Income Tax (IT)

1 Income Tax (Amendments to the Inland Revenue Act No.10 of 2006)

1.1 Tax Concessions

1.1.1 Agriculture

1.1.1.1 Development of seeds and planting martials by a company :

A reduction of 50% of the tax payable on the profits from the locally developed seeds and planting materials for a period of 5 years.

[ Section 16B will be amended]

 

1.1.1.2 Drip irrigation, greenhouse technology and high yielding seeds:

A reduction of 50% of the tax payable on the profits from agriculture by a company using drip irrigation method, greenhouse technology and high yielding seeds fora period of 5 years.  For this purpose greenhouse technology, drip irrigation and high yielding seeds will be defined.

[Relevant provisions of the Inland Revenue Act will be amended]

 

1.1.1.3 Fruit and Vegetable Industry :

The cost of acquisition of any machinery used for canning fruits and vegetables will be treated as a qualifying payment in addition to the depreciation allowance claimable on such machinery.

[Sections 25 and 34 will be amended]

 

1.1.2 Development of Micro and SME Sector

 

1.1.2.1 Tax payable by Private Equity Funds or Venture Capital companieson the profits earned by providing funds to upgrade SMEs registered with the SME Board of CSE up to the trading level, will be reduced by 50% for a period of 5 years.

 

1.1.2.2 SMEs, creating incubators for SMEs (not by splitting or reconstruction of an existing SME) by investing in designated areas will be entitled to 50% reduction of the tax payable on profits of such activity for a period of 3 years.  For this purpose ‘SME’ and the ‘identification of activities of Venture capital companies and Equity Funds’ will be specified.

 

1.1.3 Incentive for Thrust Industries: A reduction of 50% of the tax payable on the profits from the locally manufacturing of red clay tiles for a period of 3 years.

 

1.1.4 Concessions to other sectors

1.1.4.1 A reduction of 50% of the tax payable for a period of 5 years on the profit from the following activities carried out by any person:

(i) being an academic entity which offer internationally accredited courses or training programmes aimed at geriatric care or child care;

(ii) engage in building housing facilities for the elderly persons;

(iii) construction and sale of housing units in collaboration with the Government, to officers of the government sector.

 

1.1.4.2 A reduction of 50% of the tax payable for a period of 5 years from the commencement of the commercial operations by any company specifically incorporated for MICE (Meeting, Incentives, Conferences and Exhibitions) on the profits from such activities.

 

1.1.4.3 The profits generated by a company which is attributable to the expansion carried out by modernization of existing factories which is considered based on the employment generation within a period of one year commencing from April 1,2016, will be subject to half tax rate of the applicable rate for 3 years. For this purpose the necessary criteria will be specified.

 

1.1.4.4 To encourage persons to be part of the country’s higher education revolution through endowments given to our National Universities to engage in research, the triple tax deductions available for R&D activities be extended to accommodate endowments given to our National Universities.

 

1.1.4.5 Construction Industry: The cost of acquisition of machinery necessary for purifying sea sand will be treated as a qualifying payment in addition to the depreciation allowance claimable on such machinery.

 

1.2 Investment promotion

1.2.1 New Foreign Exchange Management Act ( FEME) :

A new Act named ‘Foreign Exchange Management Act’ will be introduced to facilitate foreign investments. The Inland Revenue Act will also be amended to accommodate such investments (where necessary) and to exempt income tax on foreign currency inflows.

 

1.2.2 Income from dividends on investment made by non- citizens or foreign companies in listed shares through inward remittance will be exempted from income tax.

 

1.2.3 Concession on investment in lagging region :

In lieu of the present concessions introduced in 2015, the following new concession will be introduced:

50% reduction of the tax payable by a new company (not by splitting or reconstruction of an existing company) set up in any lagging region with a minimum investment of US$ 10 Mn or 500 new employment (with new EPF Nos) for manufacturing (other than liquor or tobacco) or provision of services, for a period of 5 years form the commencement of commercial operation.

The period will be expanded to 8 years, if the new employment exceeds 800 and to 10 years if the investments for theme park.

[The concessions under section 59I, 59J and 59K will be removed which are redundant due to rate revision].

 

1.2.4 The 50% rate reduction available under the IR Act, for listing in CSE will be extended by expanding the present deadline of April 1, 2017 for further :

(i) 2 years for listing in CSE ; or

(ii) 3 years for listing in any foreign Stock Exchanges [Section 59D will be amended]

 

1.2.5 The profits and income from the cultivation of tea or rubber by any plantation company, of which the Government shareholding is in existence, will be exempted for a period of 2 years commencing from April 1, 2016.

 

1.2.6 Tax holidays and exemptions

(i) The Strategic Development Act will continue to be effective for existing companies that have availed the concessions under that Act.

For new investments, instead of Strategic Development Act, the “New investment” Act will be enacted.

 

(ii) The granting of tax concessions for any investment should be strictly under the supervision and monitoring of the Ministry of Finance which would be governed by regulations issued by the Minister. BOI or IRD will not grant any new tax holidays other than facilitation and implementation of the concessions.

1.3 Other Changes / amendments:

1.3.1 Management fee will be defined for insurance industry ;

1.3.2 The triple deduction for Research and Development expenses will be allowed only if a technology advancement and yield development is proved.

[Sections 25 and 92 will be amended]

 

1.3.3 The exemption on the interest income on foreign loans will be restricted on the interest on loans taken from foreign banks or financial institutions.

[ Section 9 will be amended]

 

1.3.4 Certain exemption on dividends after the completion of the tax holiday period will be removed.

[ Section 10 will be amended]

 

1.3.5 The refund claim for any year of assessment commencing on or after April1, 2016, should be finalized within three years from the claim of such refund (with the Return). If not finalized, the refund would be allowed to be set off against future tax liability of the same.

[Relevant provisions of the Act will be amended]

 

1.3.6 The penal provisions will be:

– amended to strengthen the tax collection and compliance by tax payers and tax practitioners; and

– introduced to ensure proper implementation of ‘transfer pricing”.

 

1.3.7 Relevant amendments will be incorporated (where necessary) for the implementation of RAMIS.

 

1.3.8 The expansion of the term “Approved Accountant” for the purposes of section 107 by adding AAT member, will be revisited by restricting the area of audits to the turnover limit not exceeding Rs 100 million and making provision to grant approval by the Commissioner General of Inland Revenue having satisfied that the respective individual has acquired necessary competencies to perform the required work under the Inland Revenue Act, in conformity with an appropriate regulatory mechanism in place.

[ Section 107 will be amended]

 

1.3.9 Administration of the transfer pricing on domestic transactions will be simplified and the areas will be specified limiting the scope considering the associated cost involved.

[ Section 104 and 104A will be amended and relevant Gazette will be published ]

 

1.3.10 Individual Taxpayers who pay Rs 25 million or more will be granted special privileges and such privileges will be regularized through a Gazette Notification by incorporating the relevant provisions to the Act.

 

1.3.11 The qualifying payment relief introduced on the expenditure associated with cost of acquisition or merger of banks or financial companies under the Banking and Financial institutions consolidation process will be removed considering the deduction already available as a cost.

[section 34 will be amended retrospectively]

 

1.4 Simplification of Income Taxation

The following measures will be taken to simplify the Income Tax Structure

(i) Rate structure will be limited only to two tax rates as the standard rate of 15% with the higher rate of 30%.

 

(a) The higher rate (30%) is applicable for the profits and income of :

– Betting &Gaming

– Liquor

– Tobacco

– Banking and Finance including insurance, leasing and related activities etc.

– Trading activities other than manufacturing or providing of services

 

All the other sectors will be liable to the standard rate of 15% ;

 

(b) The progressive tax rates applicable to individuals will be removed by increasing the tax free allowance toRs 2.4 million per year [( Rs 2,00,000/- per month) and any balance will be liable at the standard rate of 15%. (flat rate);

 

(c) The above tax treatment will be applicable to both employees subject to PAYEand self-employees.

 

(d) Deductions from the total statutory income and the assessable income will be removed considering the tax free allowance entitled to be deducted by individuals, charitable institutions etc. except the losses incurred from trade, business, profession or vocation( deductible subject to the limitations);

 

(e) The exemption on profit from employment referred to in section 8 of the Act will be removed other than the following:

– Retiring benefits and pension paid out of the consolidated fund to Government employees ;

– Earnings in foreign currency on employment out of the country , if such earnings are remitted to Sri Lanka;

– Exemptions for diplomatic missions and diplomatic personnel ;

– Release of the provident fund balance at the time of retirement;

– Compensation for loss of office subject to conditions

 

All the other cash and non-cash benefits (treated as benefit from employment) are liable to tax, if exceed the tax free threshold.

(f) The employees who are employed under more than one employer will be liable to tax at the rate of 15%.

 

(g) Tax on partnership will also be adjusted accordingly.

 

(h) The present Withholding Tax deductible by Bank or Financial institutions on interest from deposits at the rate of 2.5% will be removed and such income will be considered as part of the total statutory income.

(i) The exemption of income from interest on money deposited in banks or financial institutions by senior citizens (over 60 years of age) will remain unchanged.

 

(j) Deduction of Withholding tax on interest income arising to individual out of Sri Lanka under section 95 of the Act, will be at 15% subject to the rate specified under any Double Taxation Avoidance agreement entered into with the Government of Sri Lanka.

[ Relevant provisions and the Rate Schedules will be amended]

 

(ii) Tax exemptions granted to certain organizations under section 7 or miscellaneous exemptions under section13 will be removed.

(a) Removal of Institutional exemptions:

– The exemption on the profits and income of the International Institutions will be restricted to any profits and income other than profit and income from sources generated by charging any fee or contribution from the public in any other manner;

– The present exemption applicable to local institutions will be removed other than any Government Department, Foreign Government, University, Co-operative Society, Central Bank including Monetary Board, charitable institution (subject to conditions) or Government assisted school;

[ Section 7 will be amended]

 

(b) Removal of Miscellaneous exemptions:

The following exemptions will be removed:

-the profits and income arising or accruing to any person from any undertaking for the construction of any Port in Sri Lanka.

– the profits and income arising or accruing to any person from the administration of any sports ground, stadium or sports complex.

– 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 special requirement of such Airlines, if a Double Taxation Avoidance Agreement providing relief for double taxation of such profits and income is not in force between Sri Lanka and that country or tax is not payable in such country on such profits and income.

– the profits and income from any service rendered by any person or partnership in any port in Sri Lanka in the course of any business carried on within such port.

– the profits and income arising or accruing to any person from any undertaking for the operation of any port terminal in Sri Lanka;

[ Section 13 will be amended]

Other Proposals

Inland Revenue Department

Given the current status of the tax administration in the country, the tax administration reforms are required in modernization of systems and procedures to simplify the system in line with tax policy reforms. In this context, the first phase of the Revenue Administration Management Information System (RAMIS), to enable the automated services for filing of returns, payment of taxes, etc., will be effective from 1 January 2016.

Mandatory inclusion of the Taxpayer Identification Number (TIN) or the Business Registration Number (BRN) in all transactions in capturing all business transactions, leading to increased tax collection.

The recommendations of the Taxation Commission will be reviewed and simplification of procedures, application of lower tax rates targeting broader tax base will be at utmost importance.

Steps will be initiated to ensure the revenue collection at Divisional Secretariat level.

The income tax return will be simplified into a one-page document, which would be more tax-payer friendly and would lead to higher compliance.

Existing tax laws in the country are cumbersome, complex and based on traditional British concepts. The complexity of the tax laws has been identified as an impediment for the effective implementation of tax policy in Sri Lanka. It has led to various complications thereby hampering the effective implementation of the tax policy. Therefore, we need to redraft the tax laws to bring about necessary improvements to the legal framework to ensure clarity, consistency and simplicity towards reflecting the features of modern tax systems which will help taxpayers to understand the system easily and eliminate loopholes that have been created by the ambiguities in laws while strengthening tax administration

Steps will be taken to ensure the independency of the tax appeals commission and the appellate procedure, adhering to the principles of natural justice.

Leave a Reply

Your email address will not be published. Required fields are marked *