Preamble
His Excellency the President presented the Budget for 2011 as Minister of Finance.
The Budget proposals were a distinct departure from previous annual budgets in that they focused on the basic relevant tax regime.
Several nuisance levies that had lead to onerous requirements on the same taxed entity have been removed.
There is now an emerging tax structure that is likely to bring into reality the long awaited promise that the Sri Lankan economy will emerge as vibrant and will provide opportunities to the members of the younger generation to excel as equals with the best around the world.
22 November 2010
Table of Contents
Income Tax Economic Service Charge Value Added Tax Nation Building Tax Customs Duty Excise Duty Miscellaneous Taxes & Regulations
Income Tax
Determination of Business Profits – Deductions
Proposals provide for the following costs to be claimed when determining the tax profits from business. Changes are to come into force from 1st April 2011.
Nature of Claim
Proposal
Prevailing
Comment
Depreciation allowance
Plant & Machinery
33 1/3 %
12 1⁄2 %
The accelerated depreciation rates would grant tax payers cash flow benefits.
The new rates of tax apply to assets acquired after 1st April 2011.
Depreciation allowance
New building constructed for commercial use
10 %
6 2/3 %
The new rate is to apply to buildings constructed after 1st April 2011.
Proposal
Prevailing
Comment
Nature of claim
Research expenditure
Allow a double deduction for research conducted within Sri Lanka through an institution established for research purposes.
Research expenditure falling within the definition of Section 25 (1) (i) is an allowable expense in determining the profit or income.
Proposal seeks to intensify corporate that improve processes.
Listing Expenses
Deductible subject to a limit of 1% of the value of IPO.
No deduction as considered to be capital in nature.
Proposal seeks to develop the capital market.
Unabsorbed VAT input credit as at 31/12/2010
␣ on revenue expenditure
␣ on capital expenditure
1/4 deductible
Considered part of the capital asset cost and entitled to capital allowance.
No relief
No relief
Seeks to grant relief to VAT unrecoverable.
It is most likely that adjustment would be made over the useful life of the asset.
Corporate Taxation Determination of Business Profits Revisions to Disallowable Expenses
Expense
Proposal
Prevailing
Comment
Advertising Expenses
It is proposed to restrict disallowance on advertising to 25%
Currently, 50% of advertising expenditure is disallowed except in relation to advertising outside Sri Lanka and incurred solely in relation to;
␣ Export trade or,
␣ The provision of services for payment in foreign currency, for which a deduction was granted in full.
Proposal is to harmonize tax base to net profits and it is presumed that the current exclusions would continue.
Foreign Travel Expenses
Foreign travel expenses are to be allowed in full subject to same being incurred in the production of income. However, aggregate expenditure on foreign travel and foreign training being restricted to 2% of the previous year’s statutory income from trade or business.
Foreign travel expenses were deductible if it was incurred solely in connection with;
␣ Promotion of the export trade
␣ Provision of any services for payment in foreign currency
␣ Promotion of tourism
It is not clear whether the cost would be deductible if a business suffers a trade loss in the previous years.
Expense
Proposal
Prevailing
Comment
Foreign Training
Foreign training expenses are to be allowed in full subject to the aggregate expenditure on foreign travel and foreign training being restricted to 2% of the previous year’s statutory income from trade or business.
Currently foreign training expenditure is deductible if;
␣ Directly relevant to the duties performed by such employee before the commencement of such training
␣ Essential for upgrading the skills or performance of such employee, in such trade or business and
␣ Necessary for improving the efficiency and
performance of such trade or business.
In the event of a business loss in the previous year, treatment of deductibility of costs is to be clarified.
Management Fees
Ceiling on deductibility of management fees paid to be limited to higher of
␣ Rs.2Mnor1%of the turnover
whichever is less, or
␣ Amount determined by CGIR as
reasonable.
Currently, ceiling prevails at the higher of
␣ Rs.1Mnor1%ofthe turnover whichever is less
or
␣ Amount determined by CGIR as
reasonable.
Relief has been provided but may not be sufficient to cover cost currently being charged on companies.
Expense
Proposal
Prevailing
Comment
Tax borne by Employer
Tax on the employment income borne by the employer on behalf of the employee is to be disallowed
Current tax law does not specifically disallow same hence it is claimed as a cost of employment.
It seems that the indirect income tax borne by the employer is being considered as a prescribed levy
Nation Building Tax
NBT cost is to be allowed in full.
Deductibility is restricted on 1/3rd of NBT.
This removes the current disallowance on cost.
Income Tax
Exemptions – Tax Holiday for New Investments
It has been proposed to grant a five year tax holiday to any company which carries on a new undertaking, with a minimum investment of not less than US$ 5,000 and not more than US$ 10 million or its equivalent in rupees in such activities as are specified by the Minister from time to time by order published in the gazette having regard to the development of the national economy. Prior approval is to be obtained from the CGIR.
Exemption – Foreign Exchange Earnings Proposal
It is proposed to extend the current exemption applicable to profits earned in foreign currency on any service provided to a person or partnership outside Sri Lanka. The said exemption would not apply to commission, discounts or similar type of receipts earned in foreign currency for activities carried out in Sri Lanka.
Prevailing
Currently the said profits are exempt in terms of section 13 (dddd) up to 31st March 2011.
Exemption – Foreign Exchange Earnings from Supplies to Headquarters of foreign buyers in Sri Lanka
Proposal
It is proposed to exempt foreign exchange earnings from supply of textiles, leather products, footwear and bags to foreign buyers who establish their headquarters in Sri Lanka for management, finance, supply chain and billing.
Exemption – Industry Exemptions
Fishing & Agricultural Seeds
It is proposed to exempt following sectors for a period of five years commencing from the year of assessment 2011/12.
␣ Fishing ␣ Cultivation and primary processing of agricultural seeds or planting material
Prevailing
Fishing – tax at lower rate of income tax – 15% Cultivation and primary processing – exempt up to the year of assessment 2010/11
Unit Trust/ Mutual Funds
It is proposed to exempt profits from investment in listed debentures and equity.
Prevailing
The profits and income arising on sale of listed debentures and equity is currently exempt from income tax. Dividend income remains exclude from tax. Interest income on listed debentures is taxable.
There is ambiguity as to the activity covered by the exemption. ie whether to cultivation and primary processing in one combined activity or and two separate activities being, cultivation and primary processing.
The proposal seeks to exempt debenture interest from tax.
Income Tax
Industrial Exemptions
It is proposed to exempt following institutions from income tax from all sources of income with effect from 1st April 2011.
Prevailing
These institutions are currently liable to income tax.
Institution
No. of years
Sri Lankan Air Lines Ltd
10
Mihin Lanka (Pvt) Ltd
10
Ceylon Electricity Board
5
National Water Supply and Drainage Board
5
Ceylon Petroleum Corporation
5
Sri Lanka Ports Authority
5
These institutions will be required to pay a dividend of 25% on annual gross profits to the Government
Income Tax Business Profits Amendments to prevailing exemptions – Administrative Clarifications
Section 17- Areas of exemption to be specified. Sections 24C and 24 D – Exemption limited to profits from specified business.
Sections 21 & 21A – cut off date extended from March 31, 2009 to March 31, 2010 to comply with the qualifying criteria.
Co- operative Societies Proposal
It is proposed to extend the income tax exemption to co-operative societies registered under the provincial council statutes.
Prevailing
Co – operative societies registered under the co- operative societies Act No.5 of 1972 are exempt from income tax, thereby implying that those registered under the provincial council statutes are not exempt.
Income Tax
Qualifying Payment Relief
Individual
Qualifying Payments relief available to individual are being rescinded as follows.
Recipient
Proposed
Prevailing
Comments
Of Payment
␣ Approved Charities
␣ Government and other specified institutions
␣ Expenditure incurred by any person included in the development plan of the Government of Sri Lanka
␣ Life and Medical insurance premia
␣ Donation to specified institutions
␣ Production of Films
␣ Expenditure incurred in repayment of a housing loan or capital of any approved housing loan.
Claims to approve charity established for the provision of institutional care for sick and needy.
Claimable
Claimable
Claimable
Premia paid for a special health insurance schemes which cover incurable sickness etc
To be withdrawn
To be withdrawn To be withdrawn
Claimable
Claimable
Claimable
Claimable
Claimable
Claimable Claimable
It is presumed that prevailing upper limits remains applicable
Income Tax
Qualifying Payment Relief
Corporate
Qualifying Payments relief available to corporate are being rescinded as follows.
Recipient
Proposed
Prevailing
Comments
Of Payment
␣ Approved Charities
␣ Government and other specified institutions
␣ Expenditure incurred by any person included in the development plan of the Government of Sri Lanka
␣ Expenditure incurred in a certain specified industrial
undertaking
␣ Donation to specified institutions
␣ Production of Films ␣ Expenditure incurred in
construction of a cinema
␣ Expenditure incurred in upgrading of a cinema
␣ Undertaking for construction or sale of
houses for low income families
Restricted to payments made to approve charity established for the provision of institutional care for sick and needy.
Claimable Claimable
Claimable
To be withdrawn
To be withdrawn To be withdrawn
To be withdrawn To be withdrawn
Claimable
Claimable Claimable
Claimable Claimable
Claimable Claimable
Claimable Claimable
It is presumed that prevailing upper limits remains applicable
Income Tax
Withholding Tax
Interest income to individuals on deposits with Banks and Financial Institutions
In keeping with the increase in tax free allowance and tax slabs, the following changes to withholding of tax on interest is proposed..
Rate of final tax applicable to individuals
It was intimated that the final tax rate applicable to individuals would be revised as follows:
Proposed
Prevailing
Rs. Up to 500,000 500,000-1,500,000
1,500,000 and above
% Nil 2.5
8
Rs. Up to 300,000 300,000-1,000,000 1,000,000 and above
% Nil 2.5
10
Proposed
Prevailing
8%
10%
Income Tax
Withholding Tax
Exemption granted on interest payable to non-resident persons
Payment of interest income which is exempt from income tax in terms of the Inland Revenue Act is to be exempted from Withholding Tax.
Prevailing
Section 95 of the Act requires a deduction of withholding tax on any interest which is payable to a non-resident even though such is exempt from tax in the hands of the recipient. Interest could be remitted free of tax only with the approval of the CGIR.
Comment
This exemption would reduce the administrative burden of obtaining a direction.
Income Tax
Withholding Tax on Specified Fees
Proposal
It has been proposed to abolish withholding on specified fees effective 01.04.2011.
Prevailing
Withholding of 5% on specified fee is applicable to payments made for services rendered in the course of any business, profession or vocation or other activities of an independent character or on the purchase of articles via a tender or quotation procedure. Construction fees were liable to tax at 1%.
Comment
This proposal seeks to simplify the tax system by removing the burden on the tax payer of administering a Withholding Tax.
Income Tax
Withholding Tax on Government Securities / Corporate debt securities
Proposal
It has been proposed to impose withholding tax on corporate debt securities.
Comment
Currently withholding Tax is similar, hence it is unclear as to what the proposal seeks to introduce.
Income Tax
Corporate Tax
Rates of tax
Proposals intimated the following changes to rates of tax which are to come into force for 1 April 2011.
Nature of Profit
Proposal
Prevailing
Profits and income from sale and Manufacture or import of liquor or tobacco products
40%
35%
Standard rate of tax
28%
35%
Quoted companies
28%
33 1/3%
Public corporations and Government owned business undertakings
28%
30%
Profits on the receipt of any fund setup or funds received by a Non Governmental Organisation
28%
30%
- Banks and other financial institutions, including off –shore banking activities – Finance companies – Leasing
- Insurance and – Other specialized banking services
28%
35% Off-shore banking – 20%
Venture capital companies
12%
20%
Petroleum exploration
12%
15%
Entertainer or artist
12%
15%
Taxable income not exceeding Rs. 5Mn (Not applicable to any company in a group)
12%
15%
Profits from Export, tourism, construction
12%
15%
Profits representing sales of any product having a domestic value addition of 65% and Sri Lankan brand name
Maximum 10%
35%/15%
Clubs and association
10%
20%
Undertaking for operation and maintenance of facilities for storage
10%
35%
Local software development or supply of labour
10%
35%
Agricultural undertakings –after section 16 exemption period
10%
Exempt
SME’s
10%
15%
Partnership Tax
8%
10%
Income Tax Deemed Dividend Tax
Reduction in requirement to distribute dividends
It has been proposed to reduce the distribution requirement to 10% of distributable profits.
Prevailing
Currently a corporate is required to distribute 25% of distributable profits to avoid payment of the deemed dividend tax.
Comment
It was intimated that the intent of the proposal is to encourage investments by corporate.
Income Tax
Charitable Institutions
Withdrawal of tax exemption on business profits.
Exemption available to specified business profits of charitable institutions are to be withdrawn.
Prevailing
Under current provisions profits of business carried by a charitable institution is exempt from tax if such profits are solely applied to a charitable purpose of the institution and,
(a) either the business is carried on in the course of the actual carrying out of a primary purpose of that institution of the work connection with the business is mainly performed by the beneficiaries of the institution, or
(b) such institution receives grants from the Government of Sri Lanka and is approved by the Ministry for the purpose of this paragraph, and the business is of casual nature.
Defining Charitable Purpose.
It is proposed that charitable purpose which determines whether an institute is a charitable institute or not would be amended to incorporate the following,
- excluding educational activities carried out by any institute established under the Companies Act or for business purposes. And,
- adding activities carried out by institutions engaged in activities of environmental protection and eco friendliness.
Accordingly a “charitable purpose” would read as being,
“ a purpose for the benefit of the public or any section of the public in or outside Sri Lanka, of any of the following categories –
(a) the relief of poverty.
(b) the advancement of education or knowledge, excluding educational activities carried out by any institute established under the Companies Act or for business purposes.
(c) the advancement of religion or the maintenance of religious rites and practices or the administration of a place of public worship.
(d) any other purpose beneficial or of interest to mankind, not falling within any of the preceding categories.
(f) adding activities carried out by institutions engaged in activities of environmental protection and eco friendliness.
Investment Fund Account
Proposal
It has been proposed to require for the persons engaged in the business of banking and financial services to maintain an investment fund account at the Central Bank effective from 1st April 2011. A synopsis of the operation of Investment Fund Account can be summarized as follows;
Criterion
Proposal
Mandatory Period
3 years
Time of investment
At the end of each year of assessment
Minimum amount to be invested
␣ 8% of the profits calculated for VAT on Financial Services; and
␣ 5% of the adjusted profits calculated for income tax purposes before tax
Allowable purposes for fund utilization
For the investor to grant long term loans at a lower rate of interest.
Taxation on Income from investment
Interest on investments will be exempt from income tax.
Comment
The purpose of introducing investment fund account is to transfer all tax savings arising from the current budget proposals. The Central Bank and the Department of Inland Revenue will be issuing specific regulations requiring banks to adopt low interest rates and longer term maturity for lending of these funds.
Administrative Provisions
Administrative Provisions
Time bar for raising of assessments.
It has been proposed to determine the time bar period for raising of assessments from the statutory date of filling of income tax returns.
Prevailing
Under the current provisions the time period within which an assessment could be raised commences from the end of the said year of assessment.
Recovery action against Company officials.
It has been proposed to incorporate provisions to enable the recovery of taxes from specified company officials where it is established that such officers are directly responsible for default of income tax.
Prevailing
Current provisions enable recovery action only against the tax payer or on person who hold monies/assets to his credit / on behalf.
Comment
The proposed changes would grant an Assessor a further 8 months to raise an assessment. Accordingly an assessment could now be made within a period of 2 years and 8 months from the end of the said year of assessment.
Comment
The proposal seeks to strengthen compliance with tax laws by holding decision makers of corporate accountable for the compliance with tax laws.
Income Tax
Administrative Provisions
Establishment of an Appeal Commission.
It has been proposed to establish an appeal commission constituting legal, technical and operational experts, which is to function in terms of a specified law. The Commission will hear determinations made by the Commissioner General of Inland Revenue and will also cover appeals on taxes in dispute under other statutes. The commission is required to determine appeals within 90 days.
Function of the Board of Review is to be discontinued.
Prevailing
In terms of the current law a tax payer dissatisfied with a determination made by the Commissioner General is required to appeal to the Board of Review. The Board of Review is required to determine appeal within two years from the commencement of hearing.
Collection of tax pending decision of tax court.
It has been proposed that any appeal made consequent to the determination of an appeal by the Independent Appeal Commission would require payment of the disputed tax in full. The said proceeds would be held pending the final determination of the court.
Prevailing
Currently the statute does not mandate the payment of tax. The Appeal court has the right to make an interim determination for the recovery of tax.
Comment
The proposal seeks to afford tax payers an independent and fair hearing. It also seeks to address issues experienced in the delays seen in calling up cases for hearing and the competencies of the board members to hear same. Whilst the proposal is welcome, legislation would have to consider cases currently being heard and whether the time period specified for determination of appeals is sufficient.
Comment
The proposed revision would require tax payer to settle taxes in dispute prior to the court determination.
Income Tax
Other Administrative Provisions
Maintenance of Accounts
At present a person carrying on different businesses is chargeable to tax at different rates or exempt is required to prepare, separate statements of accounts for the purpose identifying attributable to each such source. It was proposed to expand this requirement to recover different business carried on by the same person.
Accordingly, now a person having two distinctive businesses would be required to maintain separate accounts even though taxable at the same rate.
Authorised Representative
The Members of AAT (Association of Accounting Technicians) to be considered a authorized representatives
Penal provisions to Auditors/ Tax practitioners
Penal provisions are to be introduced to prosecute auditors and tax practitioners who deliberately misuse statutory provisions of any Act or regulation. The proposal is directed at “misinterpretation of any provision” We have to await the statutory application of this proposal to see, what constitute misinterpretation.
Method of Refund payment
At present refunds are issued directly to the tax payer. The proposal to credit the bank account to the tax payer directly seeks to avoid fraudulent claims.
Ambiguities or omissions
Where necessary, translation errors will be rectified in both Sinhala and English versions of Inland Revenue Act No.10 of 2006.
Employment Income
If the employment income is the only source, the PAYE tax will be the final tax and no files needs to be maintained for the employees. Existing files of such employees would also be closed.
Closure of existing personal tax files
In the case of existing files of individuals, where final tax has been deducted at source in respect of all relevant sources of income files need not be maintained further and will be cancelled. Accordingly Section 106 which requires every person to file a return will be amended to exclude such employees.
Write off of Taxes SME
Income tax, ESC, NSL, GST and obsolete taxes that whether charged or in default due to conflict, environment and financial constraints and turnover is below Rs. 100 Million will be written off provided there is due compliance in the future .
Remission afforded to NGO
The scope of the remission procedure is to be expanded to meet contemporary social needs.
Partnership Tax
The non refundable partnership tax of 10% at present does not provide for relief of the PAYE tax which is levied on salaries that form part of the divisible profit of each partner. An amendment is needed to rectify this.
Income tax Personal Tax Exemptions
Income source
Proposed
Prevailing
Employment income -
Contributions from Provident Funds
Rental value of any official bungalow provided by the Government
Motor vehicles
Motor vehicle allowance
Exempt
Exempt
Exempt
Exempt to a maximum of Rs. 50,000 p.m.
Taxed at concessionary rates
Exempt
Taxed depending on engine capacity to a maximum of Rs. 15,000 p.m.
Taxed at standard rates
Interest income to senior citizens
Exempt threshold increased to Rs. 500,000
Exemption threshold was Rs. 200,000
Emoluments earned by non- citizen individual participating in international events
Exempt
Liable at standard rates
Income Tax
Personal Tax
Withdrawal of Exemption
Proposal announced intimated the withdrawal of exemption currently applicable to employment income.
Nature of Income
Proposed
Prevailing
Comment
Emoluments of public sector employees
Income to be chargeable to tax
Exempt
Emoluments of public sector employees are to be made chargeable to tax at standard rates.
Share award / option scheme
To be made chargeable to tax
Exempt, if the share scheme is considered to be reasonable by the CGIR
The incentive which was introduced in 2007 is to be withdrawn.
Income tax Personal Tax Tax Free Allowance – Standard Proposal
Tax free allowance has been increased to Rs. 500,000 per annum and has been extended to non-residents who are citizens of Sri Lanka.
Prevailing
In terms of the current law, the tax free allowance is Rs. 300,000 and was applicable only to residents of Sri Lanka.
Tax Free Allowance – PAYE
It was proposed to grant employees falling within the PAYE scheme a tax free allowance of Rs. 600,000. This is to apply both government and private sector employees
Prevailing
Currently the tax law does not provides for a specific tax free allowance to PAYE income earners.
Comment
The proposal is to grant relief for changes made to qualifying payment credit and interest deduction which are discussed in other sections of this document.
Income Tax
Personal Tax
Individual employed under single employer
Proposal
Employment income will be taxed under the PAYE scheme and such will be the final tax. Provision for the application of directions and refunds will not be available.
Prevailing
Income from employment is chargeable to tax at standard rates giving relief to Qualifying Payment and interest deduction and credit is given for PAYE tax withheld.
Individual employed under several employers Proposal
␣ Employment income from the ‘main employer’ o Normal PAYE table will apply. PAYE tax treated as final tax.
␣ Employment income from other employments
o o
o
Tax withheld at 16%
Aggregated with other income (if any) and tax computed under normal progressive rates.
Individual entitled to a credit for tax withheld.
Prevailing
All income aggregated and taxed under normal progressive rates. Individual entitled to a tax credit for tax withheld.
Comment This has been introduced to simplify the tax administration system.
Income tax
Personal Tax
Rates of Tax
Proposed rates of tax applicable to an individual from the year of assessment 2010/2011 is as follows.
Prevailing
Tax Slab (Rs.)
Rate (%)
First Rs. 500,000
4%
Next Rs. 500,000
8%
Next Rs. 500,000
12%
Next Rs. 500,000
16%
Next Rs. 1,000,000
20%
Balance
24%
Tax Slab (Rs.)
Rate (%)
First Rs. 400,000
5%
Next Rs. 400,000
10%
Next Rs. 400,000
15%
Next Rs. 500,000
20%
Next Rs. 500,000
25%
Next Rs. 500,000
30%
Balance
35%
Comment
Tax rates were last revised via the budget for 2009. The proposal widens the slabs and also reduces income liable to tax at the higher rates significantly.
Income Tax
Personal Tax
Withholding Tax on Director’s fee
Proposed
Payments to directors in excess of Rs. 25,000 per month, is to be subject to tax at 16%.
Prevailing
Currently payments are liable to tax at 10%.
Income Tax
Personal Tax
Filing of Returns
Proposal intimated that the requirement to file tax returns would be withdrawn on individuals where the only source of income was employment income. PAYE tax deducted will be the final tax.
Prevailing
Currently an individual is not required to file a tax return if profit from employment does not exceed Rs.1, 000,000 and PAYE tax has been deducted by the employer.
Comment
The proposal seeks to reduce the administrative burden of the Department of Inland Revenue.
Economic Service Charge Synopsis of the proposed changes
Proposal
Prevailing
Exemptions
␣ Distributors as defined in the ESC Act
␣ Dealers in lottery
␣ Unit trust or mutual fund
␣ All air lines and shipping lines
␣ Small and medium enterprises
Currently liable to ESC
Threshold
Rs. 25 Mn per quarter
Rs. 7.5 Mn per quarter
Administration – Submission of returns
Annually
Quarterly – on or before the twentieth day of the month immediately succeeding the end of that relevant quarter,
Comment
The proposed changes were introduced in order to mobilize savings, promote investments in SMEs, air lines and shipping lines.
Rate changes
Turnover
Proposed
Prevailing
BOI enterprises (liable to income tax)
␣ ␣ ␣
Apparel exporters BOI trading Houses Manufacturers of textiles to apparel exporters
0.1%
0.1%
Exempt / concessionary rate or others
␣ Exempt from income tax (including tax holiday companies)
␣ During the period which losses are made
␣ Subject to tax at concessionary rates
␣ Wholesale or retail trade other than manufactured or produced by the seller (except distributors or dealers in motor vehicles or liquor)
␣ Primary conversion of any tea , rubber or coconut plantation including desiccated coconut, coconut oil or fiber, copra and sheet rubber , but excluding any conversion which produces ant alcoholic beverage.
0.25%
0.25%
1% 0.5% 0.5%
0.5 %
Commercial operations – Advertising Agents
0.5%
1%
Other (including dealers in motor vehicles, liquor, tobacco and petroleum) and turnover of businesses which are defined under the gazette notification.
1%
1%
Comments The existing rates have been simplified to four categories.
Value Added Tax
VAT Rate
Proposal
It is proposed to reduce the luxury VAT rate of 20% to 12%.As a result there will be only 2 VAT rate in Sri Lanka i.e. 12% and zero %.
Prevailing
Under Section 2 (1) of the VAT Act, the supply of goods or services or import of goods as referred to in the “fourth schedule” to the VAT Act other than goods or services chargeable with the tax at zero per centum was taxed at 18% (luxury rate) commencing from 1st January 2005. The above rate was increased to 20% with effect from. 2nd August 2005. At present the following are liable for VAT at 20%.
The supply and import of —
␣ air conditioning machines, refrigerators, dishwashing machines, washing machines, vacuum cleaners/floor polishers, kitchen waste disposers, food grinders and mixers, ovens and cookers, hair dryers/hair dressing equipment, video player (VCD, DVD), cameras, radio, casette and Music systems, television, motor vehicles, other than motor cycles, bicycles, three wheelers and passenger transport buses, lorries, trucks and any other vehicles used for the transport of goods, watches/clocks, musical instruments, equipment for games, jewellery, aerated water other than aerated water made out of
o ginger, nelli or ayurvedic plants cultivated in Sri Lanka, and liquor including ethyl alcohol and other spirits referred to in Harmonized of Commodity
description Numbers 22.07 or 22.08 for custom purposes
␣ the supply of services by hotels, guest houses, restaurants or similar institutions in so far as such services are provided for the holding of wedding receptions and other receptions, which includes the hiring of halls for the holding of wedding receptions or other receptions other than services provided for the holding of professional conferences, seminars or similar events.
Comment
This will be effective from 1st January 2011. The proposal would simplify the VAT system by elimination of multiple rates and the prevalent rule with regard to claiming of input tax. (at present only 12% could be clamed as input though VAT has been accounted at 20%.
Value Added Tax
Exemptions
Proposal
It is proposed to exempt the following;
Description
Effective
Proposed
from
a) Supply of
Telecommunication services
01/01/2011
Exempt
locally manufactured briquettes and pallets using bio mass waste
01/01/2011
Any goods ( including importation) or services to a specific project carried on, out of foreign funds or donation received by the government, as approved by the minister considering the economic benefit to the country
01/01/2011
Any goods or services by an institution set up by the ministry of defence for the rehabilitation of disabled soldiers, so far as the activities are carried out by the participation of such soldiers
01/01/2011
Locally developed software
01/01/2011
Services being receipts from re-insurance by way of commission or compensation in a insurance business
01/01/2011
Leasing facilities for: Motor coaches with seating capacity not less than 28 passengers seats and used for public transport services Lorries; or Tractors;
01/01/2011
b) the import or supply of-
01/01/2011
Coal specified under HS code no under 2701.11, 2701.12, and 2701.19;
01/01/2011
Bitumen under HS code no 2714
01/01/2011
Machinery and equipment for leather or footwear industry or manufacture of bags under HS headings codes 8453.10,8453.20,8453.80.
01/01/2011
High-tech medical and laboratory equipment under HS Codes 8479.89.10 and item under HS hading from 90.01 through 90.33
01/01/2011
Environment and tourism sectors Hybrid and Electronic vehicles under HS codes
01/01/2011
8702.10.11, 8702.10.31,8702.10.51,8702.90.11,8702.20.31,8702.10.51, 8703.21.61, 8703.21.91, 8703.22.51,8703.22.71,8703.23.51,8703.23.53, 8703.23.71, 8703.23.91, 870.23.94, 8703.24.51, 8703.24.71.and motor homes under HS Codes 8703.32.93, 8703.33.71 and taxi Meters under HS Codes 9029.10.10.
01/01/2011
Exempt
To promote international shopping items under HS Code 8516.32,8516.33,8516.50.8516.60.10, 8516.90.10, 8516.71, 8516.72, 8516.79.20, 8517.11, 8521.10,8521.90, 8527.91,8527.92, 8528.72.41, 8528.72.91, 9101.91, 9101.99, 9105.11, 9105.19, 9105.21, 9105.29, 9207.10, 8414.51.
01/01/2011
Fashion Jewellery items under HS Codes under 3926.90.70, 7018.10, 7113.11.90, 7113.19.90, 7113.20.90.
01/01/2011
Machinery and equipment for manufacture of grain mixed bakery products under HS codes Numbers 8437.10 and 8437.80.
01/01/2011
Machinery and high-tech equipment imported for the telecom industry which are specifically identified and approved by the ministry of finance.
01/01/2011
Light weight electrical and electronic items
01/06/2010
Fruit seeds
16/08/2010
Chicks under HS Codes 0105.11.20 and 0105.11.90
13/10/2010
Meat of fowls under HS Codes 0207.11, 0207.12, 0207.13 and 0207.24
13/10/2010
Eggs (in shells fresh or preserved) under HS Codes 0407.00.01 and 0407.00.90
13/10/2010
Eggs, not in shell, including egg white and egg yolks under HS Code 0408.11, 0408.19, 0408.91, 0408.99, 3502.11 and 3502.19
13/10/2010
Comments Part II of the 1st schedule of the VAT Act should be amended to provide legislative enforceability for these amendments.
Value Added Tax
Input Tax Restriction
Proposal
It is proposed to extend the present restriction of 85% of the out put tax to 100% in relation to claiming input tax against output tax.
Prevailing
In terms of Section 22 (10) of the VAT Act which was introduced with effect from 1st January 2007, claimability of VAT input was restricted to 85% of output VAT and excess if any to be carried forward and claim in the future subject to the same restriction.
Comment
The proposal would benefit the low value addition suppliers. However the proposal does not reintroduce fundamental principle of VAT as the input VAT in toto can not be claimed by the supplier.
Value Added Tax
Deductibility of unabsorbed VAT input credit as at 31st December 2010 against income tax.
Proposal
The unabsorbed input VAT credits as at 31st December 2010 be deductible against income tax as follows.;
␣ Input credit related to revenue expenditure Deduction in four equal annual installments to be set off in four years from year of assessment
2010/11 subject to the provision of Section 25, 26 of the Inland Revenue Act.
␣ Input credit related to capital expenditure
To be treated as part of the capital assets for the purpose of capital allowances
Prevailing
No provision in the IR Act to claim the unabsorbed VAT input connected to the 85% restriction.
Comment
Proposal is not clear with regard to the unabsorbed carried forward VAT inputs which will incur from 1st of January 2011. This proposal does not benefit tax payers who are exempt from income tax.
Value Added Tax
VAT Suspension Scheme
Proposal
Monitoring of the scheme to be transferred to a separate unit established under the Department of Inland Revenue.
Prevailing
Commencing from 1st January 2005, TQB and EDB was introduced as monitoring authority of the VAT suspension scheme
Comment
This would make the scheme more effective and convenient for the participant.
Value Added Tax
New Scheme of VAT Suspension
Proposal
It is proposed to introduce a special category of supply made to following persons under a scheme of VAT suspension. The scheme will be monitored by the new unit to be established under the Department of Inland Revenue to administer the VAT suspension scheme.
␣ Registered person carrying out any special project exempted under the VAT Act. ␣ Exporter of any goods or services other than supplies covered under the existing
suspension scheme ␣ Deemed exporter ␣ Person providing value added supplies to any articles to be exported.
Comment
The proposal would provide cash flow advantage to tax payers who are covered by the scheme
Value Added Tax
Optional VAT
Proposal
It is proposed to vary the rates applicable for optional VAT during a period of 12 years, change the rates applicable to optional VAT period in which the business could remain in the status of optional VAT as follows;
Prevailing
At present the tax payers whose aggregate turnover is below 3 million may opt for registration under the scheme.
Period
Rate
Registration – end of the 3rd year
2%
4th year to 6th year
4%
7th year to 9th year
8%
10th to 12th year
12%
Comment
Optional VAT Scheme does not provide for claiming of input credits and functions as similar to the turnover tax system.
Value Added Tax
VAT on Financial Services
Proposal
␣ It is proposed to reduce the applicable rate from 20% to 12%. ␣ Value addition for tax purposes to be calculated after the deduction of VAT on Financial
Service payable. ␣ To preserve uniformity the Commissioner General to issue guidelines on
o Basis of calculation of the profit liable to VAT on Financial Services o The adjustment to be made.
␣ Bi annual return and monthly payments
Prevailing
VAT on Financial Services was introduced under the Chapter III A of the VAT Act with effect from January 1, 2003 made by any specified institution which carries on a business of supplying financial service.
With effect from 1st July 2003 it was extended to any person carrying on business of supplying of financial service.
At present both returns and payment are made on monthly basis.
Comment
This proposal would reduce the tax burden in the financial service industry. The elimination of the requirement file annual return would reduce the compliance burden.
Value Added Tax
Administrative Provisions
Proposal
The following changes are proposed in relation to the VAT Administration;
␣ VAT Refunds will be directly credited to the Bank account of the tax payer
␣ 15 days refunds scheme to be removed and a suspension scheme to be introduced.
␣ A proper mechanism to cross check input credit will be introduced
␣ Provisions will be introduced to disregard the claim of refunds in case where there is no response within a reasonable time.
␣ Certain provisions applicable to income tax appeal to be extended to VAT Act as well. ␣ The principals tax liability to be imputed on the agent. ␣ 5 year time bar provision in relation to fraud and willful evasion to be removed. ␣ VAT Advance payment scheme (WHT) to be removed.
␣ A Section similar to 179 (2) of the Inland Revenue Act to be introduced in the VAT Act as Section 43 (1) – time frame for deferment of proceedings more than 30 days due to a pending appeal.
␣ Penal provisions to be introduced for o non payment VAT of self assessment basis o failure to furnish Financial VAT Return.
Nation Building Tax
Changes to the Tax Rate
Proposal
It has been proposed to reduce the Nation Building Tax from 3% to 2%. The threshold in relation to NBT reduced to Rs.500,000/- per quarter. The present restriction in the deduction of 2/3 of NBT as an income tax deductible expenditure is removed.
In relation to the following categories the applicable threshold would be Rs.12.5 Mn. per quarter:
␣ Operating a hotel, guest house, restaurant or other similar business. ␣ Local value added agricultural produce, rice based products; ␣ Local educational institutions; ␣ Supply of labour (manpower) or employment
Prevailing
NBT is currently charged at 3% and the applicable threshold is Rs.650,000/- per quarter. As per prevailing income tax law 2/3 of the NBT payable is treated as a non tax deductible expenditure.
The effective date of the above should be clarified.
Nation Building Tax
Proposal
The following categories of business which were previously exempt from NBT have been brought in to charge.
␣ Services of star hotels above the rank of three star ␣ Any person registered for optional VAT
New Exemptions
It has been proposed to exclude the following from NBT:
a) Institutions
␣ Government Institution (Departments) ␣ Sri Lanka Airlines ␣ Air Lanka Catering Services
b) Goods or Services
␣ Supply of any goods including importation or services to a specific project carried on out of foreign funds or donations received by the government as approved by the minister;
␣ Importation of raw materials and packing materials for the manufacture of ayurvedic preparation subject to the approval of relevant authority;
␣ Services provided to the port or airline in relation the international transportation; ␣ Services provided in relation to the ship building for the international market for
payment made in foreign currency; ␣ Services of sub contractors in a construction contract; ␣ Telecommunication services; ␣ Supply of locally developed software;
␣ Import or supply of following articles; - Bitumen under HS code No 2714 - Tractors
Nation Building Tax
Policy Changes on NBT
Changes in the NBT Rate
␣ Turnover of rice manufactured out of locally produced paddy is reduced to 1.5% (w.e.f. 01.07.2009 but prior to 01.04.2011)
Excepted Articles/Services for NBT
␣ Importation of gold excluded from NBT (with effect from 01.03.2010)
␣ The plant, machinery and equipment imported for the use of large scale infrastructure development projects which have been approved by the Hon Minister of Finance as beneficial for the economic development of Sri Lanka on temporary basis on condition that goods will be re-exported after the completion of work, and the services obtained from foreign consultancies in respect of these projects.
␣ Import of chicks for breeding under HS code 0105.11.10 and other chicks under HS code 0105.11.20, 0105.11.90 with effect from 13.10.2010.
␣ Export Development Rebate paid through the Department of Commerce with effect from 01.07.2010
␣ Any international event approved by the Minister of Finance (with effect from 12th May 2010)
␣ Import of foreign currency notes and HS codes 4907.00.90 (with effect from 01st June 2010)
␣ Import of chicks for breeding, other chicks meal of fowls eggs and egg yolk with effect from 13th October 2010.
Customs Duty
Proposal
Rate changes (effective 23 November 2010) ␣ Telecom / ICT/ BPO Industry
Customs duties on software have been removed. The WTO decision on the valuation of carrier media containing software for data processing equipment will be implemented.
␣ Confectionary and Bakery Products Manufacturing
Customs duty on certain raw materials used for the production of confectionary / bakery products to be removed or reduced as follows:
HS Code
Prevailing rate ( % )
Proposed rate ( % )
8517.11
15.00
Free
8517.12.90
15.00
8517.18
5.00
8517.61
15.00 or 5.00
8517.62.10
15.00
8517.62.90
5.00
8517.69
30.00 or 5.00
8528.41
5.00
8528.51
5.00
8528.61
5.00
8443.32.40
5.00
8536.69.10
30.00
8536.90.10
15.00
HS Code
Prevailing rate ( % )
Proposed rate ( % )
11.09.00
30.00
Free
2106.90.30
30.00
15.00
1302.31
15.00
Free
1302.32
15.00
Free
1302.39
15.00
Free
1302.20
05.00
Free
0404.10
30.00
15.00
1805.00
30.00
15.00
␣ Agriculture Sector
To improve agriculture through new technology and post harvest storage and transportation systems, Customs duties on related goods will be abolished/reduced while nurturing the local industries.
HS Code Prevailing rate ( % )
Proposed rate ( % )
7309.00.10 15.00 7308.90.10 30.00 Free
8479.89.40 Free
3923.10.30 30.00 15.00
8201.10 15.00 5.00
8201.20 15.00 5.00
8201.30.10 15.00 5.00
8201.30.90 15.00 5.00
8201.40 15.00 5.00
8201.50 15.00 5.00
8201.60 15.00 5.00
8201.90 15.00
5.00
␣ Health, Pharmaceuticals and Cosmetics (including Ayurvedic products)
Customs duties on naso gastric tube feeding preparations to be abolished and custom duties on certain glass and plastic bottles used for packing of pharmaceuticals and cosmetics including Ayurvedic preparations and process will be reduced.
HS Code
2106..90.96
7010.90.10
3923.30.10
␣ Vehicles assembly
Prevailing rate ( % ) Proposed rate ( % )
30.00
15.00
30.00
Free
5.00
15.00
To support vehicle assembling industry, with local value addition, Customs duty on parts and components will be reduced.
HS Code
8707.10
8707.90.90
8708.91
8708.92
Prevailing rate ( % ) Proposed rate ( % )
30.00
30.00
30.00
30.00
15.00
15.00
15.00
15.00
␣ Instruments and Apparatus for Health, Education and Scientific research Customs duly will be abolished on instruments and apparatus for health, education and
scientific research, covered under the Chapter 90 of the Harmonized System.
␣ Tourism and Construction Industry Customs duties on selected goods (such as vehicles referred to as “Motor homes”) and
raw materials goods and will be reduced.
␣ Branded Products
No import duties and VAT for internationally branded items in order to promote Sri Lanka as an attractive destination for international shopping (only liable for PAL and NBT).
HS Code
Prevailing rate ( % )
Proposed rate ( % )
6802.23
30.00
5.00
6802.91.10
30.00
5.00
7214.10.90
30.00
15.00
7214.91.10
30.00
15.00
7214.91.20
30.00
15.00
7216.21
30.00
10.00
3903.90.10
Free
5.00
3905.21
15.00
5.00
3906.10.10
15.00
5.00
3907.50.90
15.00
5.00
8703.32.93
30.00
15.00
8703.32.94
30.00
15.00
8703.32.95
30.00
15.00
8703.33.71
30.00
15.00
8703.33.79
30.00
15.00
HS Code
Prevailing rate ( % )
Proposed rate ( % )
8516.32
30.00
Free
8516.33
8516.50
8516.60.10
8516.90.10
8516.71
8516.72
8516.79.20
8517.11
15.00
8521.10
8521.90
8527.91
30.00
8527.92
8528.72.41
15.00
8528.72.91
9101.91
Free
9101.99
9105.11
30.00
9105.19
9105.21
9105.29
9105.91
9105.99
9207.10
15.00
8414.51
30.00
␣ Electric and Highbred Electric Vehicles
To reduce the cost of fuel and damage to the environment, use of electrically operated vehicles and highbred electric vehicles will be encouraged by reducing prevailing Customs duty to a lower duty, on all such vehicles covered within the Chapter 87 of the Harmonized System as follows.
␣ Depreciation table for used motor vehicles
The depreciation table for the used motor vehicles of HS headings 87.01, 87.02,87.03, 87.04 and 87.11 will be revised as per the WTO Valuation Agreement.
Proposed
Prevailing
15%
30%
15%
15%
5%
zero
Period of Use
Depreciated FOB value
Proposed
Prevailing
HS Code 87.03
HS Codes
87.01,87.02,
87.04 and 87.11
Less than or equal 6 months
90%
Nil
Nil
6 months to 1 year
80%
90%
90%
1 year to 1.5 years
75%
80%
80%
1.5 years to 2 years
70%
80%
70%
2 years to 2.5 years
65%
75%
65%
2.5 years to 3 years
60%
75%
60%
3 years to 3.5 years
55%
70%
55%
3.5 years to 4 years
50%
60%
50%
4 years to 4.5 years
45%
55%
50%
4.5 years to 5 years
40%
50%
50%
5 years to 5.5 years
35%
40%
35%
5.5 years to 6 years
30%
40%
30%
40%
25%
6 years to 6.5 years
40%
25%
6.5 years to 7 years
40%
25%
Over 7 years
␣ New Exemption
Imports of goods to a specific project carried on, out of foreign funds or donations received by the Government as approved by the Minister giving regard to the economic benefit to the country
␣ Negative list The duty free imports on concessions granted by BOI agreements will be applicable only if local supplies of the following are unable to meet the required quantities.
- Cement - Asbestos Sheets - Spare parts for Motor Vehicles - Wires & Cables - PVC Pipes & Fittings - Paints - Furniture including pantry cupboards - Steel - Tiles (Floor, wall & roof) - Granite - Electrical Fittings - Aluminum Extrusion - Lubricants
␣ Tariff Reductions under Free Trade Agreements
The tariff reductions under the Free Trade Agreements entered into with Pakistan and South Asia Free Trade Agreement (SAFTA) will take effect from 23 November 2010.
Modernization of Customs
Upgrading of systems & facilitation of operations
Proposal
The Customs has initiated an project to upgrade its existing ICT system to the advanced version of the ASYCUDA World software package. This system is expected to introduce the following administrative changes,
␣ Reduction in the number of copies of CUSDEC’s from 5 to 2 in order to minimize the high transaction costs
␣ As a part of the new features in the aforesaid software, it is proposed to introduce the cargo accounting function which was abandoned sometime back. A centralized electronic copy will be shared among various customs divisions so that shipping agents are not required to submit hard copies to each customs office.
␣ Reductions in the number of visits required to be made to the Customs
␣ Electronic Data sharing of Customs data with the Census & Statistics Department and other government institutions. This is expected to reduce the frauds taking place in VAT refunds and vehicle registration.
In additions the following action plan is proposed in facilitating the operations at Customs,
␣ Minimize the time for import clearance by implementing a risk criteria formulated, based on cargo intelligence techniques in order to ensure that violations of such criteria will be examined whilst allowing those complying to clear up faster.
␣ Introduction of a simplified procedure to register individuals with the Customs Computer System
␣ Using ICT to further reduce the forgeries in import cargo clearance process
␣ Introducing Electronic Payment Facility for CUSDECS
␣ Reception of electronic regulatory approvals
␣ An electronic reception ( a web based system) to transmit duty waivers granted by the Treasury to the Customs
␣ Introduction of exclusive customs bonded areas. To establish this area a designated geographical zone will be set – up to deposit import cargo without paying duties and thus will result in lowering costs incurred in establishing bank guarantees for bonded cargo. These bonded warehouses will introduced with electronic communication and monitoring systems for effective management and flow of bonded goods.
Comment
This software package is primarily aimed at developing an effective and efficient customs administration which is essential to the welfare of any country. This system will fast track the customs clearance and will combat any fraud, and illegal trafficking of prohibited and restricted goods.
This system will provide vital statistics on foreign trade essential for economic planning and encourages international trade.
Source:- http://www.asycuda.org/programme.asp
Excise Duty
Proposal – Excise (Special Provisions) Act No. 13 of 1989
␣ Excise Duty rates have been revised to take into consideration the removal of Regional Infrastructure Development Levy (RIDL) and Social Responsibility Levy (SRL) on imports
␣ The concessions given to public sector employees have been published in Gazette Order bearing number 1680/25 dated 19 November 2010
Prevailing
Section 3 of the Excise (Special Provisions) Act No. 13 of 1989 imposes Excise Duty on every article manufactured or produced in Sri Lanka at rates published in Gazette Orders from time to time.
Goods purchased from Custom Duty free shops are not liable to the duty. The Minister has the power to grant exemptions from Excise Duty by Order published in the Gazette.
Comment
This revision of Exchange Duty rates is to compensate for the erosion of revenue due to removal of RIDL and SRL on imports.
Proposal – Excise Ordinance
␣ Excise duty rates applicable under Section 22 (1) of the Excise Ordinance have been revised as follows:
The new rates have been notified by Gazette Order bearing number 1680/23 dated 19 November 2010 (Effective 23 November 2010)
␣ Revisions have been made to License fees imposed under Sections 25 and 32 of the Ordinance.
The new rates have been notified by Gazette Order bearing number 1680/24 dated 19 November 2010 (Effective 23 November 2010)
␣ Manufacture, Possession and Sale The following amendments to be made to Section 15 (b) of the Excise Ordinance: “No toddy producing tree shall be tapped except Kitul & Palmyrah.”
Prevailing
Duties on excisable articles are imposed by Section 22 (1) of the Excise Ordinance (Chapter 52) by resolution from time to time at different rates depending on the place where the article is removed for consumption. The Ordinance broadly relates to Intoxicating Liquor and Intoxicating Drugs.
Presently Section 15(b) of the Ordinance does not exempt Kitul & Palmyrah.
Section 32 read with Section 25 of the Excise Ordinance grants power to the Minister to make rules for the purpose of carrying out the provisions of the Ordinance. Furthermore, it grants the Minister the power to issue notifications declaring any such change of rules. Accordingly, licenses, permits or passes are granted on the fulfillment of the criterions as mandated by law.
Description
Prevailing
Proposed
Molasses, Palmyrah, Coconut and Processed Arrack
Rs. 710 per proof litre
Rs. 813 per proof litre
“Foreign” spirits – country made
Rs. 840 per proof litre
Rs. 953 per proof litre
Malt liquor (absolute strength less than 5%)
Rs. 63 per litre
Rs. 80 per litre
Malt liquor (absolute strength more than 5%)
Rs. 79 per litre
Rs. 96 per litre
Comment
The increase in duty rates on alcohol is a proposal witnessed in almost every year.
Ports and Airport Development Levy
Proposal
It has been proposed to exempt the following from liability to PAL
o imports of goods to a specific project carried on our carried out of foreign funds or donations received by the Government as approved by the Minister giving regard to the economic benefit to the country
o International events approved by the Minister of Finance to be exempt from all taxes other than Income Tax (namely Customs Duty, VAT, NBT, Cess ,PAL, SRL, Excise Duty and RIDL with effect from 12 May 2010
o Import of foreign currency notes under HS Codes 4907.00.90 to be exempt from VAT, PAL and NBT with effect from 01 June 2010
o Importation of chicks for breeding under HS Code 0105.11.10 and other chicks, meat of fowl eggs and egg yolk under HS Codes 0105.11.20, 0105.11.90 to be exempt from Customs and Import Duties, VAT, SRL, Cess ,PAL and NBT on imports with effect from 13 October 2010
Prevailing
Ports and Airport Development Levy (PAL) was introduced by Finance Act No. 11 of 2002. PAL is charged on every article originating outside Sri Lanka and imported into Sri Lanka. The rates have been varying from 1% to 5% from time to time & at present the levy is 5%.
Comment
The exemptions that have been granted exemption from PAL seeks to complement exemptions proposed on most other taxes such as Customs Duty, Cess, Excise Duty, VAT, NBT etc
Cess
Proposal
Most raw materials have been exempted from Cess while the rates on certain others have been revised bearing in mind the local value added industries.
The new rates have been notified by Gazette Order bearing number 1680/25 dated 19 November 2010
Prevailing
The Minister in charge of the EDB is vested powers to impose a Cess in terms of Section 14 of the Sri Lanka Export Development Act No. 40 of 1979 with the concurrence of the Finance Minister.
An Order imposing Cess is published by way of a Gazette Notification and proceeds of the Cess is credited to Export Development Fund. The Act empowers the Cess to be charged on imports as well as exports.
The base for charging Cess is the value of the goods for the purpose of customs duty plus 10%. The rates are specified as either percentage rates or unit rates, whichever is higher.
Computation method : CIF value x Cess rate Quantity x Unit rate of Cess
Debits Tax
Abolition of Debits Tax
Proposal
Debits tax to be abolished with effect from 1st April 2011
Prevailing
Debits Tax Act No. 16 of 2002 (amended by Act No. 5 of 2003, No. 12 of 2007 & No. 17 of 2009) was introduced with effect from 19th August 2002 to impose a tax of 0.1% on debits chargeable on
␣ the total amount of the “debits” made during each calendar month against each “current account” maintained at a commercial bank or specialized bank.
␣ the total amount of the “debits” made during each calendar month against each “savings account” maintained at a commercial bank, specialized bank or a finance company.
␣ the amount realized on the “encashment of a certificatecertain accounts in Commercial Banks, Specialised Bank & Finance Companies and amounts realized by cheques, encashment of certificate of deposits, etc.
The onus of collecting this tax was imposed on the banks & financial institutions and debits not exceeding Rs. 20,000/- were considered exempt. The Act also contained other provisions of exemptions.
Returns and tax collected were to be submitted and paid each month by the respective banks or financial institutions.
The Government in 2008 collected Rs. 8.729Bn as Debits Tax and was the 3rd highest revenue generating tax.
Comments
The removal of Debits Tax is likely to promote the use of the banking system by tax payers.
Debits tax was introduced pursuant to the removal of stamp duty on certain financial transactions.
The removal of Debits tax would ease the tax burden on bank and financial institutions. Debit tax is perceived as a complicated tax.
Construction Industry Guarantee Fund Levy
Exemption
Proposal
It is proposed that an exemption be granted from the Construction Industry Guarantee Fund Levy (CIGFL) for special projects approved by the Minister of Finance.
Prevailing
At present, CIGFL is charged on every construction contractor on the contract value by virtue of the provisions of Finance Act No.05 of 2005 as amended.
CIGFL is being collected as a withholding tax at varied rates depending on the value of the contract at the time the contact fee is paid by the contractee and the levy is remitted to the Commissioner General of Inland Revenue.
Contractee issues a withholding tax certificate to the contractor to claim the credit against the CIGFL payable by the contractor.
Comment
CIGFL is charged on every construction contractor on their contract value on following basis.
Value of construction contract
< Rs.15mn Rs.15mn – Rs.50mn Rs.50 mn – Rs.150mn >Rs.150mn
Rates Applicable
Nil 0.25% 050%
1%
The proposed exemption seeks to encourage special development projects of the country.
Telecom Industry Levy
Proposal
It is proposed to remove the Cellular Mobile Telephone Subscribers’ Levy (CMTSL) with effect from 1 January 2011.
It was also proposed to introduce a levy of 20% on telecom services in substitution of the existing levies.
2% license fee on gross revenue to be introduced in substitution of license fee and cess imposed by telecommunication regulatory commission.
Prevailing
␣ Part II of the Finance Act No.11 of 2004 imposed the CMTSL at a rate of 2.5%. ␣ Finance (Amendment) Act No.37 of 2007 increased the rate to 10%. ␣ Budget Proposals 2008 extended the 10% levy to mobile wireless phones as well.
␣ Levy is computed on the value of supply of services or future services by the mobile telephone operator.
Comment
A complicated tax structure is applicable in the telecommunication industry. The proposal is to combine all such taxes by way of a telecommunication levy of 20%.
Environment Conservation Levy
Proposal
It is proposed to abolish Environment Conservation Levy (ECL) on telecommunication services. Gazette Order No.1680/38 dated 19 November 2010 has been issued for this purpose.
Prevailing
ECL is charged at 2% on the value of the services supplied by the licensed cellular phone operators licensed under Section 17 of the Sri Lanka Telecommunication Act No.25 of 1991.
An annual ECL of Rs.50,000/- charged on any transmitting tower as mentioned below, fixed in any part of Sri Lanka.
o o o
Television transmitting tower Broadcasting transmitting tower Telephone transmitting tower
However, where a single transmitting tower is used by number of institutes, each institute pays an annual ECL of Rs.25,000/-.
Comment
The effective date of the revision is to be clarified as the Gazette Order is not available at present.
Levy on Tele – dramas, Films & Television Commercials
Cable Television
Proposal
The scope of the levy will is extended to cover cable television.
Prevailing
Part II of The Finance Act No. 11 of 2006 introduced a levy aimed at improving and regulating the quality and standard of tele dramas, films and commercials produced in Sri Lanka and thereby ensuring the propagation of Sri Lankan values through such ele dramas, films and commercials. A levy is imposed on every tele drama, film or commercial made and / or filmed outside Sri Lanka.
The scope of chargeability excludes documentaries telecast in Sri Lanka, educational teledrama’s. Children’s entertainment and other prescribed categories.
Comment Header This levy is aimed at taxing the cable television operators in Sri Lanka.
Regional Infrastructure Development Levy
Proposal
The Regional Infrastructure Development Levy on import of vehicles to be removed with effect from 1 January 2011
Prevailing
Regional Infrastructure Development Levy was introduced with effect from 17 November 2006 by Act No. 51 of 2006. Originally, the levy was charged at 2.5% on importation of all motor vehicles liable to Excise Duty on the customs value on such vehicle calculated as per Schedule “E” of the Customs Ordinance and all other taxes at the point of import. Subsequently, the Act was amended by Act No. 47 of 2007 and Act No. 12 of 2008.
At present, the levy is charged on Motor Vehicles imported under specified HS Codes at three rates (i.e. 5%, 7.5% and 10%) dependant upon the cylinder capacity, seating capacity and specified weight as tabulated below:
HS Code
Motor Vehicle
Rate of
(Cylinder Capacity/ Seating
Levy ( % )
Capacity / Weight)
8703
Cylinder capacity – below 1600
05.00
8703
Cylinder capacity – 1600 to 2000
07.50
8703
Cylinder capacity – over 2000
10.00
8702
Seating Capacity – below 13
10.00
8702
Seating Capacity – 13 to 17
05.00
8702
Seating Capacity – over 17
07.50
8702
Specified weight
05.00
Comment
The removal of the levy is a part of the process of simplification of the duty structure on Importation of Motor Vehicles as well as simplification of the duty structure as a whole. With effect from 01 June 2010, the Customs Duty Surcharge of 15% was removed and excise duty was significantly reduced.
Motor Vehicle Concessionary Levy
Proposal
The concession of 25% duty waiver to individuals to be removed with immediate effect
Prevailing
Part I of the Finance Act No.11 of 2006 read with Gazette No. 1446/16 dated 23 May 2006 provides for a 25% duty waiver on the import of Motor vehicle for the following categories:
• An individual who has paid Rs.250,000 of income tax (as certified by the Commissioner General of Inland Revenue Department) for five consecutive years of assessment commencing 1st April 2000
• A primary holder of Sri Lanka Nation Building Bonds (SLNBB) who has a minimum aggregate investment of USD 50,000 or its equivalent in any other foreign currency, and
• The cost, insurance and freight value of the motor vehicle shall not exceed 20% of the value of the Sri Lanka Nation Building Bonds held by the primary holder, and such amount shall be less than USD 35,000 or its equivalent in any other foreign currency.
Comment The concession already granted will remain valid.
Registration and Transfer of Motor Vehicles
Proposal
Rates applicable for Vehicle Registration and Transfer have been revised with effect from 1 January 2011 in the following manner. The relevant Gazette will be issued under the Motor Vehicle Act No.14 of 1951.
␣ Fees levied on Registering a new vehicle (Rs.)
␣ Fees levied on ownership transfer of a vehicle o Normal Service (Rs.)
Vehicle Category
Proposed
Motor Car
5,000
Dual Purpose
5,000
Motor Coach
5,000
Motor Lorry
1,800
Four Wheel Tractor (Brand New)
1,000
Four Wheel Tractor (Recondition)
1,000
Hand Tractor (Brand New)
900
Hand Tractor (Recondition)
800
Motor Cycle
1,000
Motor Tricycle
500
Agricultural Land Vehicle
2,000
Non-Agricultural Land Vehicle
4,000
Motor Lorry – Fork Lift
4,000
Motor Tricycle Van
2,000
Motor Lorry – Prime Mover
4,000
Hearse
1,800
Motor Ambulance
1,800
Lorry Trailer
2,000
Tractor Trailer
1,000
Vehicle Category
Proposed
Motor Car, Dual Purpose, Motor Lorry, Motor Coach, Prime Mover, Non-Agricultural Land Vehicle
␣ Transfer Fee
1,500
␣ First Time Registration of Absolute Ownership
1,250
␣ Registration of Absolute Ownership Each Time Thereafter
500
␣ Registration of Mortgage
200
␣ Deletion of Absolute or Mortgage
300
Agricultural Land Vehicle, Three Wheeler
␣ Transfer Fee
500
␣ First Time Registration of Absolute Ownership
1,250
␣ Registration of Absolute Ownership Each Time Thereafter
500
␣ Registration of Mortgage
200
␣ Deletion of Absolute or Mortgage
300
Motor Cycle
␣ Transfer Fee
250
␣ First Time Registration of Absolute Ownership
1,250
␣ Registration of Absolute Ownership Each Time Thereafter
500
␣ Registration of Mortgage
200
␣ Deletion of Absolute or Mortgage
300
o One Day Service (Rs.)
Vehicle Category
Proposed
Motor Car, Dual Purpose, Motor Lorry, Motor Coach, Prime Mover, Non-Agricultural Land Vehicle
␣ Transfer Fee
3,000
␣ First Time Registration of Absolute Ownership
2,750
␣ Registration of Absolute Ownership Each Time Thereafter
2,500
␣ Registration of Mortgage
400
␣ Deletion of Absolute or Mortgage
500
Agricultural Land Vehicle, Three Wheeler
␣ Transfer Fee
1,500
␣ First Time Registration of Absolute Ownership
1,750
␣ Registration of Absolute Ownership Each Time Thereafter
2,500
␣ Registration of Mortgage
400
␣ Deletion of Absolute or Mortgage
500
Motor Cycle
␣ Transfer Fee
500
␣ First Time Registration of Absolute Ownership
2,750
␣ Registration of Absolute Ownership Each Time Thereafter
2,500
␣ Registration of Mortgage
400
␣ Deletion of Absolute or Mortgage
500
␣ Luxury, Dual Purpose, Semi Luxury Motor Vehicle Taxes
The following rates would be applicable with effect from 1st January 2011.
Proposed
Vehicle category and
Amount of Tax (Rupees)
cylinder capacity
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Luxury
Diesel – Cars Over 2500 & Petrol – Cars Over 2000
100,000
78,750
68,000
57,750
48,000
38,750
30,000
Semi Luxury
Diesel – Cars 2201 to 2500 Jeeps Over 2201, Petrol – Cars 1801 to 2000 and Jeeps Over 1801
50,000
39,373
34,000
28,875
24,000
19,375
15,000
Dual Purpose Semi Luxury Diesel – Cabs over 2200 Petrol – Cabs over 1800
20,000
15,750
13,600
11,550
9,600
7,750
6,000
Comment The relevant statutory amendment will be introduced to effect the above
Islamic Financial Instruments
Proposal
It has been proposed to introduce amendments to tax laws where necessary to facilitate the Islamic Financial Instruments.
Prevailing
In the recent past, there has been a growth of Islamic Finance in Sri Lanka following the rapid growth of the industry in other countries. While instruments such as Murabaha, Mudarabha, Diminishing Musharaka, Ijarah etc are available in the market, a significant appetite for Sukuks is also seen at the market place.
Comment
The development of the Islamic Finance Industry could boost the Sri Lankan economy by attraction of foreign funds. Many other countries have modified their respective tax and regulatory frameworks in order to attract the flow of foreign funds. Islamic Financial Instruments in substance are financing arrangements though they are structured in various forms. Alignment of the tax treatment of Islamic Financial Instruments with their conventional counterparts would provide the much needed level playing field for these instruments and eliminate the tax barriers for development of the industry in Sri Lanka.
The fiscal statutes to be amended for this purpose would include Inland Revenue Act, VAT Act, ESC Act, Nation Building Tax Act, Provincial Council Financial Statutes (Stamp duty & Turnover Tax).
In addition to amending the fiscal statutes, for the development of the industry in Sri Lanka, the policy makers should also introduce requisite amendments to the Banking Act, Exchange Control Laws, Securities and Exchange Commission of Sri Lanka Act, The Finance Companies Act etc.
Exchange Control Regulations
Promotion of Exports & Development of Local Capital Markets
Proposal
The budget proposes the following relief to be granted to promote exports and develop local capital markets. Approval has been granted for,
␣ foreigners to invest in rupee denominated debentures issued by local companies. However a gazette notification issued by the Controller of Exchange is to give effect to the same though an effective date has not been indicated.
␣ Sri Lankan companies to borrow from foreign sources with effect from 22nd November 2010. The procedures and documents required in order to complete the process have been prepared by Central Bank of Sri Lanka.
␣ foreign companies to open places of business in Sri Lanka with effect from 22nd November 2010. However a gazette notification issued by the Controller of Exchange is to give effect to the same whilst instructions in relation to the same have been issued to the authorized dealers.
␣ foreigners on tour or business to open accounts in foreign currency accounts with effect from 22nd November 2010. The Central Bank will issue the necessary instruction to give effect to the same.
␣ staff of foreign embassies in Sri Lanka to open new foreign currency accounts with effect from 22nd November 2010. The Controller of Exchange has issued the necessary instructions to all authorized dealers to give effect to the same.
␣ an increase in advanced payments for imports from US $ 10,000/- to US $ 50,000 with effect from 22nd November 2010. The Controller of Import & Export has issued the necessary instructions to all authorized dealers to give effect to the same.
␣ Sri Lankan residents to invest in equity of overseas companies and make payments in respect of setting up places if business outside Sri Lanka. The Minister of Finance & the Controller of Exchange has issued the necessary instructions to all authorized dealers to give effect to the same though an effective date has not been indicated.
␣ insurers to invest up to 20% of the long term fund and technical reserves abroad. However a gazette notification issued under the Regulation of Insurance Industries Act and directions thereto is to give effect to the same though an effective date has not been indicated.
␣ importers and indirect exports of gem and jewellery to open foreign currency accounts with effect from 22nd November 2010. The Controller of Exchange has issued the necessary instructions to give effect to the same and the exporters of such items are currently enjoying this facility. A simplified process to facilitate importation of gems to the country for processing and value addition to be jointly introduced by Customs, Exchange Control and the Export & Import Control Departments.
␣ Exchange control restrictions on foreigners and foreign funds investing in Unit Funds to be exempted
␣ Foreign exchange controls to operate bank accounts abroad, payment of import bills, margin requirement for advance payments, forward contact arrangements, etc to be simplified
Prevailing
In view of the positive outlook expressed by several rating agencies and continued funding by the International Monetary Fund, the Government of Sri Lanka relaxed the restrictions imposed by the Exchange Control Act No. 24 of 1953 (as amended). Some of the recent changes are as follows,
␣ The Act has granted permission for investors outside Sri Lanka to invest in the debentures issued by the Urban Development Authority
␣ The Act does not permit short term borrowings whilst borrowings of a medium and long term nature are considered very restrictively on a case by case basis by the Controller of Exchange, The loan terms such as the interest rates, pay back conditions are key factors in granting approval for such a facility
␣ Currently the BOI provides exemptions from the Act when granting approval to commence a project or company. However a normal foreign company is not provided with such benefits.
␣ Accounts such as the Non – Resident Rupee Account are available for those outside Sri Lanka provided that they do not carry out banking activities in Sri Lanka.
␣ The advance payments for imports remains at US $ 10,000/- ␣ Recently the government introduced legislation to grant permission to open, maintain and
operate foreign currency accounts with any bank outside Sri Lanka for
o those who have proceeded outside Sri Lanka temporarily for business, studies & medical purposes
o individuals or companies registered in Sri Lanka providing professional or vocational services outside Sri Lanka whilst being resident in Sri Lanka
o individuals or companies registered in Sri Lanka permitted to lend foreign currency abroad by the Central Bank
o Exporter of merchandise goods o However currently any application to invest abroad requires the approval of the Finance
Minister and is checked on a case by case basis
␣ Renaming of the SIERA (Securities Investment External Rupee Accounts), TIERA (Treasury Bond External Rupee Accounts), TIERA 2 (Treasury Bill External Rupee Accounts) and TIERA – D (Treasury Bills / Bonds External Rupee Accounts – Deshabhimani) as the Securities Investment Accounts with effect from 11th March 2010.
␣ Opening of Foreign Currency Accounts in respect of International Services Providers and their Employees (FCAISPE).
␣ Granting of permission for those resident in Sri Lanka who have earned foreign currency, the right to purchase International Sovereign Bonds issued by the Government of Sri Lanka
Comment
Over the past few months the Exchange Control regulations in Sri Lanka have been liberalized to ensure the smooth follow foreign currency in and out of the country and to promote investments.
The proposals are an extension of the prevailing regulations introduced over the past few months.
The main intention of simplifying the regulations is to facilitate foreign exchange inflows into Sri Lanka.
Provincial Council Turnover Tax
Proposal
Turnover Tax (TT) will be abolished with effect from 1 January 2011
The revenue collected by the Central Government will be transferred to the Provincial Council as follows,
(a) 100% of the total collection of Stamp Duty (b) 70% of the total collection of the motor registration fee (c) 33 1/3 % of the total collection of NBT
Prevailing
TT is charged on wholesale and retail sales within limits and subject to exemptions prescribed by law made by Parliament. This tax was devolved on the Provincial Council by the Thirteenth Amendment to the constitution.
Comment
This proposal has removed the main income source of Provincial Councils. The central government will make necessary revenue contribution to compensate the revenue loss by abolishment of Turnover Tax.
The power to levy TT on wholesale and retail sales is reserved for Provincial Councils by virtue of inclusion of the power in list (i) of the 9th schedule item 36:1 (13th Amendment to the constitution).As such the parliament may not have jurisdiction over the power of the Provincial Councils to levy TT unless an amendment is been introduced to the constitution. However impact is the state may achieve this administratively.
However, this is a progressive proposal which seeks to eliminate the complications caused in practice due to two institutions mainly Department of Inland Revenue (DIR) and Provincial Councils collecting taxes. Due to the proposal whole and retail sales sector continue to be liable for a tax in the form of NBT, to be administered by a single institution i.e. DIR.
Share Transaction Levy
Increase in Share Transaction Levy
Proposal
Share Transaction Levy to be increased from the current rate of 0.2% to 0.3% with effect from 1st January 2011.
Prevailing
Commencing from 1st January 2005, a levy in terms of the Finance Act No. 5 of 2005 was imposed at the rate of 0.2% from every buyer and seller of quoted shares sold through the Stock Exchange. The levy known as “Share Transaction Levy” (STL) is collected by the relevant stockbroker, dealer or custodian bank and paid to the stock exchange.
Comment
This increase is aimed at increasing the government revenue due to high interest in the stock market in the wake of interest rate cuts.
Prior to 31st March 2002, sale of shares resulted in either capital gains or business profits. Capital gains constituted profits and income, but ceased to with effect from 1st April 2002.
Subsequently profits from sale of listed securities were exempted from tax from 1st April 2003 to 31st March 2004. However from 1st April 2004 to 31st December 2004, such profits earned (other than by unit trusts and mutual funds) were exempted if the sale is effected after two years from the date of acquisition.
However with the introduction of STL on 1st January 2005, profits from sale of any share (other than by unit trusts, mutual funds and venture capital companies) were exempt until 31st March 2007, if STL has been charged or if the disposal has taken place after two years from the date of acquisition. Currently sale of any share is exempt if STL has been paid. Unquoted shares however remain excluded from this exemption. Profits from sale of unquoted shares are excluded from chargeability for income since the gain therefrom, if any is a capital gain.
lk.kpmg.com
KPMG Ford, Rhodes, Thornton & Co.
No. 32A, Sir Mohamed Macan Markar Mawatha, Colombo 3, Sri Lanka.
Tel: +94 11 5426426 Fax: +94 11 2446058
© 2010 KPMG Ford, Rhodes, Thornton & Co, a Sri Lankan Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
More information on http://www.lk.kpmg.com/html/budget.html