 1,000Construction of Cold Stores 2,000Expansion of Fisheries Harbours 750Agro Livestock and Fish Processing Park 100Building of Aquaculture Parks 1002500 Cluster Villages Programme(including Decentralized BudgetAllocation for Parliamentary Members)-for infrastructure and livelihooddevelopment for local communityempowerment
21,000
Digitalization of the Economy-Information, Communication andTechnology strategy transformationincluding free wi-fi in public places, stateuniversities, public sector establishments,introduction of national digital identity,national payment platform, providing 200smart digital classrooms.
10,000
Land Bank 500
MICE Convention Hall 3,000Setting up of Innovation Accelerator 100Upgrading Nenasala Centres 100New Building for Inland Revenue, Excise,Postal Departments and NationalLotteries Board
2,000
Introduction of Traffic Encoder 500Kelani Valley Railway Line 1,500Augmenting Railways and Bus Transport 1,000Improving Jaffna Railway Line 200Indian Ocean Marine Affairs Corporation 50Upgrading Industrial Estates andAgriculture Technology
500
Page 9.3
Area Description ProposedAmountRs.’ Mn
Developing Road Network- Ratnapuraexpressway, extension of marine driveupto Panadura, extension of PamankadaRatmalana Road, new bridge over Kelaniriver, reconstruction of 25 bridges and 3flyovers.
15,000
Elevated Road from Cotta Road toKaduwela- on Build Operate and Transferbasis
10,000
Fort Access Road 4,000North-East Highway 1,000Water Transport 250Yan Oya Project 1,000Megapolis and Western ProvinceDevelopment- projects to be implementedon Public Private Partnership basis
10,000
Urban Development 2,500Estate Infrastructure Development 1,000Development of Industrial Zones 700
Environmentand wildlife
National Environment ConservationProgramme
2,000
Wild Life Conservation 1,000Interest Subsidy for Conversion of ThreeWheelers from Fuel to Electricity
50
Welfare Distribute Canned Fish at ConcessionaryPrice through Lak-Sathosa
300
Rural Housing 4,500Interest Subsidy for Senior Citizens 1,500National Council for Elders 10National Child Protection Authority 100Accreditation of Child Caregiver Training 50Rectification of Salary Anomalies of SriLanka Police
3,000
Lump Sum Payment for July Strikers 500Seed Capital for Contributory PensionScheme for Artists
25
Page 9.4
Area Description ProposedAmountRs.’ Mn
Industries Micro, Small and Medium Enterprises(MSME) Credit Guarantee Fund
500
Primary Industries 2,000Construction Industry SkillsDevelopment
500
Tourism Skilled Development 100Development of Galle Fort as HeritageCity
500
Establishment of Economic Zones 200Intellectual Property Rights 100Setting up of a Bond Clearing House 500IT Branding Programme 100
Education,vocational anduniversities
Teacher training and development 3,000
Sanitary Facilities for Schools 4,000Electricity for Schools 2,000Upgrading Primary Schools- 3577primary schools to be upgraded
10,000
Providing Facilities to 1,000 SecondarySchools –facilities including activityrooms, laboratories, multimedia andeLibrary.
15,000
Basic Facilities for 1360 Schools – toimprove facilities
30,000
Upgrading 25 Plantation Schools 250Improving Science Education in Schools 450Improving Dental Health Facilities 250Establishment of Mahapola University 3,000Providing Wi-Fi Facilities and Support ofPurchase of Laptops
300
Postgraduate Institute of Pali andBuddhist
500
University Infrastructure Development 6,000Vocational Training and TechnicalEducation
3,000
Facilitating Education of Children ofEmployees' of Foreign Missions
150
Page 9.5
Area Description ProposedAmountRs.’ Mn
Law and order Establishment of Police Stations 1,000Training for Traffic Police 100Network Communications for Sri LankaPolice
250
Improvement of Court Administration 500Legal Reforms 500Strengthening Judicial TrainingInstitutions
500
Accountingand auditing
Strengthening Sri Lanka Accountingand Auditing Standards Monetary Board
100
Skilled Development in Auditing 30Providing Professional Qualifications toPublic Sector Accountants
50
Youth affairsand sports
Empowering Youth 3,000
Development of Sports 1,000Health Dialysis Centres 6,500
Kidney Hospital - Polonnaruwa 2,000Establishment of 3 Cancer Hospitals 3,000Upgrading Anuradhapura, Jaffna,Kurunegala Hospitals
3,000
Training of Health Staff 250Refurbishment of Sri JayawardanapuraHospital
1,500
Improving Nursing School at SriJayawardanapura Hospital
2,500
Building of Stroke Centres 5,000Research on Dengue, CKDU and Cancer 250Mobile Hospitals 200
Page 9.6
Area Description ProposedAmountRs.’ Mn
Provincialdevelopment
Southern and Wayamba Development 3,500
North and East Development- rapidscale resettlement, livelihoodopportunities provision, houses withsanitation and clean water, renovationof roads, establishing clinical wastemanagement system.
14,000
Pubudamu Polonnaruwa Programme-encompassing all sectors includingaccess to clean water, establishing anintegrated modern city.
10,000
Others Allocation for Ministry of SpecialAssignments
150
Strengthening Local GovernmentAuthority
1,500
Seed Capital for Exim Bank 50Strengthening Sri Lanka StandardsInstitute and Industrial TechnologicalInstitute
200
Insurance against Natural Disaster 300Policy Formulation and Analysis 200Facilitation for Bribery Commission 500MP Capacity Development- J.R.Jayawardena Centre
50
Equity Capital for Financial InstitutionRestructuring Agency
10
Restructuring of Parliamentary Affairs 250
Page 10.1
Budget 2016TenRecap on tax law changes in 2015Following the budget proposal announced in October 2014 and January2015, certain amendments were made to the Inland Revenue, Value AddedTax (VAT) and Nation Building Tax (NBT) Acts. The amending legislationswere passed in Parliament in October 2015 and are now law. Whilst most ofthe amendments to the Inland Revenue Act (IRA) have already taken effectfrom April 1, 2015, amendments to the VAT Act and NBT Act wereeffected from January 1, 2015, unless otherwise specified.
We have already informed you of the changes that were proposed as aboveby way of our post budget illustration in October 2014 and January 2015and other circulars sent via email prior to the enactments being passed inParliament. Now that the proposals have been enacted, we havesummarized and presented below the significant changes that have beenmade to these taxes.
10.1 Inland Revenue (Amendment) Act, No. 9 of 2015
(a) Exemptions
v Employment income - An employee, receiving any loan from theemployer free or at subsidized rate of interest, will be exemptfrom income tax on such benefit if such loan is granted by theemployer not out of money borrowed for that purpose. Therefore,for the employee to be entitled for exemption, the employer willhave to provide evidence that money was not borrowed for thatpurpose.
Page 10.2
v Interest income
Ø Senior citizens - Any interest arising in, or accruing to, anyresident individual who is a citizen of Sri Lanka, from anydeposit maintained in a bank or financial institution(approved by Central Bank of Sri Lanka (CBSL)) or in anyregistered co-operative society, will be exempt from incometax in respect of –
§ such interest for the period from January 1, 2015 toMarch 31, 2015, if that individual is more than 60 yearsof age or reaching 60 years during that period; or
§ any such interest for any year of assessment (YA)commencing on or after April 1, 2015, if that individualis more than 60 years of age or reaching 60 yearsduring that YA.
(Certificate of Deposits are not covered within thisexemption)
Ø Other individuals or charitable institutions - Effective fromApril 1, 2015, any interest arising in, or accruing to anyindividual or charitable institution from any one or moresavings account, will be exempt from income tax, if suchinterest paid for a month is less than Rs. 5,000/-.
Ø Corporate Debt Security issued by the Urban DevelopmentAuthority (UDA) - Interest or discount accruing (or arising)to any person from any investment (made on or afterJanuary 1, 2015) in any Corporate Debt Security, issued bythe UDA will be exempt from income tax.
Ø Nation Development Bond issued by the CBSL - Theinterest accruing (or arising) to any individual who is a SriLankan, living or employed abroad, from any investmentmade on or after January 1, 2015, in Nation DevelopmentBonds issued by the CBSL (on behalf of the Government) willbe exempt from income tax.
Page 10.3
v Dividends - Any dividend paid to a shareholder of any newundertaking which commenced on or after April 1, 2015 for themanufacture of products for export, and which is not formed bysplitting-up or re-construction of an existing undertaking, withan investment of not less than USD 2 Mn (or equivalent in anyother currency) and for which depreciation allowances areentitled to under paragraph (h) of the first proviso to section25(1)(a), where such dividends are paid out of such profits andincome of such new undertaking during the period reckonedfrom the year of assessment in which such new undertakingcommences to carry on commercial operations and for theimmediately succeeding 4 years of assessment.
v Profits from the production of films or dramas - One half of theprofits and income, for any period on or after April 1, 2015from the production of films or dramas, of any individual whoproduces an award winning cinema or a drama at aninternational film or drama festival, for a period of 5 yearscommencing from the year in which such award is received.
v Profits of a unit trust from investment in USD deposits - Theprofits and income arising or accruing to any unit trust frominvestments made on or after January 1, 2015 in US Dollardeposits or US Dollar denominated securities listed in anyforeign stock exchange.
v Profits and income from royalty - The profits and incomearising (or accruing) to any company, partnership or body ofpersons outside Sri Lanka for any YA commencing on or afterApril 1, 2015, from any payment made by way of royalty as aspecific requirement of any information technology or businessprocess outsourcing company in Sri Lanka, for the YA in whichsuch company in Sri Lanka commences operations and foranother YA immediately succeeding that YA.
Page 10.4
(b) Deductions in ascertaining profits and income
v Allowance for depreciation
Ø Buildings - The rate of deduction in respect of qualifiedbuildings constructed or certain units of condominiumproperty has been unified to be at 10%, effective from April1, 2015. Accordingly,
§ any qualified building constructed; or
§ any unit of a condominium property acquired and whichis approved by the UDA (established by the UDA Law,No. 41 of 1978) and constructed to be used as acommercial unit; or
§ any hotel building (including a hotel building complex)or any industrial building (including any industrialbuilding complex) acquired from a person who had usedsuch building in any trade or business-
(A) prior to April 1, 2015, at the rate of 6 2/3% perannum, on the cost of construction or cost ofacquisition, as the case may be, of such buildingor unit; or
(B) on or after April 1, 2015, at the rate of 10% perannum on the cost of construction or the cost ofacquisition, as the case may be, of such buildingor unit.
However, with regard to qualified building, the 10% rate hadbeen in force effective from April 1, 2011 and is presumedto remain unchanged.
Ø Plant, machinery or equipment - The depreciation rate willbe 100% of the cost of acquisition for any plant, machineryor equipment acquired and used on or after April 1, 2015, inany new undertaking which commences on or after that datefor the manufacture of products for export with an
Page 10.5
investment of not less than USD 2 Mn (or its equivalent inother currency) and which is not formed by splitting up orre-construction of an existing undertaking.
v Research expenditure - Deduction of research expenditure willbe allowed at 300% of such expenditure incurred (on or afterApril 1, 2015) for any innovation or research relating to highvalue agricultural products and such research is carried out bysuch person himself or through any research institution, in SriLanka.
For the purpose of this paragraph, the Commissioner General ofInland Revenue (CGIR) is required to issue guidelines in order toensure the uniform application of deduction.
v Royalty - For any YA commencing on or after April 1, 2014,any royalty or ground rent payable for the relevant YA and paidby such person will be deductible, if such amount was notallowed to be deducted prior to April 1, 2014, under section32(5)(a).
v Educational expenditure - For any YA commencing on or afterApril 1, 2015, an amount equal to 300% of the expenditureincurred by any person registered with the Tertiary andVocational Education Commission (TVEC) established under theTVEC Act, No. 20 of 1990 on standard skill developmenttraining by any institution recommended by such Commission tobe provided to trainees, will be deductible.
(c) Disallowable expenses in ascertaining profits - The followingpayment or expenses are not deductible in ascertaining profits fortax purposes:
v Super Gain Tax, Bars and Taverns Levy, Casino Industry Levy,Mobile Telephone Operator Levy, Direct to Home SatelliteServices Levy, Satellite Location Levy, Dedicated SportsChannel Levy and Mansion Tax imposed and levied under theprovisions of the Finance Act, No. 10 of 2015
Page 10.6
v Any ground rent or royalty payable for any period prior to April1, 2014 and paid after April 1, 2014 which is deductible undersection 32(5)(a), or annuity paid by such person
(d) Deductions in ascertaining total statutory income - The followingsums are deductible in ascertaining total statutory income:
v any ground rent or royalty payable for any period prior to April1, 2014 and which is paid after April 1, 2014; or any annuity orinterest, being any such sum which is not entitled to bededucted under section 25.
v the balance , if any, of any loss deductible under the IRA, of anybusiness of any bank, financial institution or leasing companywhich is consolidated, acquired or merged in terms of theguidelines issued by the CBSL subject to conditions specified inthe guidelines issued by the CGIR, shall continue to be deducted,if it would have been claimed under section 32 prior to suchconsolidation, acquisition or merger, notwithstanding anythingto the contrary in any other provision of IRA, but subject to theprovisions of section 32(b), from the total statutory income ofthe respective bank, financial institution or leasing company asa result of such consolidation, acquisition or merger.
(e) Qualifying payments
v Any donation to the National Kidney Fund is a qualifyingpayment.
v The cost of acquisition or merger, for the purposes of qualifyingpayment, in relation to financial sector consolidation isredefined to be
“any expenditure incurred by any bank, any financial institutionor any leasing company, by way of cost of acquisition or mergerof any other bank, any other financial institution or any otherleasing company, where such cost is ascertained by consideringall the facts on a case by case basis in accordance with theguidelines issued by the CBSL, in the manner specified by theCGIR for that purpose”.
Page 10.7
The deductibility of such qualifying payment in any YA shouldnot exceed 1/3rd of the assessable income or Rs.300 Mn;whichever is higher. The balance, if any, not deductible in thesame YA can be carried forward and deductible from theassessable income of such bank or other company for the nextsucceeding YA and so on subject to the same conditions.
(f) Extension of 16D and 17A - Section 48D has been introduced toextend the applicability of section 16D and 17A as follows:
“Notwithstanding the period specified in section 16D or paragraph(b) and (c) of subsection (2) of section 17A to complete investmentand to commence the commercial operations by any newundertaking which has been approved by the Board of Investment ofSri Lanka by entering into an agreement under section 17 of theBoard of Investment of Sri Lanka Law, No. 4 of 1978 which providesa tax holiday under section 16D or section 17A of this Act, if theapproval of the Board of Investment was granted prior to October31, 2014 and the company which invested in such undertaking isunable to complete the required investment prior to April 1, 2015and to commence commercial operations prior to April 1, 2016 dueto any practical reasons depending on the nature of the business,such period shall be extended up to April 1, 2018, if theCommissioner-General is satisfied that the nature of the activitiesengaged in by such new undertaking are only activities qualifiedunder section 16D or section 17A and the Board of Investment ofSri Lanka confirms , on request made by the investor, that thereasons for such extension is justifiable and acceptable byexamining the status of the progress of such new undertaking.”
(g) Reduced rates - For companies engaged in the manufacturingactivities specified, a conditional relief has been offered by way ofrate reduction (half the applicable rate or other rate reductions)under sections 59I, 59J 59K, 59L and 59M respectively.
(h) Deemed dividend tax - Any new undertaking (not formed bysplitting up or re-construction of an existing undertaking) andcommenced on or after April 1, 2015 for the manufacture ofproducts for export with a minimum investment of USD 2 Mn (orequivalent in any other currency) will be exempted from deemed
Page 10.8
dividend tax which is payable at the rate of 15% under the abovesection.
(i) Dividends not forming part of total statutory income - Section 63has been amended further to specify where such income forms partof trade profits (not from the source as dividend), what does notform part of the total statutory income is the net income fromdividends.
(j) Fees for technical services under section 94 and withholding taxunder section 95 - Any fees for technical service paid by a personresident in Sri Lanka to a person out of Sri Lanka has been madechargeable to income tax in Sri Lanka (subject to any provision of aDouble Tax Agreement in force), and such fees paid has been madesubjected to a withholding tax at 20%.
(k) Electronic communication - The Minister may, on therecommendation of the CGIR make regulations for the purpose ofauthorizing or facilitating the use of electronic communications orelectronic records in respect of matters specified in section 8 of theElectronic Transactions Act, No. 19 of 2006.
(l) Remuneration to employees - Consequent to the increase ofqualifying payment deduction up to Rs. 250,000/- per annum, onaccount of employment income, PAYE tax tables have beenmodified to reflect such change.
Accordingly, the tax deductible limit applicable to employees whoare resident or citizens will, effective from April 1, 2015,commence at Rs. 62,500 (on monthly basis) or Rs. 750,000/- (onannual basis).
With regard to non-citizen employees who are not residents, suchamount would be Rs. 20,833/- (on monthly basis) or Rs. 250,000/-(on annual basis)
(m) Income tax deductions from interest paid by banks or financialinstitutions - The provisions relating to income tax deduction, atsource, from the interest paid by any bank or financial institution onany deposit made therein has been modified effective from April 1,
Page 10.9
2015. Accordingly, (subject to any specific exemption on interest,provided)
v The rate of income tax deduction has been fixed at 2.5% of theinterest paid or credited to any individual, partnership orcharitable institution, irrespective of the size of income of thedepositor
v The rate of income tax deduction has been set at 8% of theinterest paid or credited to anybody of persons (subject to anyspecific exemption on interest, provided)
v The requirement for tendering a declaration to the respectivebank or financial institution (that was applicable for individual orcharitable institutions) has been dispensed with
v Tax deducted as above, from the interest paid to any personother than a company will be a final tax (i.e. there will be nofurther tax). However, withholding tax deducted from anyinterest paid or credited to any company will not be a final tax.
v The provisions to apply for directions under section 133 (to anyindividual or partnership) or 135 (to any person or partnership)were closed.
(n) Registration of persons – Withholding tax return furnished hithertoon a monthly basis has been changed to a quarterly basis.
(o) Assessment and additional assessments - In relation to transferpricing cases, the application of time bar provisions for makingassessments has been made not earlier than a period of 5 yearsfrom the date of receipt of the relevant return.
(p) Regulations - A provision has been included under section 212 (2)of the IRA, empowering the Minister to issue –
v Guidelines for the computation of the quantum of qualifyingpayment, in the case of an acquisition or merger of any bank offinancial institution, or a leasing company, so that a tax neutralposition could be continued
Page 10.10
v Rules and guidelines for the implementation of the use ofelectronic communication or electronic records in relation tothe Acts administered by the CGIR, as and when required.
(q) Rates
v Second Schedule
Ø With regard to unit trust management companies, theapplicability of a reduced rate of 10% has been limited tosuch part of taxable income from the management of therespective unit trust.
Ø It has been made clear that for any YA commencing on orafter April 1, 2014, the concessionary rate of 12% is notapplicable to companies engaged in the manufacture of anyarticle or the provision of any service. However, suchcompanies will be entitled to the same concessionary rate of12% under section 59B of the IRA, depending on the annualturnover.
v Fourth Schedule - Fees for technical services paid or credited toany person or partnership out of Sri Lanka is also brought underthis schedule, so that tax could be withheld at 20% (in theabsence of lower rate under the Double Tax Agreement ordetermined by the CGIR).
v Fifth Schedule - Item 46 of the Fifth Schedule applicable toindividuals (who are citizens) providing professional services asreferred to in section 59F has been removed, and themethodology of tax computation has been embedded to thatsection itself.
Page 10.11
10.2 Value Added Tax (Amendment) Act, No. 11 of 2015
(a) Rate - The rate of VAT was reduced from 12% to 11%. This iseffective from January 1, 2015.
(b) Threshold - Threshold to register for VAT was increased from Rs. 12Mn (or Rs. 3 Mn per quarter) to Rs. 15 Mn per annum (or Rs. 3.75Mn per quarter).
Registration threshold for VAT on financial services has also beenamended to reflect the above.
(c) Wholesale and retail trade
v Threshold - The turnover threshold for a wholesale or retailtrader to be liable to VAT has been reduced from Rs. 250 Mn toRs. 100 Mn for any period of three months.
v Calculation - In ascertaining the liability threshold of wholesaleor retail trade, the value of total supply of goods is theaggregate of the following;
Ø Wholesale and retail sale of such company/business.
Ø Wholesale and retail sale by the other companies in thegroup of companies engaged in the business of wholesaleand retail trade.
Ø Businesses engage in wholesale or retail trade, having anydirector or partner in common.
v Deemed VAT liability - In the case of persons engaged inwholesale or retail trade, for the purpose of calculating the 25%deemed exemption, the value of supply of the following goodscan be excluded.
Ø Locally produced fresh milk [with effect from January 1,2015]
Ø Locally grown fruits and vegetables or locally produced rice[with effect from November 1, 2015].
Page 10.12
The above amendment should result in a reduction of theoverall cost of VAT, which these businesses absorbed upuntil now.
(d) Leasing
v Treatment of leasing - Consideration received on transfer of aleased good at the termination of a lease exceeding 10% of totallease value had previously been considered as a separatesupply. This has now been removed and the total considerationreceived from such transfer will be considered as lease rental.Hence, VAT will be applied accordingly on such receipt.
v Financial services - The definition of financial services for thepurpose of VAT on financial services has been extended toinclude leasing facilities, if such agreement is entered into on orafter October 25, 2015.
v Exemptions - The following goods and services have beenexempted from VAT.
Ø The supply or import of
§ Agricultural tractors or road tractors for semi-trailers.
§ Ethyl alcohol imported or manufactured and supplied asa by-product which is liable to customs duty and Cess onimportation or Excise Duty on manufacture of suchproducts.
Ø Supply of
§ Provision of leasing services, if such agreement isentered into on or after October 25, 2015. This hasbeen included in the scope of VAT on FS.
§ The supply, lease or rent of residential accommodationis exempt from VAT other than such supply made bycertain specified projects. Projects which areexclusively for residential accommodation were
Page 10.13
excluded from the above exemption. This has beenamended to exclude projects partially relating toresidential accommodation (i.e., mixed projects) fromthe exemption.
§ Supply of any imported article which are subject toSpecial Commodity Levy if sold without any processing.(Previously, this exemption was limited to suppliesmade by the importer himself.).
§ Locally manufactured coconut milk with effect fromNovember 1, 2015.
Ø Import of
§ Samples worth not more than Rs. 50,000 are exemptedsubject to conditions. Originally, this exemption waslimited to samples worth Rs. 25,000 only.
§ Machinery, equipment or spare parts imported by SriLanka Ports Authority to be used exclusively within theports of the Sri Lanka Ports Authority.
Ø Import and supply [with effect from October 25, 2014) of -
§ Any motor vehicle (specified HS codes) liable to Excise(Special Provision) Duty on importation or any motorvehicle liable to the same duty on manufacture on suchvehicle.
This exemption is extended to vehicles imported ormanufactured on or before October 24, 2015 andremain unsold.
§ Cigarettes (specified HS Codes) liable to Excise (SpecialProvision) Duty and Cess on the importation ormanufacture of the same.
This exemption is extended to cigarettes imported ormanufactured on or before October 24, 2015 andremain unsold.
Page 10.14
§ Liquor (specified HS Codes) subject to Custom Duty andCess on the importation or subject to Excise Duty onmanufacture of the same.
This exemption is extended to liquor imported ormanufactured on or before October 24, 2015 andremains unsold.
10.3 Nation Building Tax (Amendment) Act, No. 12 of 2015
(a) Threshold – The threshold to be liable to NBT has been increasedfrom Rs. 12 Mn per annum (or Rs. 3 Mn per quarter) to Rs. 15 Mnper annum (or Rs. 3.75 Mn per quarter).
(b) Business of real estate – The business of real estate andimprovements thereof has been brought within the scope of NBT byextending the definition of “service” to cover business of real estateand improvement thereon.
Accordingly, the value of such service liable to NBT shall becalculated by removing the value of land and open market value ofany improvement on such land as at March 31, 1998, from the valueof the supply.
(c) Wholesale and retail sale by an importer – The following items havebeen removed from NBT liability on wholesale or retail sale by animporter, with effect from October 25, 2014.
v Any motor vehicle (specified HS codes) liable to Excise (SpecialProvisions) Duty on importation.
This exemption is extended to vehicles imported on or beforeOctober 24, 2015 and remain unsold in stocks.
v Cigarettes (specified HS Codes) liable to Excise (SpecialProvision) Duty and Cess on the importation.
This exemption is extended to cigarettes imported ormanufactured on or before October 24, 2015 and remainunsold in stocks.
Page 10.15
v Liquor (specified HS Codes) subject to Customs Duty and Cesson importation.
This exemption is extended to liquor imported on or beforeOctober 24, 2015 and remains unsold in stocks.
(d) Tax credit for manufacturers - Tax credit carried forward as anadvance tax payment by manufacturers, has been restricted to beset off only against the NBT liability arising from the business ofmanufacturing.
(e) Exemptions
v The following articles have been included under exceptedarticles;
Ø Samples imported in relation to a business worth not morethan Rs. 50,000 are exempted subject to conditions as maybe set by Director General of Customs. Originally, thisexemption was limited to samples worth Rs. 25,000 only.
Ø Machinery or equipment (specified HS codes) imported orpurchased locally generating electricity by the CeylonElectricity Board (CEB), or any other institution entered intoan agreement with CEB.
Ø Machinery, equipment or spare parts imported by Sri LankaPorts Authority to be used exclusively within the ports of theSri Lanka Ports Authority.
Ø Any motor vehicle (specified HS codes) liable to Excise(Special Provision) Duty on importation or any motor vehicleliable to the same duty on manufacture of on such vehicle.
This exemption is extended to vehicles imported ormanufactured on or before October 24, 2015 and remainunsold in stocks.
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Ø Cigarettes (specified HS Codes) liable to Excise (SpecialProvision) Duty and Cess on the importation or manufactureof the same.
This exemption is extended to Cigarettes imported ormanufactured on or before October 24, 2015 and remain instocks.
Ø Liquor (specified HS Codes) subject to Custom Duty andCess on the importation or subject to Excise Duty onmanufacture of the same.
This exemption is extended to liquor imported ormanufactured on or before October 24, 2015 and remainsin stocks.
v The following services have been included under exceptedservices;
Ø Provision of leasing facilities in respect of movableproperties under finance lease agreements entered intoprior to October 25, 2015. (In effect, the exemption givenfor leasing of movable properties has been closed for anyagreement signed after October 25, 2015).
Ø The business of real estate, being construction and sale ofresidential accommodation, if the value of the project is lessthan USD 10 Mn or its equivalent.
