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.

Value Added Tax (VAT)

Value Added Tax (VAT) [ Amendments to VAT Act No 14 of 2002]

 

(i)The present single rate will be revised to 3 bands.

0%, standard rate of 8% and higher rate of 12.5%.

– 0% for export of goods and provision of services for payment in foreign currency outside Sri Lanka

– Services sector – 12.5%

– Manufacturing or import of goods – 8% ( with the limitation of input tax )

 

(ii) The present exemptions on the Import or supply of telecom equipment or machinery, high-tech equipment including copper cables for telecom industry will be removed.

 

(iii) The wholesale and retail trade (other than by a manufacturer or importer) will be excluded from VAT

 

(iv) The present threshold will be revised to Rs 3 million per quarter or Rs 12 million per year.

Nation Building Tax

Nation Building Tax (NBT) [Amendments to NBT Act No.9 of 2009]

 

(i) The present rate of NBT will be revised to 4%.

(ii) The present exemptions on the following articles or services will be removed:

– Telecommunication service

– Supply of electricity

– Lubricants

 

(iii) The present threshold will be revised to Rs 3 million per quarter and the threshold of Rs 25 million per quarter will be removed except for any locally procured agricultural produce in the preparation for sale.

Share Transaction Levy

Share Transaction Levy (STL) [ Amendment to PART II of the Finance Act No 5 of 2005]

 

Share Transaction Levy will be removed with effect from January 1, 2016.

Betting and Gaming Levy

Betting and Gaming Levy (Amendments to Betting and Gaming Levy Act No.40 of 1988)

 

(i) The present entry fee of US$ 100 per person who enters Casino entertainment will be removed.

 

(ii) The present annual levy of Rs 200 million for carrying on the business of playing rudjino will be reduced to Rs. 5 million per year.

 

(iii) The present annual levy of Rs 200 million for carrying on the business of Casino will be increased to Rs. 400 million per year.

 

(iv) Directors and shareholders will be personally liable for non-payment or any act which is done to avoid payment of Casino Industry Levy (one off levy)

Economic Service Charge ( ESC)

Economic Service Charge ( ESC) [Amendments to ESC Act No 13 of 2006]

 

(i) The present exclusion of profit making businesses will be removed.

 

(ii) The present maximum liability of Rs 120 million per year will be removed.

 

(iii) The rate is increased from 0.25% to 0.5%.

 

(iv) The period for carried forward of ESC to be set off against income tax payable for any period commencing from April 1, 2016, is reduced from 5 years to 3 years.

 

[ Relevant provisions of the ESC Act will amended]

Excise Duty

The liquor manufacturing License fee and duty rates will be revised.

 

Excise (Special Provisions) Duty:

The concessions and rates will be revised.

 

New Excise Duty    – Web Link  – http://www.customs.gov.lk/tariff/bud2016xid.pdf

 

Excise Duty Exemptions

Government Notifications

EXCISE (SPECIAL PROVISIONS) ACT, NO. 13 OF 1989 Order under Section 3C

BY virtue of the powers vested in me by Section 3C of the Excise (Special Provisions) Act, No. 13 of the 1989, as last amended by Act, No. 17 of 2011, I, Ravi Karunanayake, Minister of Finance, do by this Order declare that, the excisable articles specified in the Schedule hereto are exempt from the payment of Excise (Special Provisions) Duty with effect from 21.11.2015. Order made under Section 3C of the said Act and published in the Extraordinary Gazette Notification No. 1885/43 of 24.10.2014 is hereby rescinded. RAVI KARUNANAYAKE, Minister of Finance. Ministry of Finance, Colombo 01. 20th November, 2015. SCHEDULE

(1) A Motor Vehicle/Article imported under various agreements and MOU’s entered into by the Government of Sri Lanka with overseas organizations and foreign governments.

(2) Locally assembled/manufactured articles, classified under the H. S. Code 84 and 85, with not less than 30% domestic value addition recommended by the Minister-in charge of the subject of industries.

(3) Every article entitled to duty free clearance under Passenger Baggage (Exemption) Regulations made under Section 107 of the Customs Ordinance (Chapter 235).

(4) Every article cleared ex-bond for the use as ship stores or for re-export.

(5) Every article manufactured in Sri Lanka and supplied to any exporter in Sri Lanka where sufficient proof is furnished to the satisfaction of the Director General of Excise that such manufactured article was exported.

(6) Every excisable article, other than motor vehicles principally designed for transport of persons, used for any specified project identified by the Minister – in- charge of subject of Finance and where the taxes are born by the Government as mentioned in the Section f(ii) of the part II of the First Schedule of the Value Added Tax Act No. 14 of 2002.

THE EXCISE ORDINANCE

Excise Notification No. 978

EXCISE DUTY ON MOLASSES, PALMYRAH, COCONUT AND PROCESSED ARRACK

BY virtue of the powers vested in me by Sub-section (1) of Section 22 of the Excise Ordinance (Chapter 52), as amended from time to time, I, Ravi Karunanayake, Minister of Finance do by this Order direct that, with effect from 21st November 2015 – (1) There shall be levied on Molasses, Palmyrah, Coconut and Processed Arrack manufactured in and issued from any licensed manufactory established in Sri Lanka, a duty at the rate of Rupees One Thousand and Eight Hundred Fifty (Rs. 1,850.00) per proof litre on Molasses, Palmyrah, Coconut and Processed Arrackprovided that such duty shall not be levied or recovered on any quantity of the aforesaid liquor which is exported out of the Island; and (2) The Excise Notification, No. 975 published in Gazette Extraordinary, No. 1934/41 of 02.10.2015 is hereby rescinded. Ministry of Finance, Colombo 01. 20th November, 2015. RAVI KARUNANAYAKE, Minister of Finance.

 

Customs Duty

(i) The present 4 band tariff structure of exempt, 7.5%, 15% and 25% will be changed

as exempt, 15% and 30%.

 

(ii) Custom Duty will be revised on following items:

– Beedi leaves, Beedi, Garments, Foot-wear, Beer, Wine, Whisky, and Ethanol

– Agriculture machinery and equipment, dairy industry machinery and equipment and fishing nets

– Sports equipment and Musical instruments

– yachts , caravan carriages, surfing equipment and mini cruise boats identified under specified HS Code No

 

(iii) Certain items in the negative list ( tiles, ceramic and sanitary ware) will be removed

 

(iv) Sri Lanka will complete its commitments on Tariff Liberalization (Phase I) of the South Asian Free Trade Area effective from November 21, 2015.

 

(v) Sri Lanka will fulfill its December 2015 target of commitments on the Tariff Liberalization (Phase II) of the South Asian Free Trade Area effective from November 21, 2015.

 

[ Relevant Gazette will be issued specifying the rate change with effect from November 20, 2016]

 

Web Link

http://www.customs.gov.lk/tariff/bud2016cid.pdf

Ports and Airports Development Levy (PAL)

Ports and Airports Development Levy (PAL)  [Amendments to PAL Act No 18 of 2011]

 

PAL will be increased from 5% to 7.5%

 

To encourage spending by tourists rate will be reduced from 5% to 2.5% on certain electronic and electrical items

 

The present rate of 5% on certain machinery will be removed.

 

[ Relevant Gazette will be issued specifying the rate change]

Special Commodity Levy

In order to promote local industry SCL will be increased on import of fish and fish related products.

Rate will be revised on certain commodities

[ Relevant Gazette will be issued specifying the rate changes]

 

Web Link

http://www.customs.gov.lk/tariff/bud2016scl.pdf

Land Tax

Land (Restriction on Alienation) Act

 

Restriction on transfer will be removed for certain identified investments

 

Tax on leasing of lands will be removed

 

[the relevant provisions of the Land (Restriction on Alienation) Act No 38 of 2014 will be amended]

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Cess

Removal of Cess:

To encourage export of value added products ‘export Cess’ will be remove on pepper, cloves and nutmeg.

 

Impose of Cess:

To encourage local industry Cess at the rate of 10% will be imposed on import of jewellary.

 

Stamp Duty

Stamp Duty [Stamp Duty (Special Provisions) Act No 12 of 2007]

Present Stamp Duty of 1.5% (every Rs. 1000 or part thereof Rs 15/-) levied on Credit Card usage will be removed with regards to local usage of credit cards.

 

Usage of credit card for foreign purchases will be increased to 2.5% ( on every Rs 1000 or part thereof Rs25/-)

 

“Share Certificate” will be exempted from with effect from January 1, 2016.

 

[ Relevant rate change will be Gazetted and applicable on transactions entered into on or after January 1, 2016]

 

Mansion Tax

Mansion Tax [ PART VIII of the Finance Act No 10 of 2015]

The mansion tax applicable on condominium units will be removed; and

 

The first installment of the Mansion tax is payable on or before March 31, 2016.

 

[PART VIII of the Finance Act No 10 of 2015 will be amended ]

Telecommunication Levies

International Telecommunication Operators Levy (ITOL) on incoming calls will be increased US$ Cents 9 to US$ Cents 12.

 

Environmental Fee will be charged per tower at the rate of Rs.50, 000/- per annum.

 

Cess levied at 2% for international transit traffic will be exempted with effect from January 1, 2016.

Import Tax on Garments & Footware

The present composite tax imposed on (at the Custom point) sale of garments to the local market by export oriented companies [refers to in section 22(1) of the VAT Act] will be increased to Rs. 200 /- per piece.

The same rate will be extended to sale of footwear to the local market by export oriented companies.

The applicable rate for sale of fabric and cut pieces remains the same.

The sale of export quality products to the local market by export oriented BOI companies will be restricted to 5% of the total turnover and will be subjected to the tax at the rate specified above.

 

Surtax

Surtax will be imposed with effect from any Year of Assessment commencing from April 1, 2016, at the rate of 25% of the income tax liability of profit on business of Tobacco, Liqour and Betting and Gaming which were earlier subject to income tax at 40%.

Motor Vehicles Charges & Fine

Fine on Road Accidents

A fine of Rs 10,000/- will be imposed on person who is responsible on road accidents payable in case of road accidents. In addition the cost to the government property damage (if any) is also payable.

 

Vehicle Valuation Certificate Fee:

A fee on valuation certificates obtainable for finance facilities will be charged:

– Three wheeler/Motor Cycle – Rs.5,000/-

– All other vehicles – Rs.25,000/-

Effective date :  January 1, 2016.

 

Unregistered vehicles to be registered before 31/03/2016:

Such vehicles could be registered by paying the following fee to RMV:

– Cars/ Vans – Rs.01 Mn

– Other vehicles – Rs.0.75 Mn

 

Vehicle Entitlement fee:

A fee will be imposed in lieu of ‘Motor Vehicle Importers Registration fee’ with effect from January 1, 2016, payable to the Commissioner General of Inland Revenue before the opening of LCs at the

following rates:

Type Rate per vehicle

Motor Cycle/three wheelers- Rs.2,000/-

Motor Cars – Rs.15,000/-

 

Auctioning of Number Plate –

Unique lifetime Number will be subjected to an Onetime fee of Rs.2.50Mn

 

Emission Levy –

The levy is payable to the Divisional Secretariat at the point of renewal of annual license on every motor vehicle which is over 03 years at the rate of Rs 5,000/- per year.

 

Motor Vehicle Licence Fee will be revised with effect from January 1, 2016.

 

Luxury & Semi-Luxury Motor Vehicle Tax : [Amendment of PART II of the Finance Act No. 16 of 1995]

 

Luxury & Semi-Luxury Motor Vehicle Tax will be removed with effect from April 1,2016.