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Contents

Summary of revenue and expenditure - Comparison of


government revenue and expenditure for the last 4 years

Income tax - Proposals with significant impact to both


corporate and individual taxes and rates

Value Added Tax - The VAT rate has been reduced from
11% to 8% for manufacturing and increased to 12.5% for
service sector

4
5

Nation Building Tax - Rate increased from 2% to 4% and


the liable service expanded
Economic Service Charge Payable on turnover
irrespective of profit or loss and carried forward reduced
from 5 to 3 years

Customs and Excise Duty- Reduced from 4 to 3 bands


and changes to motor vehicle taxes and permits

Foreign direct investment - Abolishing Land Lease tax


and restricted ownership permitted

Other taxes, levies and charges - Certain levies removed


and new levies and charges

Public investment - Increased public sector investment to


uplift socio economic standards

10

Recap on key tax law changes in 2015 - This section lists


key tax law changes made in 2015

Budget 2016

One

Summary of revenue and


expenditure
The Hon. Ravi Karunanayake Minister of Finance
presented the maiden budget of the United Front
led coalition government on the 20th of November
2015. The budget was aimed at accelerated
development, encouraging FDI, creating the
necessary conditions to promote local industry and
thereby creating the environment for greater
employment opportunities. In this direction a
number of tax policies have been presented with
the aim of enhancing revenue of the government by
tapping the sectors that are paying relatively lower
levels of tax. The following table illustrates
estimated revenues and expenditure of the
government for the ensuing year.

Page 1.1

Page 1.2

Budget 2016

Two
Income tax
2.1 Corporate income tax

In his budget speech delivered in Parliament today the Hon. Minister of


Finance made the following proposals in relation to corporate income tax.
(a)

Income tax rate changes There will be two income tax rates
applicable at 15% and 30% as follows.
v

The higher rate 30% is applicable on the profits and income of the
following

Betting and gaming

Liquor

Tobacco

Banking and finance including insurance, leasing and related


activities etc.

Trading activities other than manufacturing or providing of


services

It is expected that the above rate will be applicable to companies


and not to individuals engaged in such trades in lieu of individual
tax rate placed at a maximum rate of 15%.

Page 2.1

In addition, a Surtax will be imposed at the rate of 25% of the


income tax liability from the businesses of tobacco, liquor and
betting and gaming.
v

The lower rate of 15% is applicable on all the other sectors


which will mainly include all services, manufacturing and
agriculture.

(b)

Profit on sale of shares Consequent to the proposal to abolish the


Share Transaction Levy it is believed that the profit from the sale of
shares quoted in the Colombo Stock Exchange will now be liable to
income tax unless such gain is a capital gain.

(c)

Deemed dividend The minimum amount of dividend to be


distributed by quoted companies will be increased from 10% to 15%
of the distributable profits.

(d)

Life insurance business - The profits of a company engaged in the


life insurance business is the investment income of the life insurance
fund less management expenses attributable to that business. It is
proposed that for this purpose the management expenses will be
defined.

(e)

Research and development expenses - The triple deduction for


research and development expenses will be allowed, only if a
technology advancement and yield development is proved.

(f)

Interest income - The exemption granted currently to any person or


partnership outside Sri Lanka on the interest income from foreign
loans given to a person or partnership in Sri Lanka will be restricted
to the interest on loans taken from foreign banks or financial
institutions.

(g)

Dividends - Certain exemptions on dividends after the completion of


the tax holiday period will be removed. It is expected that such
concessions granted under certain agreements with the BOI will
continue.

(h)

Refunds - Currently any income tax refund claimed has to be


refunded within a period of six months from the date of claim. If not
refunded so, interest at the rate of 1% of such sum will accrue. It has

Page 2.2

been proposed to make amendments so that 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
claimed with the Return. If not finalized, the refund would be allowed
to be set off against future tax liability.
(i)

Approved Accountant - The definition of Approved Accountant for


the purpose of section 107 will be further revised to place
restrictions on those who can be included as approved accountants.

(j)

Transfer pricing - Administration of the transfer pricing on domestic


transactions will be simplified and the areas will be specified limiting
the scope. Penal provisions will be introduced to ensure proper
implementation of transfer pricing regulations.

(k)

Qualifying payment relief - It has been proposed to remove the


qualifying payment relief granted under section 34 on the
expenditure associated with cost of acquisition or merger of banks
or financial companies under the Banking and Financial institutions
consolidation process. It is expected that any unclaimed amounts
under the above section will be permitted to be carried forward.

(l)

Concessions
v

Agriculture

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. Up to year of assessment ending
2015/16 profits from the above was exempted from
income tax.

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
for a period of 5 years.
For this purpose greenhouse technology, drip irrigation
and high yielding seeds will be defined.

Page 2.3

Fruit and Vegetable Industry - A qualifying relief payment


has been granted in addition to depreciation allowance on
the cost of acquisition of any machinery used for canning
fruits and vegetables.

Development of micro and SME sector

The tax payable by Private Equity Funds or Venture Capital


companies on 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.

The creation of 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.

Incentive for Thrust Industries - The tax payable on the profits


from the manufacture of red clay tiles locally will be reduced by
50% for a period of 3 years.

Concessions to other sectors

The profits from the following activities carried out by any


person will be reduced by 50% for a period of five years.

an academic entity which offer internationally


accredited courses or training programs aimed at
geriatric care or child care;

engaged in building housing facilities for the elderly


persons;

Page 2.4

construction and sale of housing units in


collaboration with the Government, to officers of the
government sector.

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
Meeting, Incentives, Conferences and Exhibitions on the
profits from such activities.

Modernising existing factories - 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 reduced
by 50% for a period of for 3 years.
For this purpose the necessary criteria will be specified.

Endowments towards R&D to qualify for 300% - The triple


deduction currently available for R&D will be extended to
endowments given to National Universities to engage in
research.

Purifying sea sand - The cost of acquisition of machinery


used for purifying sea sand will be treated as a qualifying
payment in addition to the depreciation allowance
claimable on such machinery.

Dividends exempted - Currently dividends paid to any person


including non -citizens and foreign companies are subject to
income tax at 10% subject to certain exemptions. It has been
proposed to exempt form income tax dividends on investment
made by non- citizens or foreign companies in listed shares
through inward remittances.

Concession on investment in lagging region - In lieu of the


present concessions under sections 59 I, 59J and 59K a 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 will be granted under the following conditions for a

Page 2.5

period of 5 years from the commencement of commercial


operations.

a minimum investment of USD 10 Mn or 500 new


employment with new EPF numbers

for manufacturing (other than liquor or tobacco) or


provision of services

The period will be extended to 8 years, if the new employment


exceeds 800 and to 10 years if the investment is for a theme
park.
v

Listing in any stock exchange - The current concession where


the income tax payable is reduced to 50% for listing in CSE
before 1st April 2017 will be extended as follows.

2 years for listing in CSE ; or

3 years for listing in any foreign Stock Exchanges

Tea and rubber cultivation exempted - The profits and income


from the cultivation of tea or rubber which is currently taxable
at 10% will be exempted for a period of two years in the case of
any plantation company, in which the Government has a
shareholding commencing from April 1, 2016. It is not clear
whether this exemption will be extended to cover the profits and
income attributable to the manufacture of tea or rubber will also
be exempted.

(m) Removal of miscellaneous exemptions - The following exemptions


will be removed:
v

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.

Page 2.6

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;

(n)

Removal of institutional exemptions The exemption on the profits


and income of the international intuitions will be restricted to any
profits and income other than the profits and income generated by
charging any fee or contribution.

(o)

Local institutions The present exemption granted other than any


government department, foreign government, universities,
corporate societies, Central Bank, charitable institutions and
government assisted schools.

2.2 Individual tax - The following proposals were made in relation to


income of individuals including employment income, selfemployment and interest from deposits.
(a) The progressive tax rates applicable to individuals will be
removed by increasing the tax free allowance to Rs. 2.4 Mn per
year (Rs. 200,000 per month) and any balance will be liable at
the standard rate of 15%.
The following table illustrates the effect of the change made to
the personal income tax on a person whose taxable income
(prior to the tax free allowance) is Rs. 10 Mn per annum.

Page 2.7

Description
Tax free allowance
Balance
Total

Present
Taxable
income
prior to
tax free
allowance
Tax
Rs.000
Rs.000
500
9,500
1,960
10,000
1,960

Proposal
Taxable
income
prior to
tax free
allowance
Tax
Rs.000
Rs.000
2,400 7,600 1,140
10,000 1,140

(b) The above tax treatment will also be applicable to both


employees, subject to PAYE scheme and those self- employed.
(c) No deductions from statutory income except for losses from any
trade, business profession or vocation.
(d) Employees who under employment by more than one employer
will be taxed at 15% at a flat rate.
(e) Withholding tax on interest from deposits with banks and
financial institutions will be abolished. However, interest income
will now form a part of statutory income from interest and liable
to tax if the total taxable income exceeds the tax free threshold.
This will not include interest earned by senior citizens who will
continue to be exempted from tax on interest income.
(f) Exemptions granted under section 8 for certain employment
income will be restricted to the following.
v

Retiring benefits and pension paid to government


employees out of the consolidated fund.

Earnings from foreign employment if such earnings are


remitted to Sri Lanka.

Employees of diplomatic missions

Release of provident balances at the point of retirement

Compensation for loss of office subject to conditions.

Page 2.8

As a result of the above amendment one of the key exemptions


that will be removed is the exemption granted up to Rs. 50,000
per month for the use of a motor vehicle provided or any
allowance paid in lieu of that by the employer.
(g) The WHT rate applicable under section 95 for a person outside
Sri Lanka will be limited to 15% or such other rate as specified
under a double tax agreement. It is expected that the
amendments proposed to personal tax as above will also apply
to partnerships as applicable.

Page 2.9

Budget 2016

Three
Value Added Tax (VAT)
3.1

Rate - It has been proposed to introduce 3 rate bands instead of the


existing 2 rate bands with effect from January 1, 2016. These would
be as follows:
(a)

0% (Zero rated) - will be applicable to export of goods and


services for foreign currency receipts. Although not
specifically mentioned it is assumed that all zero rated services
currently provided for under Section 7 of the VAT law would
continue to be zero rated.

(b)

8% (Standard rate) - will be applicable on the manufacture and


import of goods. This is a reduction of 3% from the current
11%. However it is proposed to limit the input tax claimable by
manufactures and importers which would likely result in a
higher pay out of VAT per period by such importers and
manufacturers. Details of such restrictions of inputs have not
been elaborated.

(c)

12.5% (Higher rate) will be imposed on the service sector.


This is an increase of 1.5% from the existing 11% currently
imposed on the service sector. Banking and financial services
would also be liable at the higher rate and it is assumed that
the computation of financial services VAT would remain
unchanged.

Page 3.1

3.2

It is assumed that the above rates would be applicable to all liable


supplies excluding the existing exemptions in the VAT law unless
such exemptions have been specifically removed as highlighted
below.
(a)

Exclusion from VAT - The wholesale and retail supply of


goods which was liable to VAT subject to a threshold of Rs
100 million has been excluded from the VAT net. VAT on
this sector was mainly introduced in the previous budgets to
tax super markets including items which were specifically
exempted.
The new proposal would result in the exclusion of this sector
from paying VAT with effect from January 1, 2016. It
should however be noted that after the exemption applies
the input VAT would not be allowable and would be a cost.
As there is no transition provisions specifically included any
unclaimed VAT on inputs (eg closing stocks) is likely to be a
cost.

(b)

Exemptions - There are no new VAT exemptions introduced


in this budget. However the exemptions on the following
items relevant to the telecom industry have been removed
and will be liable to VAT at the point of import and at the
time of supply from January 1, 2016.
v
v

3.3

Telecom equipment or machinery


High-tech equipment and copper cables for the
telecom industry.

Threshold - The turnover threshold to be liable to VAT is currently


Rs. 15 Mn per annum and Rs. 3.75 Mn per quarter. This is proposed
to be reduced to Rs. 12 Mn per annum or Rs. 3 Mn per quarter.

Page 3.2

Budget 2016

Four
Nation Building Tax

4.1 Rate - The rate of NBT is proposed to be increased from the current
2% to 4% from January 1, 2016. This would result in manufactures
and service providers paying NBT on their sales at 4% and importers
paying NBT on liable imports at 4%. In the absence of any specific
comments on banking and financial services it is assumed the current
method of computation would apply and the value addition would be
liable to NBT at 4%.
Wholesalers and retailers on the other hand would be eligible for the
existing exemption of 50% on their turnover (as per the existing law)
resulting in the effective rate of NBT paid by them increasing from 1%
to 2% as a result of the budget proposals.
4.2 Input tax - It is assumed that the input NBT currently granted to
manufactures would continue to be in effect together with the
existing exemptions available, other than those mentioned below.
4.3 Exemptions - There are no new exemptions proposed for NBT.
However the following exempted items would be made liable to NBT at
4% from January 1, 2016.
(a)
(b)
(c)

Telecommunication Services
Electricity
Import and sale of Lubricants

This would result in the cost of such utilities increasing by 4%.

Page 4.1

4.4 Threshold - The general threshold is proposed to be reduced in line


with VAT where the threshold would be reduced from Rs. 3.75 Mn
per quarter to Rs. 3 Mn per quarter.
The special threshold applicable to certain industries of Rs. 25 Mn
per quarter is proposed to be removed other than for the business of
processing of any locally procured agricultural produce in the
preparation for sale.
As a result of the proposed removal of the Rs. 25 Mn threshold, the
following businesses would be liable to NBT from January 1, 2016 if
the liable turnover exceeds Rs. 3 Mn.
(a) Operation of a hotel, guest house, restaurant or other similar
business
(b) Provision of educational services by any institution established
locally for that purpose
(c) Supply of labour (manpower)

Page 4.2

Budget 2016

Five

Economic Service Charge


5.1 Chargeability to ESC - It has been proposed to re-introduce the
liability to ESC on the turnover of businesses of which profits are
liable to income tax.
Currently, ESC is chargeable only on the turnover of businesses which
are under any tax exemption or which are incurring losses.
5.2 Threshold - Present maximum liability of Rs. 120 Mn per annum
removed. The liability threshold of Rs. 50 Mn per quarter remains
unchanged.
5.3 Rate - Present rate of 0.25% increased to 0.5%.
5.4 ESC carry forward - Currently the period for carrying forward of ESC
which could be set off against income tax payable in any year of
assessment is 5 years.
It is proposed to reduce the period of carrying forward of ESC to 3
years effective from April 1, 2016.
5.5 Exemptions - Turnover currently exempt from ESC remains
unchanged.

Page 5.1

Budget 2016

Six

Customs and Excise Duty


6.1 Strengthening and simplifying Sri Lanka Customs Administration The Governments proposed initiatives to enhance Sri Lankas
competiveness and facilitate trade will be welcomed by the trading
community, who will be keen to work with Sri Lanka Customs to meet
all objectives:
(a) Revamp the Customs Ordinance to meet the needs of the
present day requirements;
(b) A new valuation system to be introduced by January 1, 2016 to
curb under invoicing of motor vehicle spare parts, tiles, tyres,
etc.;
(c) Electronic submissions of all import Customs declarations by
June 2016 with all relevant government agencies to be linked
online by January 1, 2016;
(d) All regular importers to be registered with Sri Lanka Customs
from January 1, 2016;
(e) Importation of used washing machines, TVs and mobile phones to
be banned from January 1, 2016;
(f) Incorporation of an International Trade Agency to implement an
international trade policy. Additionally, it is proposed to enter
into Free Trade Agreements with countries such as USA, China,
South Korea etc.;

Page 6.1

(g) Establishment of a one stop-shop to provide all necessary


permission, clearances and approvals at a single window platform
connecting relevant government agencies including the
Department of Import and Export Control, Inland Revenue
Department, Department of Commerce, Department of
Agriculture, Consumer Affairs Authority, etc.;
(h) Invite foreign Customs personnel to be located in Sri Lanka to
pre-clear export cargo;
(i)

In future, duty free shops at ports and airports to be operated on


joint venture basis with local and foreign counter parts.

6.2 Changes to cross border duties and taxes (at the point of import) The following changes to Custom Duty, CESS, Ports and Airport
Development Levy, Excise (Special Provisions) Duty and Special
Commodity Levy are proposed to be gazetted with effect from
November 20, 2016.
(a) Customs Duty
v

Change of the present four band tariff structure [Exempt;


7.5%; 15% and 25%] to Exempt, 15% and 30%.

To harness the benefits from the Tourism Sector, it has been


proposed to open duty free gem and jewelry shops at the
airport.

It has been proposed for the Central Bank of Sri Lanka to


introduce a scheme allowing 50 licenses for the purpose of
importing gold free of all import duties.

The import duties on printed books, magazines and journals


are proposed to be exempted from import duties.

Duty rates to be revised on the following items:


v

Beedi leaves, Beedi, Garments, Foot-wear, Beer, Wine,


Whisky, and Ethanol;

Page 6.2

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;

Building Materials such as steel, tiles and sanity ware;

Proposed Customs Duty reductions under Preferential Trade


Agreements
v

Removal of certain items from the negative list of the BOI


(tiles, ceramic and sanitary ware)

Completion of Sri Lankas commitments on Tariff


Liberalization (Phase I) of the South Asian Free Trade Area
effective from November 21, 2015.

Fulfillment of Sri Lankas December 2015 target of


commitments on the Tariff Liberalization (Phase II) of the
South Asian Free Trade Area effective from November 21,
2015.

(b) Excise Duty


v

The liquor manufacturing License fee and duty rates is


proposed to be revised.

It is proposed that every tax-paid liquor bottle to be labled


with a full-proof sticker for the purpose of visual
identification.

The excise duty rate, per proof litre, on Molasses, Palmyrah,


Coconut and Processed Arrack has been increased to Rs.
1,850, from the previous rate of Rs. 1,595.

The excise duty rate, per proof litre, on Country made


Foreign spirits has been increased to Rs. 2,030, from the
previous rate of Rs. 1,860.

Page 6.3

The excise duty rate on Malt Liquor, of less than 5% strength,


has been reduced to Rs. 160 per litre, from the previous rate
of Rs. 190.

The excise duty rate on Malt Liquor, of 5% and above, has


been increased to Rs. 315 per litre, from the previous rate of
Rs. 245.

(c) Excise (Special Provisions) Duty


v

The concessions and rates will be revised and subject to the


gazette notice.

An excise exemption will be provided for goods locally


assembled/manufactured, of HS Codes 84 and 85, with not
less than 30% value addition.

(d) Port & Airport Development Levy (PAL)


v

The current rate of 5% is proposed to be increased to 7.5%.

The current rate of 5% on certain electronic and electrical


items is proposed to be reduced to 2.5%.

The current rate of 5% on certain machinery is proposed to


be removed.

(e) CESS
v

It is proposed to impose 10% CESS on the import of


Jewellery in order to encourage the local industry.

Also the Export CESS to be removed on pepper, cloves and


nutmeg to encourage the exports of value added products.

(f) Special Commodity Levy


v

It is proposed to increase the levy to Rs. 50/- on the import


of fish and fish related products to promote the local
industry.

Page 6.4

For the purpose of protecting the local confectionary


industry, it is proposed to reduce the Special Commodity
Levy on vegetable fat.

Rates on certain other commodities are proposed to be


revised.

(g) Other Import taxes on apparel and footwear


v

The current composite tax imposed on the sale of garments


in the local market by export oriented companies under the
VAT Act, is proposed to be increased to Rs. 200/- per piece.
No change is proposed on the sale of fabric and cut pieces.

The same rate of Rs. 200/- per piece is proposed to be


imposed on the sale of footwear in the local market by
export oriented companies.

The sale of export quality products in the local market by


export oriented BOI companies will be restricted to 5% of the
total turnover and will be subject to tax as mentioned above.
Clarity is required in relation to the application of this
restriction, to understand if it applies only for Garments and
Footwear manufacturers, or for all manufacturers.

Page 6.5

6.3 Motor vehicle industry


(a) Valuation of motor vehicles for Duty - The Sri Lanka Customs
Valuation Committee has recently introduced the following new
valuation system to address revenue leakages from undervaluation of motor vehicles imported to the country.

Type of
Import
Japanese /
Thai domestic
models
imported to
Sri Lanka
Vehicles
imported by
brand new
dealers
Common
vehicle
models
imported by
new dealers
and parallel
importers.
Cars of origin
other than
mentioned in
point#1
above,
imported
exclusively by
used car
importers.

Pricing Methodology

Source

Value to be based on the


highest specification model
popularly imported to Sri
Lanka.
Manufacturers price
excluding domestic taxes of
the country of export.
Based on the
manufacturers invoice
value.

Manufacturers
website and other
official publications.
http://www.customs.g
ov.lk/news/Values%20
17-11-2015.pdf

Manufacturers value given


to new car dealers will be
extended to parallel
importers.
In case of conflict, values to
be issued by the Hon.
Minister for a particular
model.
Manufacturers value of the
country of export.

Invoice issued/
certified by the
manufacturer of the
vehicle.
Invoice issued/
certified by the
manufacturer of the
vehicle. Alternatively,
Minister to fix values
in consultation with
Ministry and Sri Lanka
Customs.
Authorized website, or
other authorized
published sources of
the manufacturer.

Page 6.6

6.4 Excise Duty rates


(a)

To strengthen the collection of duties, a simple unit rate of excise


duty is proposed, based on engine capacity (cubic centimeters).
Also, changes are proposed to excise duty percentages payable on
certain vehicles.

(b)

In order to promote a cleaner environment, the Government is in the


process of initiating various measures. One such initiative proposed
is the reduced excise duty rate of 2.5% for vehicles run entirely on
solar, hydrogen or helium.
It is expected that these changes will be effective immediately.

6.5 Concessionary schemes


(a)

Concessionary permit schemes - It is proposed to abolish all vehicle


permits granted under different schemes. However, the government
officers are to be financially compensated for the benefit foregone.

(b)

Concessionary scheme for export of reconditioned vehicles - In


order to enhance motor mechanic related activities and the creation
of new employment, it is proposed to grant 50% tax credit for the
importation of one motor vehicle for every 20 vehicles exported by
the same exporter under this scheme. However, the tax in respect of
which the credit is proposed to be given needs to be clarified.
Further, the private sector has been encouraged to seek possibilities
of importing used cars for export after reconditioning.

6.6 Other Fees and Tariffs


(a)

Motor Vehicle Entitlement Fee - The Motor Vehicle Import


Registration License Fee was introduced on January 29, 2015 on
importers of motor vehicles for business purposes. For the purpose
of mitigating undue advantage gained by certain importers, a new
import fee will be introduced.
The Motor Vehicle Entitlement Fee is proposed to be imposed as
follows:

Page 6.7

v
v
v

Motor Cycle and Three Wheelers- Rs. 2,000/-;


Motor Cars- Rs.15,000/-;
Other Vehicles- Rs. 10,000/-;

This is proposed to be effective from January 1, 2016, payable to


the Commissioner General of Inland Revenue before opening the
Letters of Credit.
(b) Motor Vehicle License Fee - The Motor Vehicle License Fee (Revenue
License) will be revised with effect from January 1, 2016 as a
measure to enhance Provincial Council revenue.
(c) Unregistered vehicles - All unregistered vehicles to be registered
before March 31, 2016. Such vehicles could be registered by paying
the following fee to the Registrar of Motor Vehicles:
v
v

Cars and Vans, Rs. 0.01 Mn


Other vehicles, Rs.0.75 Mn

(d) Emission Levy - A levy of Rs. 5,000/- is payable on every motor


vehicle, which is over 03 years. This levy is payable to the Divisional
Secretariat at the point of renewal. The effective date of the levy is to
be notified.
It is also proposed to liberalize and make competitive the issuance of
license, by allowing more players in the market.
(e) Luxury & Semi-Luxury Motor Vehicle Tax - The Luxury & SemiLuxury Motor Vehicle Tax introduced by the Finance Act, No. 16 of
1995 is proposed to be removed with effect from April 1, 2016.
(f) Vehicle Valuation Certificate Fees - From January 1, 2016 a fee on
the valuation of vehicles is proposed as follows, at the time of
obtaining a finance facility:
v
v

Motor Cycle and Three Wheelers- Rs. 5,000;


All other vehicles - Rs. 25,000.

Page 6.8

Budget 2016

Seven

Foreign Direct Investments (FDI)


7.1 Tax concessions for new investments
(a) Currently income tax holidays are granted only to projects having the
Strategic Development Project (SDP) status. SDP is generally given to
projects of national interest and which is likely to bring economic and
social benefits to the country. Generally, FDIs involving USD 100 Mn
and above were granted SDP status.
(b) Going forward a New Investment Act will be introduced to grant tax
concessions and tax holidays for new investments. Tax concessions
and holidays will not be granted under the Strategic Development Act
hereafter.
(c) The Strategic Development Project Act will continue to be effective for
existing companies that have availed the concessions under such Act.
(d) The criterion to qualify for a tax holiday under the New Investment Act
is a moot point. The Hon. Minister has identified key thrust areas which
has potential for investment. It is not clear at this point whether the
tax concessions provided under the New Investment Act will be limited
to these key areas.
v
v
v
v
v
v
v
v

Oil refinery
Renewable energy
Integrated car manufacturing
Manufacturing steel bridges for the region
Fertilizer, manufacturing triple super phosphate
Satellite technology
Aircraft repair and logistical support
Integrated sugar industry

Page 7.1

(e) It is also not clear at this point whether the New Investment Act will
grant tax concessions and exemptions from indirect taxes such as
VAT, NBT and import point taxes such as PAL and Customs duties.
(f) It is proposed to provide tax holidays and Government lands to
investors who invest in lagging regions of the country.
(g) It is proposed to allow foreigners to borrow 40% of their investment
in condominiums from banks in local currency.
7.2 Administrative proposals
(a) Tax holidays will be granted, supervised and monitored by the
Ministry of Finance. The Board of Investment (BOI) and the Inland
Revenue Department will not grant any tax holidays other than
facilitation and implementation of the concessions.
(b) An organization under the name of Agency for Development will be
established. This agency is to replace the BOI, the Export
Development Board and Sri Lanka Tourism Development Authority.
(c) The Agency for Development will ensure that applications for foreign
investments are completed to commence business within 50 days.
(d) New Export Processing Zones will be set up. It is proposed to give the
management of these Zones to private sector management
companies.
(e) Highly environmentally sensitive industries will be facilitated to
operate in specifically designated areas such as Puttalam,
Hambantota and Kilinochchi.
7.3 Investing in listed companies
(a) It is proposed to exempt dividend income on investments made by
non-citizens or foreign companies in listed shares through inward
remittances. The withholding tax of 10% on dividends will not apply to
such dividend income.

Page 7.2

(b) The Share Transaction Levy (STL) that is imposed on transactions


carried out through the stock exchange will be removed from January
1, 2016. It is not clear at this point whether the income tax
exemption given for the profits and income from the sale of shares on
which the STL is paid will be correspondingly amended.
(c) Stamp duty on share certificates will be removed.
7.4 Foreign loans
(a) The exemption on interest income on foreign loans will be restricted
on the interest on loans taken from foreign banks or financial
institutions.
7.5 Purchasing and leasing land
(a) Currently foreigners/foreign companies are restricted from
purchasing land with few limited exceptions. It is proposed to remove
this restriction for certain identified projects.
(b) The land lease tax of 7.5% and 15% that is imposed on
foreigners/foreign companies will be removed.
7.6 Exchange control
(a) The Exchange Control Act will be abolished and an investor friendly
Foreign Exchange Management Bill will be introduced.
(b) Currently foreign investments (including share capital and loans)
should be brought into Sri Lanka through the Securities Investment
Account (SIA). It is proposed to allow investors to bring in money to
Sri Lanka through any bank account existing in the formal banking
system.
7.7 Other proposals
(a) Introduction of a fee of USD 250,000 for resident visa for a three
year period and USD 5 Mn for a permanent residence visa for
foreigners, with approval of the Cabinet of Ministers.

Page 7.3

Budget 2016

Eight

Other taxes, levies and charges


8.1 Following taxes are proposed to be removed from the tax system;
(a)

Share Transaction Levy (STL) - The prevailing STL of 0.3% on both


buyer and seller on the turnover of every share trading transaction
(conducted through the Colombo Stock Exchange) will be abolished
with effect from January 1, 2016.

(b)

Construction Industry Guarantee Fund Levy (CIGFL) - The CIGFL


imposed on construction contractors ranging from 0.25% to a
maximum rate of 1% will be abolished with effect from January 1,
2016.

(c)

Tourism Development Levy (TDL) - TDL of 1% imposed on institutions


licensed under the Tourism Development Act will be removed with
effect from 1 January 2016.

(d)

Luxury and Semi-Luxury Motor Vehicle Tax - Annual Levy on Luxury


and Semi-Luxury motor vehicles will be removed with effect from 1
April 2016.

Page 8.1

8.2 The Honorable Minister has also proposed to revise the following
taxes and levies:
Tax/Levy

Changes

Stamp duty

Stamp duty applicable on share


certificate will be removed.
Stamp duty on credit card
transactions (local usage) will be
removed.
Stamp duty for foreign purchases will
be increased to 2.5%.
Transfer of real estate assets to a
Listed Real Estate Trusts (REIT)
(subject to conditions) will be
exempted from Stamp duty.
International Telecommunication
Operators Levy (ITOL) on incoming
calls will be increased from USD
Cents 9 to USD Cents 12
Cess levied at 2% for international
transit traffic will be exempted.
Mansion tax on condominium units will
be removed.
The first installment is due for
payment on or before March 31,
2016.
The entrance fee of USD 100 for
entering casino entertainment will be
removed.
Annual levy on the business of playing
rudjino will be reduced from Rs. 200
million to Rs. 5 million.
Annual levy on the business of casino
will be increased from Rs. 200 million
to Rs. 400 million.

Telecommunication
Levies

Mansion
Tax

Betting &
Gaming
Levy

Effective
date
January
1, 2016

January
1, 2016

Not
specified

January
1, 2016

Page 8.2

8.3 The Hon. Minister of Finance has proposed to impose the following
new taxes, levies and charges:
Tax/Levy
Environmental
Fee
Annual license
fee

Changes

An Environmental Fee will be charged


at Rs. 50,000/- per tower per annum.
Every company registered with
Registrar of Companies will be subject
to an annual license fee of;
Private companies Rs.
60,000
Public quoted company Rs.
500,000
Other - Rs.100,000
Liquidation fee Rs. 250,000/- will be charged on
Voluntary liquidation of a company.
Fee for
All business entities should be
business
registered with their respective local
councils at a nominal fee of Rs. 100.
Residence
USD 250,000 for residence visa for 3
Visa Fess
years
USD 5 Mn for permanent resident visa
Charge on air
A charge will be imposed on Airlines
tickets
on the sale of international air tickets
at USD 2 per passenger.

Effective
date
January
1, 2016
Not
specified

Not
specified
Not
specified
Not
specified
Not
specified

Page 8.3

8.4 The Honorable Minister has proposed to revise the following taxes,
levies and charges:
Tax/Levy

Changes

Beedi
manufacturing
license fee
Embarkation
Levy
Passport fee

Will be increased from Rs. 1,500 to


Rs. 5,000.

Dual
citizenship fee
SAARC Visa
fee
Company
registration
fees
Local
government
rates

Effective
date
Not
specified

Will be increased from USD 25 to


USD 30
Will be revised as follows;
Adult
Child
(Rs.)
(Rs.)
One day
10,000
5,000
Normal
3,000
2,000
Fee for dual citizenship is increased
from Rs. 250,000 to Rs. 300,000.
Fee for SAARC Visa is increased
from USD 10 to 20.
This is proposed to be revised.

Not
specified
January
1, 2016

Local government council rates on


properties will be limited to 15% of
the annual value of commercial
entities.

Not
specified

Not
specified
Not
specified
Not
specified

Page 8.4

Budget 2016

Nine
Public investments

In his budget speech, the Hon. Minister of Finance proposed the following
allocations of funds for socio economic activities identified by the
Government.
Area

Description

Agriculture
and
aquaculture

Improving Seed Production


Rehabilitating Small Tanks and Irrigation
Canals
Facilitating Local Milk Powder
Manufacturers
Enhancement of Fish Breeding Facilities
Implementation of Rubber Master Plan
Rehabilitation of Coconut Cultivation
Strengthening Tea, Rubber and Coconut
Research Institutions
Strengthening Sugar and Palmyrah
Research Institutions
Branding of Spices
Cinnamon Research, Development and
Training
National Science Foundation

Proposed
Amount
Rs. Mn
1,000
2,000
1,000
100
100
250
200
100
150
150
50

Page 9.1

Area

Description

Infrastructure

Building Warehouses
Construction of Cold Stores
Expansion of Fisheries Harbours
Agro Livestock and Fish Processing Park
Building of Aquaculture Parks
2500 Cluster Villages Programme
(including Decentralized Budget
Allocation for Parliamentary Members)for infrastructure and livelihood
development for local community
empowerment
Digitalization of the EconomyInformation, Communication and
Technology strategy transformation
including free wi-fi in public places, state
universities, public sector establishments,
introduction of national digital identity,
national payment platform, providing 200
smart digital classrooms.
Land Bank
MICE Convention Hall
Setting up of Innovation Accelerator
Upgrading Nenasala Centres
New Building for Inland Revenue, Excise,
Postal Departments and National
Lotteries Board
Introduction of Traffic Encoder
Kelani Valley Railway Line
Augmenting Railways and Bus Transport
Improving Jaffna Railway Line
Indian Ocean Marine Affairs Corporation
Upgrading Industrial Estates and
Agriculture Technology

Proposed
Amount
Rs. Mn
1,000
2,000
750
100
100
21,000

10,000

500
3,000
100
100
2,000
500
1,500
1,000
200
50
500

Page 9.2

Area

Environment
and wildlife

Welfare

Description
Developing Road Network- Ratnapura
expressway, extension of marine drive
upto Panadura, extension of Pamankada
Ratmalana Road, new bridge over Kelani
river, reconstruction of 25 bridges and 3
flyovers.
Elevated Road from Cotta Road to
Kaduwela- on Build Operate and Transfer
basis
Fort Access Road
North-East Highway
Water Transport
Yan Oya Project
Megapolis and Western Province
Development- projects to be implemented
on Public Private Partnership basis
Urban Development
Estate Infrastructure Development
Development of Industrial Zones
National Environment Conservation
Programme
Wild Life Conservation
Interest Subsidy for Conversion of Three
Wheelers from Fuel to Electricity
Distribute Canned Fish at Concessionary
Price through Lak-Sathosa
Rural Housing
Interest Subsidy for Senior Citizens
National Council for Elders
National Child Protection Authority
Accreditation of Child Caregiver Training
Rectification of Salary Anomalies of Sri
Lanka Police
Lump Sum Payment for July Strikers
Seed Capital for Contributory Pension
Scheme for Artists

Proposed
Amount
Rs. Mn
15,000

10,000
4,000
1,000
250
1,000
10,000
2,500
1,000
700
2,000
1,000
50
300
4,500
1,500
10
100
50
3,000
500
25

Page 9.3

Area

Description

Industries

Micro, Small and Medium Enterprises


(MSME) Credit Guarantee Fund
Primary Industries
Construction Industry Skills
Development
Tourism Skilled Development

Education,
vocational and
universities

Development of Galle Fort as Heritage


City
Establishment of Economic Zones
Intellectual Property Rights
Setting up of a Bond Clearing House
IT Branding Programme
Teacher training and development
Sanitary Facilities for Schools
Electricity for Schools
Upgrading Primary Schools- 3577
primary schools to be upgraded
Providing Facilities to 1,000 Secondary
Schools facilities including activity
rooms, laboratories, multimedia and
eLibrary.
Basic Facilities for 1360 Schools to
improve facilities
Upgrading 25 Plantation Schools
Improving Science Education in Schools
Improving Dental Health Facilities
Establishment of Mahapola University
Providing Wi-Fi Facilities and Support of
Purchase of Laptops
Postgraduate Institute of Pali and
Buddhist
University Infrastructure Development
Vocational Training and Technical
Education
Facilitating Education of Children of
Employees' of Foreign Missions

Proposed
Amount
Rs. Mn
500
2,000
500
100
500
200
100
500
100
3,000
4,000
2,000
10,000
15,000

30,000
250
450
250
3,000
300
500
6,000
3,000
150

Page 9.4

Area

Description

Law and order

Establishment of Police Stations


Training for Traffic Police
Network Communications for Sri Lanka
Police
Improvement of Court Administration
Legal Reforms
Strengthening Judicial Training
Institutions
Strengthening Sri Lanka Accounting
and Auditing Standards Monetary Board
Skilled Development in Auditing
Providing Professional Qualifications to
Public Sector Accountants
Empowering Youth

Accounting
and auditing

Youth affairs
and sports
Health

Proposed
Amount
Rs. Mn
1,000
100
250
500
500
500
100
30
50
3,000

Development of Sports
Dialysis Centres
Kidney Hospital - Polonnaruwa
Establishment of 3 Cancer Hospitals
Upgrading Anuradhapura, Jaffna,
Kurunegala Hospitals

1,000
6,500
2,000
3,000
3,000

Training of Health Staff


Refurbishment of Sri Jayawardanapura
Hospital
Improving Nursing School at Sri
Jayawardanapura Hospital
Building of Stroke Centres
Research on Dengue, CKDU and Cancer
Mobile Hospitals

250
1,500
2,500
5,000
250
200

Page 9.5

Area

Description

Provincial
development

Southern and Wayamba Development

Others

North and East Development- rapid


scale resettlement, livelihood
opportunities provision, houses with
sanitation and clean water, renovation
of roads, establishing clinical waste
management system.
Pubudamu Polonnaruwa Programmeencompassing all sectors including
access to clean water, establishing an
integrated modern city.
Allocation for Ministry of Special
Assignments
Strengthening Local Government
Authority
Seed Capital for Exim Bank
Strengthening Sri Lanka Standards
Institute and Industrial Technological
Institute
Insurance against Natural Disaster
Policy Formulation and Analysis
Facilitation for Bribery Commission
MP Capacity Development- J.R.
Jayawardena Centre
Equity Capital for Financial Institution
Restructuring Agency
Restructuring of Parliamentary Affairs

Proposed
Amount
Rs. Mn
3,500
14,000

10,000

150
1,500
50
200
300
200
500
50
10
250

Page 9.6

Budget 2016

Ten

Recap on tax law changes in 2015


Following the budget proposal announced in October 2014 and January
2015, certain amendments were made to the Inland Revenue, Value Added
Tax (VAT) and Nation Building Tax (NBT) Acts. The amending legislations
were passed in Parliament in October 2015 and are now law. Whilst most of
the amendments to the Inland Revenue Act (IRA) have already taken effect
from April 1, 2015, amendments to the VAT Act and NBT Act were
effected from January 1, 2015, unless otherwise specified.
We have already informed you of the changes that were proposed as above
by way of our post budget illustration in October 2014 and January 2015
and other circulars sent via email prior to the enactments being passed in
Parliament. Now that the proposals have been enacted, we have
summarized and presented below the significant changes that have been
made to these taxes.
10.1 Inland Revenue (Amendment) Act, No. 9 of 2015
(a)

Exemptions
v Employment income - An employee, receiving any loan from the
employer free or at subsidized rate of interest, will be exempt
from income tax on such benefit if such loan is granted by the
employer not out of money borrowed for that purpose. Therefore,
for the employee to be entitled for exemption, the employer will
have to provide evidence that money was not borrowed for that
purpose.

Page 10.1

v Interest income
Senior citizens - Any interest arising in, or accruing to, any
resident individual who is a citizen of Sri Lanka, from any
deposit maintained in a bank or financial institution
(approved by Central Bank of Sri Lanka (CBSL)) or in any
registered co-operative society, will be exempt from income
tax in respect of

such interest for the period from January 1, 2015 to


March 31, 2015, if that individual is more than 60 years
of age or reaching 60 years during that period; or

any such interest for any year of assessment (YA)


commencing on or after April 1, 2015, if that individual
is more than 60 years of age or reaching 60 years
during that YA.

(Certificate of Deposits are not covered within this


exemption)
Other individuals or charitable institutions - Effective from
April 1, 2015, any interest arising in, or accruing to any
individual or charitable institution from any one or more
savings account, will be exempt from income tax, if such
interest paid for a month is less than Rs. 5,000/-.
Corporate Debt Security issued by the Urban Development
Authority (UDA) - Interest or discount accruing (or arising)
to any person from any investment (made on or after
January 1, 2015) in any Corporate Debt Security, issued by
the UDA will be exempt from income tax.
Nation Development Bond issued by the CBSL - The
interest accruing (or arising) to any individual who is a Sri
Lankan, living or employed abroad, from any investment
made on or after January 1, 2015, in Nation Development
Bonds issued by the CBSL (on behalf of the Government) will
be exempt from income tax.

Page 10.2

v Dividends - Any dividend paid to a shareholder of any new


undertaking which commenced on or after April 1, 2015 for the
manufacture of products for export, and which is not formed by
splitting-up or re-construction of an existing undertaking, with
an investment of not less than USD 2 Mn (or equivalent in any
other currency) and for which depreciation allowances are
entitled to under paragraph (h) of the first proviso to section
25(1)(a), where such dividends are paid out of such profits and
income of such new undertaking during the period reckoned
from the year of assessment in which such new undertaking
commences to carry on commercial operations and for the
immediately succeeding 4 years of assessment.
v Profits from the production of films or dramas - One half of the
profits and income, for any period on or after April 1, 2015
from the production of films or dramas, of any individual who
produces an award winning cinema or a drama at an
international film or drama festival, for a period of 5 years
commencing from the year in which such award is received.
v Profits of a unit trust from investment in USD deposits - The
profits and income arising or accruing to any unit trust from
investments made on or after January 1, 2015 in US Dollar
deposits or US Dollar denominated securities listed in any
foreign stock exchange.
v Profits and income from royalty - The profits and income
arising (or accruing) to any company, partnership or body of
persons outside Sri Lanka for any YA commencing on or after
April 1, 2015, from any payment made by way of royalty as a
specific requirement of any information technology or business
process outsourcing company in Sri Lanka, for the YA in which
such company in Sri Lanka commences operations and for
another YA immediately succeeding that YA.

Page 10.3

(b)

Deductions in ascertaining profits and income


v Allowance for depreciation
Buildings - The rate of deduction in respect of qualified
buildings constructed or certain units of condominium
property has been unified to be at 10%, effective from April
1, 2015. Accordingly,

any qualified building constructed; or

any unit of a condominium property acquired and which


is approved by the UDA (established by the UDA Law,
No. 41 of 1978) and constructed to be used as a
commercial unit; or

any hotel building (including a hotel building complex)


or any industrial building (including any industrial
building complex) acquired from a person who had used
such building in any trade or business(A)

prior to April 1, 2015, at the rate of 6 2/3% per


annum, on the cost of construction or cost of
acquisition, as the case may be, of such building
or unit; or

(B)

on or after April 1, 2015, at the rate of 10% per


annum on the cost of construction or the cost of
acquisition, as the case may be, of such building
or unit.

However, with regard to qualified building, the 10% rate had


been in force effective from April 1, 2011 and is presumed
to remain unchanged.
Plant, machinery or equipment - The depreciation rate will
be 100% of the cost of acquisition for any plant, machinery
or equipment acquired and used on or after April 1, 2015, in
any new undertaking which commences on or after that date
for the manufacture of products for export with an

Page 10.4

investment of not less than USD 2 Mn (or its equivalent in


other currency) and which is not formed by splitting up or
re-construction of an existing undertaking.
v Research expenditure - Deduction of research expenditure will
be allowed at 300% of such expenditure incurred (on or after
April 1, 2015) for any innovation or research relating to high
value agricultural products and such research is carried out by
such person himself or through any research institution, in Sri
Lanka.
For the purpose of this paragraph, the Commissioner General of
Inland Revenue (CGIR) is required to issue guidelines in order to
ensure the uniform application of deduction.
v Royalty - For any YA commencing on or after April 1, 2014,
any royalty or ground rent payable for the relevant YA and paid
by such person will be deductible, if such amount was not
allowed to be deducted prior to April 1, 2014, under section
32(5)(a).
v Educational expenditure - For any YA commencing on or after
April 1, 2015, an amount equal to 300% of the expenditure
incurred by any person registered with the Tertiary and
Vocational Education Commission (TVEC) established under the
TVEC Act, No. 20 of 1990 on standard skill development
training by any institution recommended by such Commission to
be provided to trainees, will be deductible.
(c)

Disallowable expenses in ascertaining profits - The following


payment or expenses are not deductible in ascertaining profits for
tax purposes:
v Super Gain Tax, Bars and Taverns Levy, Casino Industry Levy,
Mobile Telephone Operator Levy, Direct to Home Satellite
Services Levy, Satellite Location Levy, Dedicated Sports
Channel Levy and Mansion Tax imposed and levied under the
provisions of the Finance Act, No. 10 of 2015

Page 10.5

v Any ground rent or royalty payable for any period prior to April
1, 2014 and paid after April 1, 2014 which is deductible under
section 32(5)(a), or annuity paid by such person
(d)

Deductions in ascertaining total statutory income - The following


sums are deductible in ascertaining total statutory income:
v any ground rent or royalty payable for any period prior to April
1, 2014 and which is paid after April 1, 2014; or any annuity or
interest, being any such sum which is not entitled to be
deducted under section 25.
v the balance , if any, of any loss deductible under the IRA, of any
business of any bank, financial institution or leasing company
which is consolidated, acquired or merged in terms of the
guidelines issued by the CBSL subject to conditions specified in
the guidelines issued by the CGIR, shall continue to be deducted,
if it would have been claimed under section 32 prior to such
consolidation, acquisition or merger, notwithstanding anything
to the contrary in any other provision of IRA, but subject to the
provisions of section 32(b), from the total statutory income of
the respective bank, financial institution or leasing company as
a result of such consolidation, acquisition or merger.

(e)

Qualifying payments
v Any donation to the National Kidney Fund is a qualifying
payment.
v The cost of acquisition or merger, for the purposes of qualifying
payment, in relation to financial sector consolidation is
redefined to be
any expenditure incurred by any bank, any financial institution
or any leasing company, by way of cost of acquisition or merger
of any other bank, any other financial institution or any other
leasing company, where such cost is ascertained by considering
all the facts on a case by case basis in accordance with the
guidelines issued by the CBSL, in the manner specified by the
CGIR for that purpose.

Page 10.6

The deductibility of such qualifying payment in any YA should


not exceed 1/3rd of the assessable income or Rs.300 Mn;
whichever is higher. The balance, if any, not deductible in the
same YA can be carried forward and deductible from the
assessable income of such bank or other company for the next
succeeding YA and so on subject to the same conditions.
(f)

Extension of 16D and 17A - Section 48D has been introduced to


extend the applicability of section 16D and 17A as follows:
Notwithstanding the period specified in section 16D or paragraph
(b) and (c) of subsection (2) of section 17A to complete investment
and to commence the commercial operations by any new
undertaking which has been approved by the Board of Investment of
Sri Lanka by entering into an agreement under section 17 of the
Board of Investment of Sri Lanka Law, No. 4 of 1978 which provides
a tax holiday under section 16D or section 17A of this Act, if the
approval of the Board of Investment was granted prior to October
31, 2014 and the company which invested in such undertaking is
unable to complete the required investment prior to April 1, 2015
and to commence commercial operations prior to April 1, 2016 due
to any practical reasons depending on the nature of the business,
such period shall be extended up to April 1, 2018, if the
Commissioner-General is satisfied that the nature of the activities
engaged in by such new undertaking are only activities qualified
under section 16D or section 17A and the Board of Investment of
Sri Lanka confirms , on request made by the investor, that the
reasons for such extension is justifiable and acceptable by
examining the status of the progress of such new undertaking.

(g)

Reduced rates - For companies engaged in the manufacturing


activities specified, a conditional relief has been offered by way of
rate reduction (half the applicable rate or other rate reductions)
under sections 59I, 59J 59K, 59L and 59M respectively.

(h)

Deemed dividend tax - Any new undertaking (not formed by


splitting up or re-construction of an existing undertaking) and
commenced on or after April 1, 2015 for the manufacture of
products for export with a minimum investment of USD 2 Mn (or
equivalent in any other currency) will be exempted from deemed

Page 10.7

dividend tax which is payable at the rate of 15% under the above
section.
(i)

Dividends not forming part of total statutory income - Section 63


has been amended further to specify where such income forms part
of trade profits (not from the source as dividend), what does not
form part of the total statutory income is the net income from
dividends.

(j)

Fees for technical services under section 94 and withholding tax


under section 95 - Any fees for technical service paid by a person
resident in Sri Lanka to a person out of Sri Lanka has been made
chargeable to income tax in Sri Lanka (subject to any provision of a
Double Tax Agreement in force), and such fees paid has been made
subjected to a withholding tax at 20%.

(k)

Electronic communication - The Minister may, on the


recommendation of the CGIR make regulations for the purpose of
authorizing or facilitating the use of electronic communications or
electronic records in respect of matters specified in section 8 of the
Electronic Transactions Act, No. 19 of 2006.

(l)

Remuneration to employees - Consequent to the increase of


qualifying payment deduction up to Rs. 250,000/- per annum, on
account of employment income, PAYE tax tables have been
modified to reflect such change.
Accordingly, the tax deductible limit applicable to employees who
are resident or citizens will, effective from April 1, 2015,
commence at Rs. 62,500 (on monthly basis) or Rs. 750,000/- (on
annual basis).
With regard to non-citizen employees who are not residents, such
amount would be Rs. 20,833/- (on monthly basis) or Rs. 250,000/(on annual basis)

(m)

Income tax deductions from interest paid by banks or financial


institutions - The provisions relating to income tax deduction, at
source, from the interest paid by any bank or financial institution on
any deposit made therein has been modified effective from April 1,

Page 10.8

2015. Accordingly, (subject to any specific exemption on interest,


provided)
v The rate of income tax deduction has been fixed at 2.5% of the
interest paid or credited to any individual, partnership or
charitable institution, irrespective of the size of income of the
depositor
v The rate of income tax deduction has been set at 8% of the
interest paid or credited to anybody of persons (subject to any
specific exemption on interest, provided)
v The requirement for tendering a declaration to the respective
bank or financial institution (that was applicable for individual or
charitable institutions) has been dispensed with
v Tax deducted as above, from the interest paid to any person
other than a company will be a final tax (i.e. there will be no
further tax). However, withholding tax deducted from any
interest paid or credited to any company will not be a final tax.
v The provisions to apply for directions under section 133 (to any
individual or partnership) or 135 (to any person or partnership)
were closed.
(n)

Registration of persons Withholding tax return furnished hitherto


on a monthly basis has been changed to a quarterly basis.

(o)

Assessment and additional assessments - In relation to transfer


pricing cases, the application of time bar provisions for making
assessments has been made not earlier than a period of 5 years
from the date of receipt of the relevant return.

(p)

Regulations - A provision has been included under section 212 (2)


of the IRA, empowering the Minister to issue
v Guidelines for the computation of the quantum of qualifying
payment, in the case of an acquisition or merger of any bank of
financial institution, or a leasing company, so that a tax neutral
position could be continued

Page 10.9

v Rules and guidelines for the implementation of the use of


electronic communication or electronic records in relation to
the Acts administered by the CGIR, as and when required.
(q)

Rates
v Second Schedule
With regard to unit trust management companies, the
applicability of a reduced rate of 10% has been limited to
such part of taxable income from the management of the
respective unit trust.
It has been made clear that for any YA commencing on or
after April 1, 2014, the concessionary rate of 12% is not
applicable to companies engaged in the manufacture of any
article or the provision of any service. However, such
companies will be entitled to the same concessionary rate of
12% under section 59B of the IRA, depending on the annual
turnover.
v Fourth Schedule - Fees for technical services paid or credited to
any person or partnership out of Sri Lanka is also brought under
this schedule, so that tax could be withheld at 20% (in the
absence of lower rate under the Double Tax Agreement or
determined by the CGIR).
v Fifth Schedule - Item 46 of the Fifth Schedule applicable to
individuals (who are citizens) providing professional services as
referred to in section 59F has been removed, and the
methodology of tax computation has been embedded to that
section itself.

Page 10.10

10.2 Value Added Tax (Amendment) Act, No. 11 of 2015


(a)

Rate - The rate of VAT was reduced from 12% to 11%. This is
effective from January 1, 2015.

(b)

Threshold - Threshold to register for VAT was increased from Rs. 12


Mn (or Rs. 3 Mn per quarter) to Rs. 15 Mn per annum (or Rs. 3.75
Mn per quarter).
Registration threshold for VAT on financial services has also been
amended to reflect the above.

(c)

Wholesale and retail trade


v

Threshold - The turnover threshold for a wholesale or retail


trader to be liable to VAT has been reduced from Rs. 250 Mn to
Rs. 100 Mn for any period of three months.

Calculation - In ascertaining the liability threshold of wholesale


or retail trade, the value of total supply of goods is the
aggregate of the following;
Wholesale and retail sale of such company/business.
Wholesale and retail sale by the other companies in the
group of companies engaged in the business of wholesale
and retail trade.
Businesses engage in wholesale or retail trade, having any
director or partner in common.

Deemed VAT liability - In the case of persons engaged in


wholesale or retail trade, for the purpose of calculating the 25%
deemed exemption, the value of supply of the following goods
can be excluded.
Locally produced fresh milk [with effect from January 1,
2015]
Locally grown fruits and vegetables or locally produced rice
[with effect from November 1, 2015].

Page 10.11

The above amendment should result in a reduction of the


overall cost of VAT, which these businesses absorbed up
until now.
(d)

Leasing
v

Treatment of leasing - Consideration received on transfer of a


leased good at the termination of a lease exceeding 10% of total
lease value had previously been considered as a separate
supply. This has now been removed and the total consideration
received from such transfer will be considered as lease rental.
Hence, VAT will be applied accordingly on such receipt.

Financial services - The definition of financial services for the


purpose of VAT on financial services has been extended to
include leasing facilities, if such agreement is entered into on or
after October 25, 2015.

Exemptions - The following goods and services have been


exempted from VAT.
The supply or import of

Agricultural tractors or road tractors for semi-trailers.

Ethyl alcohol imported or manufactured and supplied as


a by-product which is liable to customs duty and Cess on
importation or Excise Duty on manufacture of such
products.

Supply of

Provision of leasing services, if such agreement is


entered into on or after October 25, 2015. This has
been included in the scope of VAT on FS.

The supply, lease or rent of residential accommodation


is exempt from VAT other than such supply made by
certain specified projects. Projects which are
exclusively for residential accommodation were

Page 10.12

excluded from the above exemption. This has been


amended to exclude projects partially relating to
residential accommodation (i.e., mixed projects) from
the exemption.

Supply of any imported article which are subject to


Special Commodity Levy if sold without any processing.
(Previously, this exemption was limited to supplies
made by the importer himself.).

Locally manufactured coconut milk with effect from


November 1, 2015.

Import of

Samples worth not more than Rs. 50,000 are exempted


subject to conditions. Originally, this exemption was
limited to samples worth Rs. 25,000 only.

Machinery, equipment or spare parts imported by Sri


Lanka Ports Authority to be used exclusively within the
ports of the Sri Lanka Ports Authority.

Import and supply [with effect from October 25, 2014) of

Any motor vehicle (specified HS codes) liable to Excise


(Special Provision) Duty on importation or any motor
vehicle liable to the same duty on manufacture on such
vehicle.
This exemption is extended to vehicles imported or
manufactured on or before October 24, 2015 and
remain unsold.

Cigarettes (specified HS Codes) liable to Excise (Special


Provision) Duty and Cess on the importation or
manufacture of the same.
This exemption is extended to cigarettes imported or
manufactured on or before October 24, 2015 and
remain unsold.

Page 10.13

Liquor (specified HS Codes) subject to Custom Duty and


Cess on the importation or subject to Excise Duty on
manufacture of the same.
This exemption is extended to liquor imported or
manufactured on or before October 24, 2015 and
remains unsold.

10.3 Nation Building Tax (Amendment) Act, No. 12 of 2015


(a)

Threshold The threshold to be liable to NBT has been increased


from Rs. 12 Mn per annum (or Rs. 3 Mn per quarter) to Rs. 15 Mn
per annum (or Rs. 3.75 Mn per quarter).

(b)

Business of real estate The business of real estate and


improvements thereof has been brought within the scope of NBT by
extending the definition of service to cover business of real estate
and improvement thereon.
Accordingly, the value of such service liable to NBT shall be
calculated by removing the value of land and open market value of
any improvement on such land as at March 31, 1998, from the value
of the supply.

(c)

Wholesale and retail sale by an importer The following items have


been removed from NBT liability on wholesale or retail sale by an
importer, with effect from October 25, 2014.
v

Any motor vehicle (specified HS codes) liable to Excise (Special


Provisions) Duty on importation.
This exemption is extended to vehicles imported on or before
October 24, 2015 and remain unsold in stocks.

Cigarettes (specified HS Codes) liable to Excise (Special


Provision) Duty and Cess on the importation.
This exemption is extended to cigarettes imported or
manufactured on or before October 24, 2015 and remain
unsold in stocks.

Page 10.14

Liquor (specified HS Codes) subject to Customs Duty and Cess


on importation.
This exemption is extended to liquor imported on or before
October 24, 2015 and remains unsold in stocks.

(d)

Tax credit for manufacturers - Tax credit carried forward as an


advance tax payment by manufacturers, has been restricted to be
set off only against the NBT liability arising from the business of
manufacturing.

(e)

Exemptions
v

The following articles have been included under excepted


articles;
Samples imported in relation to a business worth not more
than Rs. 50,000 are exempted subject to conditions as may
be set by Director General of Customs. Originally, this
exemption was limited to samples worth Rs. 25,000 only.
Machinery or equipment (specified HS codes) imported or
purchased locally generating electricity by the Ceylon
Electricity Board (CEB), or any other institution entered into
an agreement with CEB.
Machinery, equipment or spare parts imported by Sri Lanka
Ports Authority to be used exclusively within the ports of the
Sri Lanka Ports Authority.
Any motor vehicle (specified HS codes) liable to Excise
(Special Provision) Duty on importation or any motor vehicle
liable to the same duty on manufacture of on such vehicle.
This exemption is extended to vehicles imported or
manufactured on or before October 24, 2015 and remain
unsold in stocks.

Page 10.15

Cigarettes (specified HS Codes) liable to Excise (Special


Provision) Duty and Cess on the importation or manufacture
of the same.
This exemption is extended to Cigarettes imported or
manufactured on or before October 24, 2015 and remain in
stocks.
Liquor (specified HS Codes) subject to Custom Duty and
Cess on the importation or subject to Excise Duty on
manufacture of the same.
This exemption is extended to liquor imported or
manufactured on or before October 24, 2015 and remains
in stocks.
v

The following services have been included under excepted


services;
Provision of leasing facilities in respect of movable
properties under finance lease agreements entered into
prior to October 25, 2015. (In effect, the exemption given
for leasing of movable properties has been closed for any
agreement signed after October 25, 2015).
The business of real estate, being construction and sale of
residential accommodation, if the value of the project is less
than USD 10 Mn or its equivalent.

Page 10.16