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Tax System of Sri Lanka

The Sri Lankan government offers a wide range of incentives for investors. These incentives are available foreign provided the investment is undertaken through a company incorporated in Sri Lanka Incentives offered fall under two classes or "regimes" and the investor may be eligible for inducements provided by either of these regimes. BOI Incentives under Section 17 of the BOI Law General incentives under the 'normal laws' of the country

Tax structure of Sri Lanka

Income tax
The tax is levied on the Income of any person arising in or derived from Sri Lanka. A resident is taxable on world income Any other person is taxable only on income arising or derived in Sri Lanka.

Economic Service Charge (ESC)


An Economic Service Charge is imposed on any person carrying on a trade, business , profession or vocation. The rate of ESC is 0.25% to 1% on total turnover or receipts it is exceeds SRL 7.5Mn or USD 75,000 per quarter. This can be set off against the income tax payable and can be carried forward for four years , but no refund is due.

Custom Duty
Sri Lanka Customs is a key state organization operational at the frontiers and its main functions center around revenue collection and enforcing Customs law and other related rules and regulations In the process the department endeavors to ensure smooth movement of people and goods across the border. Custom duty is applicable for the import and export procedures.

Remittance Tax
In addition to paying the Standard corporate income tax , remittances made by a branch to a foreign head office are subject to a 10% tax.

Social Responsibility Levy( SRL)

SRL is imposed on Companies at 1.5% of the income tax liability

Value Added Tax (VAT) and Turnover Tax (TT)


VAT is levied on supply of most goods and services , as well as the most import of goods. Standard rate is 12% with a reduced rate of 5% applying to essential items. Certain supplies are zero-rated or exempt. Retail and wholesale businesses that supply goods are subject to a turnover tax of 1%

Nation Building Tax (NBT)


The Government has imposed a new levy termed the Nation Building Levy akin to the National Security Levy which prevailed at the rate of 3% on turnover. Importers , Manufactures and Providers of services are liable for NBT. The levy is payable for any quarter where turnover for the quarter exceeds Rs.100,000.

Tax Concessions for Qualifying Activities


Tax concessions are dealt under two regimes; Board of Investment (BOI) Regime in terms of regulations under the BOI law. Normal Tax Regime statutorily mandated in terms of the Inland Revenue ACT and amendment thereto.

Tax Concessions for Qualifying Activities


Incentives under BOI regime are legally enforced in terms of agreements concluded under BOI law and hence would prevail for the specified period as stipulated therein and are valid for the lifetime of the Company. Incentives under the Sri Lanka tax status which are time based would legally prevail for the time period as mandated statute. Transactions based incentives , could be withdrawn by amendment to legislation at a future date prospectively.

Agriculture (Normal Tax Regime)

Agriculture (Normal Tax Regime)


Qualifying Activity Agriculture and Agro processing Agriculture Cultivation of land with plants of any description , rearing of fish or animal husbandry including poultry farms , veterinary and artificial insemination services and other support services. Core Conditions Company Income Tax Incentives Year 1 -5 0%

Agro processing Processing of any agricultural product or fishing product including deep sea fishing. Rs.10Mn Incorporated post 01/04/2002

New undertaking Year 6 -7 on or after 01/04/2006 10% with minimum Year 8 Investment onwards Rs.50Mn 15% Incorporated pre 01/04/2002

Agriculture ( BOI Regime)

Agriculture ( BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives

Fishing & processing of sea food

New Company Minimum Investment Rs.7.5Mn Minimum Employees 20

Year 1 10/15 0%

Agriculture ( BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives 15/20

North /East Province Regional Year 1 Cultivation and development outside 0% processing Colombo and Gampaha District Dairy farming and livestock development New Company Cultivation processing of and vegetables and Minimum Investment fruits Rs.15Mn

Minimum Employees Rice Mill for the - 20 grinding of rice and/or the making of rice based products

Tourism and Recreation (Normal Tax Regime)


Qualifying Activity Core Conditions Income Tax Incentives 0%

Providing accommodation to Registered with Ceylon Year 1 3 Tourists in Manor Houses or Tourist Board on or after Thematic Bungalows 01/04/2003 Provide accommodation for 10 years from date of registration with Tourist Board

Exhibition of cinematographic Film

any

Exhibition of Year 1 5/10 cinematographic film on or after April 2007 In new cinema or upgraded cinema defined

0%

Tourism and Recreation (Normal Tax Regime)


Qualifying Activity Infrastructure Development Tourism and Recreation Core Conditions Company Income Tax Incentives Year 0% Investment Year 10% Year made 20% from of 8 1 5

Minimum Rs.10Mn

onwards

Investment to be within 1 year commencement undertaking

Tourism and Recreation (BOI Regime)


Qualifying Activity Tourism and /or Recreation Core Conditions New Company Income Tax Incentives Year 1 -5 Year 6 -7 Minimum 500,000 Investment US$ Year 8 onwards 20% 0% 10%

Tourism and Recreation or Regional Development outside construction and operation Colombo/Gampaha Districts of hotels North/East Year 1 -15 Province New Company Minimum Investment Rs.40Mn Minimum employees - 25

0%

Information Technology (Normal Tax Regime)


Qualifying Activity Information Technology and allied services Core Conditions Company Income Tax Incentives Year 0% 1 -5

New Undertaking on or after 01/04/2006 within Year minimum Investment 10% Rs.50Mn-Incorporation pre 01/04/2002 Rs.10MnIncorporationpost 01/04/2002

6-7

Year 8 onwards 20% (15% if export oriented)

Information Technology (BOI Regime)


Qualifying Activity Information and / or technology services technology information enabled Core Conditions Company Income Tax Incentives Year 0% 1 -5/12

Minimum Investment US$ 150,000 First two years 10% Employing minimum of 15 technically qualified Thereafter local persons 20% (15% if export turnover > 70% in foreign currency)

Small Scale Infrastructure(Normal Tax Regime)


Qualifying Activity Power Generation Tourism and Recreation Minimum Investment Year 6 Ware housing and cold Rs.10 Mn within 1 year 10% storage from commencement of undertaking Year 8 onwards Garbage collection or disposal Construction of houses Construction of hospitals -7 Core Conditions Company Income Tax Incentives Year 0% 1 -5

20%

Small Scale Infrastructure (BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives Year 0% Year 10% Year 20% 8 1 5

Power Generation New Company Tourism and Recreation Construction and/or operation of Minimum warehouses Investment US$ Garbage collection and /or 500,000 disposal Construction of supermarkets Construction of houses Construction of hospitals Water supply Infrastructure required for film or cinema industry Special project as approved by cabinet of Ministers/Cabinet sub committee on investment facilitation

-7

onwards

Small Scale Infrastructure (BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives

Infrastructure or Minimum construction activity Investment approved by the Board 5Mn

Year US$ 0% Year 10% Year 20% 8

-5

6-7

Mew Company

onwards

Large Scale Infrastructure(Normal Tax Regime)


Qualifying Activity Core Conditions Income Tax Incentives Power generation Company ,transmission or distribution Minimum Investment Sea ports, air ports, Rs.1,000Mn highways or railways Industrial parks Warehouses or stores Rs.2,500Mn Sanitation facility or solid waste management system Water services Urban housing or town Rs.5,000Mn center development Rs.7,500Mn Investment to be completed within 1 year from commencement of operation

Year 1-6 Year 7 onwards

0% 15%

Year 1 -8 0% Year 9 onwards 15% Year 1-10 0% Year 11 0nwards 15% Year 1 -12 0% Year 13 0nwards 15%

Large Scale Infrastructure (BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives

Establishment of industrial New Company estates including development and Minimum Investment management of Industrial US$ 500,000 Estates and Special Economics Zones

Year 0%

-3/15

Thereafter 15%

Large Scale Investments(Normal Tax Regime)


Qualifying Activity Pioneering Nature No activity gazetted to date Core Conditions Company Minimum Investment Rs.250Mn 999Mn Rs.1,000Mn-2,499Mn Year 1 -8 Above Rs.2,500mn Year 1 -10 New undertaking on 0r after 01/04/2006 Post tax holiday First 2 10% Thereafter 20% 0% 0% Income Tax Incentives

Year 0%

-5

years

Large Scale Investments(Normal Tax Regime)


Qualifying Activity Core Conditions Income Tax Incentives Year 0% Year 10% 1 -5

Industrial or other New Company business activity connected to advance Minimum Investment technology or which of US$ 5Mn pioneering nature

-7

Year 8 onwards 20% (15% if >80% exported / >70% of turnover in foreign currency)

Large Scale Investments(BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives 0% 15% Petroleum and petroleum products Company Year 1 5/15 Agriculture, agro processing services other than processing of black tea in bulk Minimum Thereafter Power generation , transmission & Investment US$ 12.5 distribution Mn Development of sea ports , air ports ,highways , railways , water services , public transport Any other infrastructure project approved by the BOI with the concurrence of the Minister Large scale manufacturing of service industry project or any business activity for export as approved by board

Education and Training(BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives Year 0% 1 5/12

Training Institutions

Company

Minimum Investment US$ 100,000 First two 10% Provide training for not less than 250 students per Thereafter annum and 500 students 20% per annum if already in existence

years

BPO Industries (BOI Regime)


Qualifying Activity Business Outsourcing Process Core Conditions Company Income Tax Incentives Year 0% 1 3/12

Minimum Investment US$ 150,000 First two 10% 70% of turnover in foreign currency Thereafter 15%

years

Apparel (BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives Year 0% First 10% 1 -5/15

Production / Manufacturing New Company of textile for export including fabric Minimum manufacturing , printing , Investment US$ dyeing , washing and 500,000 finishing Minimum export 80% of output

two

years

Thereafter 15%

Apparel (BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives 1 -15

North /East Province Regional Development Year Manufacture of textile outside Colombo and 0% and apparel Gampaha Districts New Company Minimum Rs.40Mn Investment

Minimum Employees 100

Export Oriented Manufacture and Services (Normal Tax Regime)


Qualifying Activity Core Conditions Income Tax Incentives Year 0% Year 10% Year 15% 8 1 5 Export of non-traditional Company products* including deemed New undertaking on o exports after 01/04/2006 with minimum Investment *Goods other than black tea in bulk , crepe rubber , scrap Rs.50Mn-Incorporated pre rubber , latex and fresh 01/04/2002 coconuts. Rs10Mn Incorporated post 01/04/2002 Minimum export 80% Year 0% Year 10% Year 15% 1 6 8 -5 -7 onwards

-7

onwards

Minimum export 80% Export production company village

Export Oriented Manufacture and Services (BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives

Production/Manufacture of non New Company Year 1-3/7 traditional goods for export, Minimum Investment First 2 years including deemed exports US$250,000 Thereafter Minimum export 80% of output Export of services as determined by the BOI New Company Year 1 -5 Minimum Investment Year 6-7 US$ 500,000 Year 8 onwards 70% of Turnover in convertible foreign currency

0% 10% 15%

0% 10% 15%

Export Trading Entreport Trade

Houses/

New Company Annual Turnover Warehouse within custom US$ 5-10Mn 10% bonded area US$ 10-25Mn 5% Export -100% >US$ 25Mn(1-5Yrs) 0% Thereafter 15%

Export Oriented Manufacture and Services (BOI Regime)


Qualifying Activity Export Trading Houses for rural sector Core Conditions New Company Collection centers are to be established outside Colombo and Gampaha Export 100% Minimum Investment US$ 150,000 Income Tax Incentives Year 0% Year 5% Year 15% 6 1 -5

onwards

Modernization of food Company and beverages , processing units in the Minimum Investment export plantation sector 150,000 to qualify HACCP or international accreditation

Year 0% US$ Thereafter 15%

-5

Research and Development(Normal Tax Regime)


Qualifying Activity Engaged solely in Research and Development* *Research and Development
includes any systematic or intensive study carried out in the field of science or technology with the object of using results thereof for the production or improvement of materials , devices , products or process.

Core Conditions Company New undertaking

Income Tax Incentives Year 0% 5 1 -5

Year Minimum Investment 15% Rs.2 Mn within 1 year from commencement of undertaking

onwards

Research and Development(BOI


Regime)
Qualifying Activity Core Conditions Income Tax Incentives

Engaged in research and development

New Company

Year 0% 6

-5

Minimum Investment US$ 100,000 Year 15%

onwards

Industry and Services (Normal Tax Regime)


Qualifying Activity Core Conditions Income Tax Incentives Year 0% Year 10% Year 20% 8 15 Manufacture of Company machinery, industrial New undertaking on and machine tools or after 01/04/2006 with minimum investment Electronics Rs.50 Mn Incorporation pre 01/04/2002 Rs.10Mn Incorporation 01/04/2002 post

-7

onwards

Industry and Services (Normal Tax Regime)


Qualifying Activity Manufacture of ceramics , glassware or other mineral based products Manufacture of based products Core Conditions Company Income Tax Incentives 1 6 8 -5 7 Year 0% Year New undertaking 10% rubber Minimum Investment Year Rs.50Mn 20%

onwards

Light and heavy No reduction or engineering industries withdrawal of investment during Refrigerated transport period of exemption services or cold room storage services

Industry and Services (BOI Regime)


Qualifying Activity Core Conditions Income Tax Incentives Manufacture of industrial equipment , components and/Machinery tools , New Company Minimum Investment US$ 150,000 New Company Minimum Investment US$ 5,000,000 Year 1-5 0% Year 6-7 10% Year 8 onwards 20% Year 1 -5 0% Year 5-6 10% Year 6 onwards 20% (15% if export oriented and>80%of the products to be exported or more than 70%of export TO in foreign currency)

Industrial or other business activity connected to advanced technology or which is of pioneering nature

Large scale manufacturing/service industry or business activity for export

New Company Minimum Investment US$ 12.5Mn

Year 1- 6/15 Thereafter

0% 15%

General other concessions for BOI enterprises


Duty free of import of capital goods during the project implementation stage is ordinary enabled for contracting enterprises engaged in infrastructure development , IT development , regional headquarters , agriculture , research and development. Duty free exemption on both capital and raw material is enabled only in the case of export oriented manufacture. It appears that the BOI grants contracting enterprises exclusion from exchange control only if engaged in export oriented manufacture or services. The agreements with the BOI prevail for the lifetime of the Company. Income tax exemptions grants would however be for the time period as specified in the agreement.

Transfer Tax
A non-citizen who acquires immovable property in Sri Lanka must pay additional stamp duty of 100% of the value of property. Any Company which has been approved by the BOI , obtains a land under exempted sectors ( to be satisfied with Investment requirement) will be exempted from payment of 100% land transfer tax provided the total value of land is met by inward remittances of foreign currency.

Useful Websites
www.inlandrevenue.gov.lk www.boi.lk

Thank You