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Sunday June 16th, 2024

Sri Lanka budget 2023, key tax changes

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe has announced tax changes in an effort boost revenues and also make external trade easier, according to a budget presented for 2023;.

Border Taxes

Sri Lanka will phase out CESS, a para tariff in three years starting from January 2023.

Ports and Airports Levy, another border tax will be phased out in five years.

Instead standard import duty will be raised from 0, 10 and 15 percent to 0, 15 and 20 percent.

Customs Import Duty on a total of 378 selected HS Codes will be revised the Export Development Board Act, No.40 of 1979, effective from November 15,2022.

A Surcharge Tax will be charged at the point of importation, on diesel, petrol and crude oil.

Value Added Tax

A new Value Added Tax Act will be introduced consolidating the amendments inhoduced from the year 2002 to the year 2022.

The exemptions specified in the First Schedule to the VAT Act will be rationalized with effective from April 2023

Crude estimate suggests that revenue forgone due to the VAT exemptions granted to various sectors, indcuding electricity, tsansport and fuel, is estimated to be more than 1 percent of GDP.

Hence it is proposed to remove certain exemptions after reviewing. Amendments to the VAT Act to remove
certain exemptions will be made effective from 01 April 01, 2023.

Social Security Contribution Levy

In 2022 the tax system was further complicated by a cascading social contribution levy, which applies on top of value added tax.

Commercial hub enterprises will be exempted from the the Social Security Contribution Levy Act, No.25 of 2022

Importation of any motor vehicle identified under Harmonized Commodity Description and Coding Numbers for Custom purposes and liable to Excise Duty under the Excise (Special Provisions) Act, No. 13 of 1989, will be exempted from Social Contribution levy with effect from 01.01.202

Equipment used by differently abled persons and the pharmaceutical product categorized under HS code 2844.110, will be exempted from SSCL.

Finance Act/Hub activities

Any business or project intends to engage in the commercial hub activities will be eligible for exemptions granted under the Strategic Development project Act, No.14 of 2008, if identified as Strategic
Development Project.

Exemptions under the commercial hub activities will be extended to bunkering services.

Gaming

The definition of “bookmaker” in Betting and Gaming Lery Act wiJl be extended to include a person receives or negotiates bets on all type of sports event, including online betting.

A licensing mechanism for the business of bookmaker will be introduced, for a fee. Betting and Gaming Levy Act will be amended to permit the licensed bookmakers to register with Inland Revenue Department.

Transitional provision on dividends

Provisions will be introduced to improve the clarity of income tax liability on dividend during the period from October’1.,2022 to the effective date of the Inland Revenue (Amendment) Act, 2022, as follows:-

i. exempt dividend received or derived by non-residents during that period

ii. apply income tax rate of 15% for dividend received or derived by residents during that period

iii exemption will be applicable on any dividend paid by a resident company to a member to the extent that such dividend payment is attributable to, or derived fronL another dividend received by that
resident company or another resident company.

Income tax for grant aid projects

Income eamed by non-resident persons from engagaing in Govemment projects approved by the Minister of Finance taking into consideration the economic benefit to the country, where such project is totally funded from foreign grants.

PAYE tax paid by SOEs for workers

lt is noticed that some State0wned Enterprises (SOEs) are still paying the PAYE / APIT tax liability of employees. This issue has also been questioned at the Committee on Public EnterPrises (COPE) and by the Auditor General as well.

Hence, I propose to sto such payments effective from 1 January 2023,

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Sri Lanka state airport agency swimming in cash after sovereign default

ECONOMYNEXT – State-run Airport and Aviation Services (Sri Lanka) Ltd is swimming in cash after a sovereign default halted debt repayments allowing it to post a profit of 29.7 billion rupees with 10.4 billion rupees in interest income, official data showed.

In April 2022 Sri Lanka declared a sovereign default after printing large volumes of money over more than two years to enforce rate cuts and blowing the biggest hole in the balance of payments in the history of the island’s money printing central bank.

Interest earnings of Airport and Aviation Services also shot up to 10.4 billion rupees in 2023 from 6.1 billion in 2022 and 3.3 billion rupees in 2021 before the sovereign default.

Under the terms of the default or ‘debt suspension’, state agencies like the Airport and Aviation Services, and Sri Lanka Port Authority were also not required to service loans, even if they had the cash to repay loans.

AASL’s finance income shot up in 2023 “mainly because the company has invested surplus cash saved by not servicing the foreign loans obtained by the company due to the temporary debt moratorium policy of the country,” the Finance Ministry said in a report.

Sri Lanka’s rupee and foreign currency interest rates also shot up in 2022 and 2023 as rate cuts enforced by money printing were lifted to clear anchor conflicts.

After inflationary rate cuts kill confidence in a currency triggering capital flight and parallel exchange rates, excessively high rates are needed to kill domestic credit and stabilize the currency.

Countries with such flawed operating frameworks in central banks tend to have chronic high nominal interest rates in any case.

AASL’s rupee revenues went up to 48.8 billion rupees in 2023 from 32.2 billion rupees in 2022 as passenger movements increased to 7.5 million from 5.5 million with a recovery in tourism and local traffic.

Sri Lanka’s currency crisis hit in 2022 just as the island was recovering from Coronavirus pandemic triggering fuel shortages and power cuts as money printing triggered forex shortages.

From 2022 March the rupee collapsed from 200 to 370 levels an attempt to float the rupee was failed by a surrender rule (a type of buy-side pegging which pushes the exchange rate down).

In 2023, after hiking rates to kill credit, the surrender rule was removed, leading to a currency appreciation.

The airport agency also made an exchange gain of 6.1 billion rupees in 2023 against an exchange loss of 10.5 billion rupees in 2022 the rupee appreciated. (Colombo/June16/2024)

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Sri Lanka car import relaxing roadmap given to IMF: State Minister

ECONOMYNEXT – Sri Lanka has submitted a roadmap on relaxing vehicle imports to the International Monetary Fund, State Minister of Finance Ranjith Siymabalapitiya said as the country recovers from the worst currency crises in the history of its central bank.

The import relaxation will allow vehicles for public transport, goods transport, then motor cycles and cars use by private individuals and after that, luxury cars, Minister Siyambalapitiya said.

Luxury cars however attract the highest taxes for each dollar spent on imports.

Economic analysts have characterized vehicle import controls as a ‘cascading policy error’ that follows inflationary rate cuts, which then deprive taxes to the state and triggers more money printing and more forex shortages, requiring even higher corrective interest rates and a contraction of economic activities to save the rupee.

According to the latest IMF report car import controls may have led to revenue losses of 0.7 to 0.9 percent of GDP.

Sri Lanka started controlling imports few years after a central bank was set up in 1950 and also tightened exchange controls progressively, so that macroeconomists using post-1920 spurious monetary doctrines taught at Anglophone universities could print money through various mechanisms to suppress rates.

Sri Lanka is working with the IMF as a guide on many issues and the roadmap was submitted to the agency on June 14, Minister Siyambalapitiya said.

The IMF in an economic report released last week the plan was expected to be submitted by June 15.

Whatever the IMF’s faults, which some wags have called ‘progressive Saltwaterism’, the agency does not advocate import controls as solution to balance of payments problems, despite a Mercantilist fixation with the current account deficit in countries with reserve collecting central banks, analysts say.

Import controls have the same effect as import substation on the balance of payments, which is none, classical economists have pointed out and is now mainly a problem associated with macro economists and economic bureaucrats of so-called basket case countries.

Any pressure on the currency or missed reserves targets in the IMF program has come in the past only if the central bank printed money to suppress rates as credit growth picked up from car imports.

Sri Lanka had 3,000 items under import controls when rates were suppressed with printed money from 2020 to 2022 but eventually ended up with the worst currency crisis triggered by macro economists in the history of the country and eventual external default.

A committee made up of the Department of Trade and Fiscal Policy of the Finance Ministry, the Department of Registration of Motor Vehicles, the Central Bank and two associations representing vehicle imports were appointed to come up with the roadmap, he said. (Colombo/June15/2024)

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Chitrasiri Committee presents draft constitution for Sri Lanka Cricket

ECONOMYNEXT – A draft constitution for Sri Lanka Cricket, the governing body for cricket in the island, prepared by a committee headed by retired Supreme Court judge K T Chitrasiri, was presented to President Ranil Wickremesinghe today (15).

The Sri Lanka team were ignominiously knocked out of the Men’s T20 World Cup tournament this week, sparking renewed criticism of the team and the governing body.

Last November, a cabinet sub-committee was appointed to address challenges faced by Sri Lanka Cricket and provide recommendations after consecutive losses became a hot topic in parliament.

After parliament decided to remove the administrators of the sport, the International Cricket Council (ICC) Board suspended Sri Lanka Cricket’s membership.

Based on the sub-committee’s recommendations in its report, the Cabinet then appointed an expert committee to draft a new constitution for Sri Lanka Cricket.

The committee headed by judge K T Chitrasiri includes President’s Counsel Harsha Amarasekara, Attorney-at-Law Dr Aritha Wickramanayake and Chairman of the Sri Lanka Chamber of Commerce Duminda Hulangamuwa.

Deputy Solicitor General Manohara Jayasinghe, and Shamila Krishanthi, Assistant Draftsman representing the Legal Draftsman’s Department, and Loshini Peiris, Additional Secretary to the President were also on the committee. (Colombo/Jun14/2024)

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