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Tuesday May 30th, 2023

Sri Lanka budget 2021 key tax changes and relief

ECONOMYNEXT – Sri Lanka will give a 100,000 rupee a month tax relief for personal income tax payers who invest in government securities, shares of listed companies and housing loan and medical insurance will also be deductible, Prime Minister and Finance Minister Mahinda Rajapaksa said.

“To encourage private savings, I propose to treat medical insurance, interest on housing loans, investments in Government Securities and shares of listed companies incurred up to Rs.100,000 per month as deductible expenditures in the calculation of personal income tax,” PM Rajapaksa told parliament presenting a budget for 2021.

Sri Lanka will also introduce a special Goods and Services tax for, alcohol, tobacco, gaming, telecommunications replacing several different taxes, he said.

Other tax changes and relief proposed are as follows.

*For the benefit of the country, I request from all entrepreneurs to utilize the funds hidden locally or internationally in order to evade laws relating to taxes and foreign exchange. It is expected to make legal provisions to provide a tax pardon to entrepreneurs thus utilizing funds for any investment facilitated by this budget under the payment of taxes amounting to 1 percent.

*In order to promote investments in the housing market through the Sri Lanka Real Estate Investment Trust (SLREIT) regulated by the Securities and Exchange Commission, I propose to exempt such investments from capital gains tax and dividends free from income tax, and to reduce the stamp duty up to 0.75 percent.

*So as to promote the listing of local companies with the Colombo Stock Exchange, I propose to provide a 50 percent tax concession for the years 2021/2022 for such companies that are listed before 31 December 2021 and to maintain a corporate tax rate of 14 percent for the subsequent three years.

*I propose to simplify the Taxes on Capital Gains, where such taxes will be calculated based on the sale price of a property or the assessed value of a property whichever is higher.

*I propose to exempt the tax on dividends of foreign companies for three years if such dividends are reinvested on expansion of their businesses or in the money or stock market or in Sri Lanka International sovereign bonds.

*On instances when the commercial banks in Sri Lanka purchase Sri Lanka International sovereign bonds subject to a minimum of USD 100 million, I propose to suspend the risk weighted provisioning under Central Bank Regulations for three years and to free the profits on capital and interest income of this investments from taxes.

“In order to encourage the recycling and re use of material from construction, I also propose a ten year tax holiday for investments in selected recycling sites.

*Investments exceeding USD 10 million with potential to change the landscape of the economy, in the areas of export industries, dairy, fabric, tourism, agricultural products, processing and information technology will be provided with concessions up to a maximum of 10 years under the Strategic Development Law.

*In order to encourage savings, I propose to release the interest income of the welfare societies and institutions from income taxes which was imposed by the previous government.

*In order to promote the Colombo and Hambanthota ports as commodity trading hubs in international trading, and to encourage investments in bonded warehouses and warehouses related to offshore business I propose to exempt such investments from all taxes.

*In order to encourage the exports of multi-national companies which are import based for requirements of the domestic market, it is proposed to reduce the tax imposed on their dividends by 25 percent in 2021 and 50 percent in 2023 under the condition that they increase their exports by 30 percent and 50 percent in the respective years.

*In order to maintain a similar amount as the import expenditure in foreign exchange in domestic banks, the interest income of such deposits will be exempted from taxes.

*To develop the latent industries such as mineral sand, phosphate, fertilizer and graphite as high value export industries, I propose to reduce the expenditure on research and development expenses of local entrepreneurs involved with the Institute of Nanotechnology from taxes.

*I propose to provide separate docks, dockyard access facilities and long-term credit facilities to promote boat and shipbuilding activities which has high development prospects due to the rising demand in the fisheries, tourism and shipping sectors and the high production potential of local manufacturers. It is also proposed to grant a tax break of 7 years for local boat and shipbuilding

*We believe that the Colombo Port City will become a prime choice for investors and business community due to the business and investor friendly legal framework and proposed advanced infrastructure. It is expected to provide concessions on required taxes and specific goods trade, banking and foreign exchange with the objective of converting the Port City Economic Zone as one of the hubs for investment promotions in the country.

*It is proposed to establish a shop in all Grama Niladhari divisions where the network of shops has been adequately expanded targeting 25,000 female entrepreneurs chosen from Samurdhi families. Under this network of shops functioning under government sponsorship and bank credit facilities, priority will be given to sell local products. Related expenditure of the local entrepreneurs who contribute to establish these shops will be considered as deductible expenditures in the calculation of personal income tax.

Import Duty>

Sri Lanka has brought in a three band import duty framework and steep CESS as protectionist taxes for an import substitution regime to give extra profits to some domestic companies.

“I propose the to formulate a balanced trade policy yielding long-term returns so as to increase the export earnings of our industrial products and to save foreign exchange through import substitutions that could be produced locally,” Prime Minister Rajapaksa said.

“In ensuring that the production economy is geared to fulfill the above objectives, the following proposals will be implemented.

1. To limit importation of agricultural commodities except the items that cannot be produced domestically (negative List).

2. To impose the Special commodity levy to balance the supply and demand of domestic production for selected agricultural products

3. To impose CESS to provide the required protection on the imports and exports of domestic production.”


Sri Lanka publishes trade taxes for import substitution economy, new duty list

Sri Lanka protectionism to continue, three band tariff for some

*I propose to exempt import tax on the import of machinery with modern technologies.

*In ensuring that the production economy is geared to fulfil the above objectives, the following proposals will be implemented to remove import taxes on the raw materials not available in the country, machineries and equipment with modern technology, to boost exports, and also to encourage domestic industries to produce value added goods

*I propose to reduce the import taxes levied on vehicle spare parts required for new production sectors to incentivize entrepreneurs in automobile industries engaged in vehicle repairing and vehicle assembly.

*Certain raw materials such as cement, premix, iron rods, bitumen that cannot be produced domestically will be imported in bulk without import duties, to be used to for the construction of mega housing schemes, highways and also to ensure the smooth and continuous availability of such materials for small and medium construction activities at a competitive price.

How the latest tax changes will combine with the tax changes announced in December/January 2020

Budget 2021-Taxation

1. Income Tax (Amendments to Inland Revenue Act, No. 24 of 2017)

1.1 Removal of Withholding Tax (WHT)

Following payments are exempt from Withholding tax with effect from January 01, 2020

(i). Interest, specified fees, dividend, charge, natural resource payment, rent, royalty, premium or retirement payments made to residents.

(ii). Employment income.

(iii). Partners’ share of a Partnership profit. The taxable income of the partnership excluding Rs. 1 million per annum is subjected to Partnership Tax at the rate of 6%.

1.2 Exemptions from income tax

(i). Profits and income earned by any person from farming including agriculture, livestock and fish farming, with effect from April 1, 2019.

(ii). Profits and income earned from providing Information Technology and enabling services, with effect from January 1, 2020. The enabling services will be prescribed by regulations by the Minister in charge of the subject of Finance.

(iii). Profits and income earned from services rendered to persons outside Sri Lanka, including the income earned from foreign sources if the payments for such services or income from such sources are received in foreign currency, through a bank, with effect from January 1, 2020.

(iv). Interest income earned on Non-Resident Foreign Currency (NRFC) and Resident Foreign Currency (RFC) accounts, with effect from January 1, 2020. (v). Interest paid on loans obtained from any person outside Sri Lanka, with effect from April 1, 2018.

(vii). Interest or discount paid or allowed to any person on Sovereign Bonds denominated in foreign currency, with effect from April 1, 2018.

(viii). Funds received by any Public Corporation out of the funds voted by Parliament from the Consolidated Fund or out of any loan arranged through the Government, with effect from April 1, 2018.

(ix). Dividends paid by a resident company to any non-resident person, with effect from January 1, 2020.

(x). Dividends distributed by Commercial hub Enterprises, with effect from January 1, 2020.

(xi). Dividends from and gains on the realization of shares in a non-resident company where derived by any person with respect to a substantial participation in the non-resident company with effect from January 1, 2020 (xii). Amounts derived by any non-resident person from laboratory services or standards certification services, with effect from January 1, 2020.

(xiii). Amounts received by any religious institution by way of grants and donations, with effect from January 1, 2020.

(xiv). All aircraft related payments, software licenses and other overseas payments made by SriLankan Airlines with effect from April 1, 2018.

(xv). Exemption or variation of the applicability of the provisions of the Inland Revenue Act, No. 24 of 2017, in respect of projects approved under the Strategic Development Projects Act, No. 14 of 2008

1.3 Qualifying Payments

(i). Personal relief for residents or non-residents but citizens for each year of assessment is Rs. 3,000,000/- with effect from January 1, 2020.

(ii). Payments made to Consolidated Fund by any Public Corporation is deductible in calculating income tax of such Corporation, with effect from April 1, 2019. 50

(iii). Following payments subject to maximum of Rs.100,000/- per month or Rs. 1.2 million per annum is deductible, with effect from January 1, 2020 in calculating the Personal Income Tax:-

• Health expenditure including contributions to Medical Insurance

• Educational expenditure incurred locally

• Payment of interest on housing loans

• Contribution to an approved pension scheme

• Expenditure incurred for the purchase of equity or security

1.4 Income Tax Rate Changes

(i). Revision of Personal Income tax rates on taxable income with effect from January 1, 2020 as follows

First Rs. 3 Million – 6%
Next Rs. 3 Mn – 12%
Balance – 18%

(ii). Income tax rate applicable on the terminal benefits is revised with effect from January 1, 2020, as follows:

• First Rs. 10 Million – Exempt
• Next Rs. 10 Milion – 6%
• Balance – 12%

(iii). Payments to non-residents where such payments has a source in Sri Lanka is treated as final withholding payments, with effect from January 01, 2020 and subjected to tax as follows:

• Interest payments – 5%
• Any other payment – 14%

(iv). Corporate Income Tax Rate is revised, with effect from January 1, 2020, as follows:-

• Exports, Tourism, Education, Medicare, Construction, and Agro processing 14%

• Manufacturing 18%

• Trading, Banking, Finance, Insurance, etc. (Standard Rate) 24%

• Liquor, Tobacco, Betting and Gaming 40% 51

1.5 Advance Income Tax

(i). Advanced Personal Income Tax can be deducted from regular fixed income (remuneration, interest etc.) of individuals, subject to the written consent of such individual with effect from April 1, 2020.

(ii). Advanced Income tax can be collected at the source, subject to the written consent of the tax payer with effect from April 1, 2020.

1.6 Tax Relief Measures to Facilitate Post COVID – 19 Economic Recovery

(i). Consideration of the income generated from the supply of Health Protective Equipment and similar products by BOI companies on the request of Ministry of Health and Indigenous Medical Services, Department of Health Services, Tri Forces and Sri Lanka Police as “Deemed Exports” and to consider the said quantities for the calculation of 80% export requirement for the tax purposes, to become eligible for reduced tax rates.

(ii). Waiver of Income tax in arrears, payable by the SMEs as defined in the Inland Revenue Act, No. 24 of 2017, on the assessments issued up to the year of assessment 2018/2019 by the CGIR, where he is satisfied that there is no fraud or wilful neglect involved in the disclosure of income or any claim for any deduction or relief.

(iii). The income tax return furnished by the SMEs for the year of assessment 2019/2020 is proposed to be accepted and additional assessment not to be issued for that year on tax payers, who furnish the Income Tax Returns for the year and pay the tax declared in the Return.

(iv). A grace period is proposed to be granted to settle the taxes in arrears/default, as agreed with the Legacy Unit, Default Tax Recovery Unit and the Revenue Administration Management Information System (RAMIS) Unit of the Department of Inland Revenue.

(v). The payment or/and submission of the returns of any tax administered by the CGIR, which is due for the period from March 1, 2020 to June 30, 2020, proposed to be treated as paid or/and submitted on the due date if such payment/submission is made on or before December 31, 2020.

2. Value added Tax (VAT) Amendment to VAT Act 14 of 2002

i. Increase of threshold for the Value Added Tax (VAT) from Rs. 3 million per quarter or Rs 12 million per annum to Rs75 million per quarter or Rs 300 mn per annum with effect from January 01, 2020.

ii. Granting permission for the voluntary registration of VAT upon a written request made by any person who carries out a taxable activity, even if such a person is not within the VAT registration threshold

iii. Exemption of the sale of Condominium housing units from VAT with effect from December 1, 2019.

iv. Exemption of information technology and enabling services with effect from January 1, 2020.

v. Reduction of VAT Rate on the import and/or supply of goods or supply of services other than financial services from 15% to 8% with effect from December 1, 2019 vi. Exemption of the supply of services in respect of inbound tours, by a travel agent registered with the Sri Lanka Tourism Development Authority with effect from April 1, 2020. vii. Exemption of quantities supplied/donated of health protective equipment and similar products by export oriented BOI companies to the Ministry of Health and Indigenous Medical Services, Department of Health Services, Tri Forces and Sri Lanka Police on their request.

viii. Exemption of Importation or importation and supply or importation and donation of machinery and equipment including medical, surgical, surgical and dental instruments, apparatus, accessories and parts thereof, hospital/medical furniture and drugs, chemical and similar items required for the provision of health services to address the COVID 19 Pandemic from May 20, 2020 to December 31, 2020.

ix. Reduction of piece based VAT Rate applicable on domestic sale of certain garments by – to Rs. 25/-in line with the removal of Nation Building Tax and reduction of VAT rate.

x. Removal of the provisions permitting to treat the supplies made by the suppliers who are not registered for VAT as VAT inclusive supplies, introduced in respect of the wholesale and retail trade, in line with the increase of threshold for registration for VAT and introduction of voluntary registration.

3. Technical Rectifications

Relevant amendment will be made to the Inland Revenue Act, No. 24 of 2017 and Value Added Tax Act No. 14 of 2020 to rectify certain ambiguities (including differences in translations).

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  1. sacre blieu says:

    Will the Finance Minister also ensure that the Stock Market fraudsters will also be brought to book, both, the past and present. There are also companies that were floated during the stock market boom, who have neglected the minority shareholders and have disgracefully siphoned out such investment to a privately owned company of the directors. No dividends, depreciated stock value and into a junk status.

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  1. sacre blieu says:

    Will the Finance Minister also ensure that the Stock Market fraudsters will also be brought to book, both, the past and present. There are also companies that were floated during the stock market boom, who have neglected the minority shareholders and have disgracefully siphoned out such investment to a privately owned company of the directors. No dividends, depreciated stock value and into a junk status.

Sri Lanka rupee at 296.75/297.25 to dollar at open, bond yields steady

ECONOMYNEXT – Sri Lanka’s rupee opened at 297 /297.50 against the US dollar in the spot market on Monday, while bond yields were steady, dealers said.

The rupee closed at 296.75 /297.25 to the US dollar on Monday after opening around 296.50 /297.50 rupees.

A bond maturing on 01.09.2027 was quoted at 26.50/75 percent steady from Friday’s close at 26.50/65 percent.

Sri Lanka’s rupee is appreciating amid negative private credit which has reduced outflows after the central bank hiked rates and stopped printing money. (Colombo/ May 29/2023)

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Sri Lanka rupee appreciation squeezes exporters

ECONOMYNEXT – Sri Lanka’s recent appreciation is starting to squeeze apparel exporters as their domestic costs including wages and energy, were hiked over recent months, when the rupee fell steeply, an industry official said.

Companies had raised salaries and emoluments at rates averaging 25 percent for workers while transport costs have also gone up but not has come down, Yohan Lawrence Director General of the Join Apparel Association Forum said.

Apparel factories in particular also provide transport and some meals for workers.

Electricity prices have also been hiked, based on the rupee which was weaker. A tariff cut is expected from June after the rupee appreciated and imported fuel prices fell.

Sri Lanka’s rupee collapsed in 2022 from 200 to 360 to the US dollar as interest rates were suppressed with liquidity injections and a failed attempt was made to float the rupee with surrender requirement in place.

From the second half of 2022, with higher interest rates and negative private credit, the central bank has avoided printing money under conditions which are generally accepted to be difficult, and is broadly running deflationary open market operations, triggering a balance of payments surplus and putting the rupee under upward pressure.

Central bank net credit to government which was 3,302 billion rupees in September in 2022, was down to 3,209 billion rupees by March 2023, part of which was due to rollovers, analysts say.

Market pricing of fuel and electricity by the Ministry of Energy and also spending controls and tax hikes buy have also helped contain domestic credit.

Sri Lanka also has mandatory conversion rules, imposed on exporters, which is a concern for exporters.

“We believe rupee should be at its natural level, but with forced conversions you won’t get the correct picture,” Lawrence said.

Sri Lanka has to release a plan to remove import controls, exchange controls and other restrictions imposed in the period where policy rates were suppressed with liquidity injections (so-called multiple currency practices and capital flow measures) by June under the IMF program.

Apparel exporters have also seen orders fall amid tighter conditions in Western markets.

The central bank has to peg (intervene actively in forex markets and create money) to meet reserve targets under an IMF program and cannot free float (avoid creating money through international operations) the rupee.

The newly created money has generally been absorbed in an overnight liquidity shortage.

There have also been foreign purchases of rupee Treasuries. Amid a contraction in credit, the inflows also do not turn into imports fast as the money if the money is spent.

By making purchases a little below what is allowed by the contraction in domestic credit, the rupee can be allowed to appreciate, analysts say.

The central bank has so far allowed the rupee to appreciate to around 300 to the US dollar from 360 levels under a transparent guidance peg up to February.

Except after the 2008/2009 currency crisis, Sri Lanka’s central bank has not previously allowed to the rupee to appreciate under IMF programs where the first year in particular sees balance of payments surpluses, before private credit and domestic investments picks up again.

One of the considerations used by third world central banks are Real Effective Exchange Rate indices.

The REER of the Sri Lanka rupee based on a basket of currencies calculated by the central bank was 61.12 points in February before the rupee was allowed to appreciate by lifting a surrender rule.

In March the index went up to 69.55 points, but remained steeply below 100. Real effective exchange rates are calculated also taking into account inflation in counterpart trading nations.

Sri Lanka’s inflation index had hardly risen since September amid rupee gains. Falling food prices can help contain pressure for further wage hikes, analysts say. (Colombo/May30/2023)

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Sri Lanka forum to discuss central bank independence vs sound money

ECONOMYNEXT – Central bank independence and sound money will be under discussion at a public event organized by the Sri Lanka chapter of the Bastiat Society today, May 30, as island is recovering from the worst episode of monetary instability since independence.

The forum will feature Lawrence H White, Professor of Economics at George Mason University in the US, and W A Wijewardene, former Deputy Central Bank Governor, of the Central Bank of Sri Lanka.

“The discussion will compare the current system against alternative systems and explore the relationship between such banking systems and sound money,” the organizers said.

White specializes in the theory and history of banking and money. He is the author of “The Clash of Economic Ideas” (2012), “The Theory of Monetary Institutions” (1999), “Free Banking in Britain” (2nd ed., 1995), and “Competition and Currency” (1989).

Wijewardene has been speaking on central bank independence in Sri Lanka long before it became a topic of wider discussion, but also on accountability.

In April, a Central Bank Independence and Other Matters, which includes a collection of his orations on the subject over the years as well a recent development was published.

The discussion comes as independent central banks in the West have created the worst inflation since the 1970s and early 1980s and are apparently unaccountable to parliaments and the public.

The early 1980s also saw the first wave of external debt crises in so-called soft-pegged countries in Latin America and Eastern Europe in particular as the US and UK tightened policy to end the Great Inflation.

The discussion will be held at 7.00 pm at the Lakmahal Community Library and those interested can register online, the organizers said. (Colombo/May30/2023)

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