Sri Lanka – Round-up of income & indirect tax reforms

Sri Lanka is known for its intricate web of taxes. In the past three years, many of these taxes have been subject to changes that aim to attract more foreign investment.

Sri Lanka’s taxes include both income tax and indirect taxes, such as Nation Building Tax, Economic Service Charge, Ports and Airports Development Levy and Value Added Tax (VAT). Sri Lanka also levies six different taxes at the point of import. Some important changes to these taxes are discussed below.

2011 budget changes – simplification measures
The 2011 budget strived to rationalize and simplify the tax system. Resident individuals are taxed on worldwide income. Resident employees earning remuneration from employment exceeding 600,000 Sri Lankan rupees (LKR) are subject to income tax. Non-residents are taxed on income derived from Sri Lanka only.

Also in 2011, the maximum corporate tax rate was reduced to 28% (from 35%). Several acts were amended to simplify and rationalize taxation, including the VAT Act, Excise (Special Provisions) Act, and the Nation Building Tax Act. The Debit Tax Act was repealed and the Debit Tax abolished.

2012 budget – tax holidays
In 2012, tax concessions were introduced for companies, depending on whether they qualify as small-, medium- or large-scale enterprises based on the quantum of investment. Under these concessions, companies in the agriculture, tourism, construction and other industries are eligible for tax holidays of:

• up to four years for small-scale enterprises
• up to six years for medium-scale enterprises
• up to 12 years for large-scale industries.

Customs duties simplified
In 2010, the government took major steps towards simplifying and broadening the trade tax structure with effect from 1 June 2010. The complexity of custom duty structure was simplified with a four-band duty structure of 0%, 5%, 15% and 30%, while the 15% import surcharge was eliminated. Various taxes that applied to imports of most essential commodities have been unified under Special Commodity Levy, to make the tax administration more efficient and taxation simpler.

2013 budget – foreign exchange controls eased & other concessions
The 2013 budget proposals were instrumental in relaxing Sri Lanka’s exchange control regulations. Over the next three years, corporate entities are allowed to borrow up to 10 million U.S. dollars (USD) per annum and licensed commercial banks are allowed to borrow up to USD 50 million without prior permission from the Exchange Control Department. Previously, foreign currency borrowings were restricted to specified industries.

Another proposal would permit resident Sri Lankans and expatriates to transfer their foreign savings into investments in foreign instruments up to USD 5 million without prior approval. Currently, such investments require special approval from the Exchange Control Department.

Recent tax amendments exempt interest accruing to any person outside Sri Lanka from investing in a security or bond issued by any person in Sri Lanka. These amendments also provide for half-tax holiday for three years to a new company listed in the Colombo Stock Exchange (CSE), provided 20% of its shares are publicly listed.

Any supply of services by a Unit Trust management company to a Unit Trust is deemed an exempt supply for VAT purposes. Additionally, the 10% concessionary income tax rate available to Unit Trusts has been extended to Unit Trust Management companies.

Tax exemptions for Strategic Development Projects
To attract large-scale foreign investment, the 2008 Strategic Development Project Act offers incentives to projects that are in the national interest, are likely to bring economic and social benefits to the country, and are likely to change the country’s landscape.

To qualify as a Strategic Development Project (SDP), you must show that the goods and services provided are strategically important in providing public benefits, attracting foreign investment, generating employment, or transforming technology.

Upon receiving Cabinet approval, SDPs enjoy full or partial exemptions for up to 25 years from a wide range of taxes, including income tax, VAT, Nation Building Tax, Economic Service Charge, and Customs Duty.

A recent amendment added the Betting and Gaming to the schedule of taxes covered by the SDP Act. As a result, any casino that is determined to be an SDP also may be exempt from the country’s Betting and Gaming Levy.