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11
CHALLENGES OF CHALLENGES OF GLOBALIZINGGLOBALIZING
TAX SYSTEMS : TAX SYSTEMS :SRI LANKA’S JOURNEYSRI LANKA’S JOURNEY
N. R. GAJENDRAN N. R. GAJENDRAN FCAFCA
Partner, Gajma & Co Partner, Gajma & Co
22
DOING BUSINESS INDICATORSA Copublication of the World Bank and the International Finance
Corporation
Ease of Ease of Doing Doing
BusinessBusiness
World World RankRank 101101 120120 7676 107107 111111 6060 119119
SAARCSAARC
RankRank33 77 22 44 55 11 66
Starting a Starting a Business Business
World World RankRank 2929 111111 5959 9292 6060 3434 5252
SAARCSAARC
RankRank 11 77 44 66 55 22 33
Dealing Dealing with with
Licenses Licenses
World World RankRank 160160 134134 9393 116116 125125 88 119119
SAARC SAARC RankRank 77 66 22 33 55 11 44
Employing Employing WorkersWorkers
World World RankRank 111111 8585 132132 129129 155155 77 1414
SAARCSAARC
RankRank44 33 66 55 77 11 22
Registering Registering Property Property
World World RankRank 134134 112112 8888 171171 2525 178178 3333
SAARCSAARC
RankRank55 44 33 66 11 77 22
Sri Lanka
IndiaPakistan
Bangladesh
NepalMaldives
Bhutan
33
Getting Getting Credit Credit
World World RankRank 9797 3636 6868 4848 9797 135135 158158
SAARCSAARC
RankRank 44 11 33 22 44 55 66
Protecting Protecting investors investors
World World RankRank 6464 3333 1919 1515 6464 6464 122122
SAARCSAARC
RankRank44 33 22 11 44 44 55
Trading Trading across across bordersborders
World World RankRank 6060 7979 9494 112112 151151 110110 149149
SAARCSAARC
RankRank11 22 33 55 77 44 66
Enforcing Enforcing Contracts Contracts
World World RankRank 133133 177177 154154 175175 123123 9494 3838
SAARCSAARC
RankRank44 77 55 66 33 22 11
Closing a Closing a Business Business
World World RankRank 3939 137137 5151 102102 9595 120120 178178
SAARCSAARC
RankRank 11 66 22 44 33 55 77
DOING BUSINESS INDICATORS (Contd)
Sri Lanka
IndiaPakistan
Bangladesh
Nepal
Maldives
Bhutan
44
Paying Paying Taxes Taxes
WorldWorld
RankRank 158158 165165 146146 8181 9292 11 6868
SAARC SAARC RankRank 66 77 55 33 44 11 22
PaymentPayment
(Number (Number per year)per year)
WorldWorld
RankRank 6262 6060 4747 1717 3333 11 1919
SAARC SAARC RankRank 77 66 55 22 44 11 33
Time (Hours Time (Hours per year)per year)
WorldWorld
RankRank 256256 271271 560560 400400 408408 -- 274274
SAARC SAARC RankRank 22 33 77 55 66 11 44
Total tax Total tax ratesrates
(% of profit)(% of profit)
WorldWorld
RankRank 63.763.7 70.670.6 40.740.7 39.539.5 32.532.5 9.19.1 39.839.8
SAARC SAARC RankRank 66 77 55 33 22 11 44
PAYING TAXES
NOTE: SAARC ranking not done by World Bank or IFC
Sri Lanka
IndiaPakistan
Bangladesh
Nepal
Maldives
Bhutan
55
TAX SYSTEM IN SRI LANKATAX SYSTEM IN SRI LANKA
Taxes in Sri Lanka consist the following:Taxes in Sri Lanka consist the following:
Income TaxIncome Tax Economic Service ChargeEconomic Service Charge Partnership TaxPartnership Tax Social Responsibility LevySocial Responsibility LevyTaxes on goods and servicesTaxes on goods and services Value Added TaxValue Added Tax Excise DutyExcise Duty Custom DutyCustom Duty Turnover TaxTurnover Tax Ports and Airports Development LevyPorts and Airports Development Levy Tourism Development LevyTourism Development LevyBank Debit TaxBank Debit TaxStamp DutyStamp DutyShare Transaction LevyShare Transaction LevyBetting and Gaming LevyBetting and Gaming LevyThere is no tax on capital gains, no gift tax and estate duty There is no tax on capital gains, no gift tax and estate duty
66
Taxes administered by the Department of Inland Revenue includeTaxes administered by the Department of Inland Revenue include
Income Tax Income Tax Value Added Tax.Value Added Tax. Economic Service ChargeEconomic Service Charge Stamp DutyStamp Duty Bank Debit TaxBank Debit Tax Social Responsibility LevySocial Responsibility Levy Partnership Tax Partnership Tax Betting and Gaming LevyBetting and Gaming Levy
Economic Service Charge (ESC) was introduced as a minimum Economic Service Charge (ESC) was introduced as a minimum alternative taxalternative tax
TAXES ADMINISTERED BY THE DEPARTMENT OF INLAND REVENUE
77
ESC is payable on the turnover of a business if it exceeds Rs 7.5 ESC is payable on the turnover of a business if it exceeds Rs 7.5 million per quarter and rates varies from 0.05% to 1%million per quarter and rates varies from 0.05% to 1%
ESC is an advanced payment against income tax for those who ESC is an advanced payment against income tax for those who are liable to income taxare liable to income tax
If a person is liable to ESC, 5% withholding tax on services is not If a person is liable to ESC, 5% withholding tax on services is not appliedapplied
Partnerships are liable to a partnership tax at the rate of 10% on Partnerships are liable to a partnership tax at the rate of 10% on its aggregated amounts of divisible profits and other incomeits aggregated amounts of divisible profits and other income
The partnership tax attributable to the share of profits of the The partnership tax attributable to the share of profits of the partners is allowed against the income tax liability of the partnerspartners is allowed against the income tax liability of the partners
TAXES ADMINISTERED BY THE DEPARTMENT OF INLAND REVENUE (Contd)
88
CHARGEABILITY TO INCOME TAXCHARGEABILITY TO INCOME TAX
A resident is taxed on his worldwide incomeA resident is taxed on his worldwide income
A non resident is taxed on profits and income arising in or derived from A non resident is taxed on profits and income arising in or derived from Sri LankaSri Lanka
Profits and income arising in or derived from Sri LankaProfits and income arising in or derived from Sri Lanka Property in Sri LankaProperty in Sri Lanka Services rendered in Sri LankaServices rendered in Sri Lanka Business transacted in Sri LankaBusiness transacted in Sri Lanka
99
CHARGEABILITY TO INCOME TAX CHARGEABILITY TO INCOME TAX (Contd)(Contd)
Resident Person Resident Person
• A company is resident if
The registered or principal office is in Sri Lanka The registered or principal office is in Sri Lanka oror
the control and management of it’s businessthe control and management of it’s business are exercised in Sri Lankaare exercised in Sri Lanka
• An individual is resident if present in Sri Lanka for more than 183 days
1010
ASCERTAINMENT OF PROFITS AND OF PROFITS AND
INCOMEINCOME
All outgoings and expenses incurred in the production of profits and All outgoings and expenses incurred in the production of profits and income are deductibleincome are deductible
Entertainment expenses, 50% of advertising expenses and traveling Entertainment expenses, 50% of advertising expenses and traveling outside Sri Lanka (other than for exports) are disallowedoutside Sri Lanka (other than for exports) are disallowed
Management expenses are restricted to the lower of Rs. 1 millionManagement expenses are restricted to the lower of Rs. 1 million or 1% of the turnoveror 1% of the turnover
No tax depreciation for motor vehicles used for travelingNo tax depreciation for motor vehicles used for traveling
10% presumptive tax on dividend income10% presumptive tax on dividend income
10% presumptive tax on interest income, in the case of individuals 10% presumptive tax on interest income, in the case of individuals
1111
ASCERTAINMENT OF PROFITS AND INCOME ASCERTAINMENT OF PROFITS AND INCOME (Contd)(Contd)
THIN CAPITALIZATION RULETHIN CAPITALIZATION RULE
Interest payment between group companies are restrictedInterest payment between group companies are restricted
If the borrower is a manufacturer and if the loan exceeds 3 times If the borrower is a manufacturer and if the loan exceeds 3 times
of equity and reserves, interest on the excess is disallowedof equity and reserves, interest on the excess is disallowed
In the case of others, if the loan exceeds 4 times of equity and In the case of others, if the loan exceeds 4 times of equity and reserves , interest on the excess is disallowedreserves , interest on the excess is disallowed
1212
ASCERTAINMENT OF PROFITS AND INCOME ASCERTAINMENT OF PROFITS AND INCOME (Contd)(Contd)
TRANSFER PRICING PRINCIPLETransactions between associated enterprises should be at arm’s Transactions between associated enterprises should be at arm’s length pricelength price
An undertaking shall be an associated undertaking of another An undertaking shall be an associated undertaking of another undertaking, if the first mentioned undertaking participates in the undertaking, if the first mentioned undertaking participates in the control of the second to an extent as may be prescribedcontrol of the second to an extent as may be prescribed
““Arm’s length price” is the price applied in uncontrolled conditions in Arm’s length price” is the price applied in uncontrolled conditions in a transaction between persons other than associated undertakingsa transaction between persons other than associated undertakings
Methods of arm’s length price should be prescribedMethods of arm’s length price should be prescribed
1313
TRANSFER PRICING PRINCIPLETRANSFER PRICING PRINCIPLE (Contd)(Contd)
Commonly used arm’s length pricing methodsCommonly used arm’s length pricing methods
Comparable Uncontrolled Price methodComparable Uncontrolled Price method
Resale Price methodResale Price method
Cost Plus methodCost Plus method
Profit Split methodProfit Split method
Transactional Net Margin methodTransactional Net Margin method
ASCERTAINMENT OF PROFITS AND INCOME ASCERTAINMENT OF PROFITS AND INCOME (Contd)(Contd)
1414
ASCERTAINMENT OF PROFITS AND INCOME ASCERTAINMENT OF PROFITS AND INCOME (Contd)
NON RESIDENT COMPANYNON RESIDENT COMPANY
Head office expenditure of a non resident company is Head office expenditure of a non resident company is restricted to 10% of the profitsrestricted to 10% of the profits
Head office means executive and general administration Head office means executive and general administration expenditure incurred outside Sri Lankaexpenditure incurred outside Sri Lanka
This includes cost of remuneration and traveling of persons This includes cost of remuneration and traveling of persons managing the Head office and cost of premisesmanaging the Head office and cost of premises
TRANSFER PRICING PRINCIPLETRANSFER PRICING PRINCIPLE (Contd)(Contd)
1515
DOUBLE TAX AGREEMENTS
MFN clause of the protocol may be used to one’s advantage in theMFN clause of the protocol may be used to one’s advantage in the India – Sri Lanka DTAIndia – Sri Lanka DTA
eg: eg: (1) Establishment of construction site PE may be extended to 12 months (1) Establishment of construction site PE may be extended to 12 months ( as a result of Sri Lanka- Iran DTA) ( as a result of Sri Lanka- Iran DTA)
(2) Establishment of Service PE may be extended to 275 days (2) Establishment of Service PE may be extended to 275 days (as a result of Sri Lanka – Romania DTA) (as a result of Sri Lanka – Romania DTA)
Absence of “securing orders” in the Agency PE clause may mitigateAbsence of “securing orders” in the Agency PE clause may mitigate the establishment of PE under DTA between India - Sri Lanka and the establishment of PE under DTA between India - Sri Lanka and Pakistan - Sri LankaPakistan - Sri Lanka
Tax sparing clause is present in the DTA between India - Sri LankaTax sparing clause is present in the DTA between India - Sri Lanka and Pakistan - Sri Lankaand Pakistan - Sri Lanka
The absence of an article for Fees for Technical Services (FTS) may The absence of an article for Fees for Technical Services (FTS) may mitigate withholding payments on management / technical fees from mitigate withholding payments on management / technical fees from Sri LankaSri Lanka
No capital gains tax in Sri LankaNo capital gains tax in Sri Lanka
1616
ENCOURAGEMENT OF VOLUNTARY COMPLIANCE
Self assessment system is in operation in Sri Lanka Self assessment system is in operation in Sri Lanka
Other than a Quoted Public Company, audited accounts are not Other than a Quoted Public Company, audited accounts are not necessary , if the turnover is less than Rs 250 million or the profitsnecessary , if the turnover is less than Rs 250 million or the profits
is less than Rs 100 millionis less than Rs 100 million
In the case of an individual, 10% discount is granted if he pays his In the case of an individual, 10% discount is granted if he pays his quarterly installment of income tax one month before the due datequarterly installment of income tax one month before the due date
An individual who has paid more than Rs. 250,000/- as income tax An individual who has paid more than Rs. 250,000/- as income tax consecutively for five years is entitled to a reduction of 25% of all consecutively for five years is entitled to a reduction of 25% of all import levies in the import of a motor vehicle import levies in the import of a motor vehicle
The income tax return of an individual will be accepted without any The income tax return of an individual will be accepted without any question if he pays 20% more income tax compared to that of the question if he pays 20% more income tax compared to that of the previous yearprevious year
1717
ENCOURAGEMENT OF VOLUNTARY COMPLIANCE (Contd)
TIME BAR FOR INCOME TAX ASSESSMENTTIME BAR FOR INCOME TAX ASSESSMENT
1 ½ years, if returns are filed on time1 ½ years, if returns are filed on time
In other cases 3 yearsIn other cases 3 years
No time bar for fraud or evasionNo time bar for fraud or evasion
Income tax outstanding cannot be recovered after 5 years from Income tax outstanding cannot be recovered after 5 years from the date on which the tax becomes final and conclusivethe date on which the tax becomes final and conclusive
1818
VOLUNTARY COMPLIANCE (Contd)
TAXPAYER PRIVILEGE CARDS
An individual who pays more than Rs. 1 million as income tax is entitled to a Gold Card. (for non citizens it is Rs. 2million)
An individual who pays more than Rs. 500,000/- as income tax is entitled to a Silver Card (for non citizens it is Rs. 1 million)
Privileges of the card holder
Overdraft facility
Credit Card facility
Priority treatment at Government agencies
Use of business class lounge at the airport
1919
TAX INCENTIVESTAX INCENTIVES
Income tax exemption is available for the following :
Agriculture Agriculture
Agro processing Agro processing
Industrial and machine tool manufacturingIndustrial and machine tool manufacturing
Machinery manufacturingMachinery manufacturing
ElectronicsElectronics
Export of non -traditional productsExport of non -traditional products
2020
TAX INCENTIVES (Contd)TAX INCENTIVES (Contd)
Income tax exemption (Contd)Income tax exemption (Contd)
Information TechnologyInformation Technology
Large scale projects exceeding Rs. 1 billionLarge scale projects exceeding Rs. 1 billion
Infrastructure development for generation of powerInfrastructure development for generation of power
TourismTourism
RecreationRecreation
Warehousing and cold storageWarehousing and cold storage
Garbage collection or disposalGarbage collection or disposal
Construction of housesConstruction of houses
Construction of hospitalsConstruction of hospitals
New undertakings located outside Colombo and Gampaha DistrictsNew undertakings located outside Colombo and Gampaha Districts
2121
Income tax exemption (Contd)Income tax exemption (Contd)
Relocation of undertakings outside Colombo and Gampaha DistrictsRelocation of undertakings outside Colombo and Gampaha Districts
Research and developmentResearch and development
Venture capitalVenture capital
Manor houses or thematic bungalows
New or upgraded cinemas
Reopening of abandoned factories
New undertakings in the Eastern Province
New undertakings in lagging regions
TAX INCENTIVES (Contd)TAX INCENTIVES (Contd)
2222
FOREIGN DIRECT INVESTMENTSFOREIGN DIRECT INVESTMENTS
FDI is protected under Article 157 of the Constitution of the FDI is protected under Article 157 of the Constitution of the Democratic Socialistic Republic of Sri LankaDemocratic Socialistic Republic of Sri Lanka
Sri Lanka has entered into investment protection agreement with Sri Lanka has entered into investment protection agreement with India and PakistanIndia and Pakistan
Sri Lanka is one of the founder members of Multi-lateral Investment Sri Lanka is one of the founder members of Multi-lateral Investment Guarantee Agency (MIGA) of the World Bank.Guarantee Agency (MIGA) of the World Bank.
The Board of Investment (BOI) is a one-stop investment facilitation The Board of Investment (BOI) is a one-stop investment facilitation agencyagency
BOI can enter into agreements to grant special concessions and BOI can enter into agreements to grant special concessions and privileges overriding income tax, Custom and Exchange Control privileges overriding income tax, Custom and Exchange Control lawslaws
Entire Sri Lanka is considered to be an Investment Promotion Zone Entire Sri Lanka is considered to be an Investment Promotion Zone (IPZ)(IPZ)
100% foreign investment is possible for other than areas 100% foreign investment is possible for other than areas specifically reserved for Sri Lanka, regulated areas and areas specifically reserved for Sri Lanka, regulated areas and areas subject to conditional approvalssubject to conditional approvals
2323
AREAS FOR FOREIGN INVESTMENTAREAS FOR FOREIGN INVESTMENT
Areas Totally Reserved for Sri Lanka
Money lendingMoney lending
Pawn- brokingPawn- broking
Retail trade investment with a capital less than US $ 1 millionRetail trade investment with a capital less than US $ 1 million
Coastal fishingCoastal fishing
2424
AREAS FOR FOREIGN INVESTMENT AREAS FOR FOREIGN INVESTMENT (Contd)
Areas Subject to Automatic or Conditional Approval
Foreign investments in the areas listed below will be Foreign investments in the areas listed below will be approved limited to 40% . Foreign ownership in excessapproved limited to 40% . Foreign ownership in excessof 40% will be approved on a case by case basis by the BOIof 40% will be approved on a case by case basis by the BOI
Export of goods subject to quota restrictionExport of goods subject to quota restriction
Tea, rubber, coconut, coca, rice, sugar and spicesTea, rubber, coconut, coca, rice, sugar and spices
Non renewable natural resourcesNon renewable natural resources
Timber based industries using local timberTimber based industries using local timber
2525
AREAS FOR FOREIGN INVESTMENT (Contd)
Areas Subject to Automatic or ConditionalAreas Subject to Automatic or Conditional
Approval (Contd)Approval (Contd)
Fishing (deep sea fishing)Fishing (deep sea fishing)
Mass communicationsMass communications
Education
Freight forwardingFreight forwarding
Travel agenciesTravel agencies
Shipping agenciesShipping agencies
2626
AREAS FOR FOREIGN INVESTMENT AREAS FOR FOREIGN INVESTMENT (Contd)(Contd)
REGULATED AREAS
The following areas has to be specifically approvedThe following areas has to be specifically approved
Air transportationAir transportation
Coastal shippingCoastal shipping
Manufacture of arms, ammunitions, explosives, military vehicles and Manufacture of arms, ammunitions, explosives, military vehicles and equipment air-craft and other military hardware equipment air-craft and other military hardware
Manufacture of poisons, narcotics, alcohols, dangerous drugs and Manufacture of poisons, narcotics, alcohols, dangerous drugs and toxic, hazardous or carcinogenic materialstoxic, hazardous or carcinogenic materials
Producing currency, coins or security documentsProducing currency, coins or security documents
Large scale mechanized mining of gemsLarge scale mechanized mining of gems
LotteriesLotteries
2727
VALUE ADDED TAXVALUE ADDED TAX
Value Added Tax (VAT) is imposed on a person who carries on a Value Added Tax (VAT) is imposed on a person who carries on a taxable activity, if the turnover exceeds Rs1.8 million per annum taxable activity, if the turnover exceeds Rs1.8 million per annum
VAT may be computed using the addictive method (supply of VAT may be computed using the addictive method (supply of financial services) or deductive method (other supplies) financial services) or deductive method (other supplies)
VAT Rates - 0%, 5%, 15% and 20%VAT Rates - 0%, 5%, 15% and 20%
VAT exemptions are available for certain goods and servicesVAT exemptions are available for certain goods and services
Input tax can be deducted from the out put tax subject to maximum Input tax can be deducted from the out put tax subject to maximum of 85% of the output taxof 85% of the output tax
No input tax deduction is available if the out put tax rate is No input tax deduction is available if the out put tax rate is 5%5%
The input tax rate cannot exceed 15%The input tax rate cannot exceed 15%
No input tax deduction against exempt suppliesNo input tax deduction against exempt supplies
Whole and retail activity is excluded from VATWhole and retail activity is excluded from VAT
2828
VALUE ADDED TAX (Contd)VALUE ADDED TAX (Contd)
VAT ON FINANCIAL SERVICES
Accounting profit before income tax has to be adjusted forAccounting profit before income tax has to be adjusted for
remuneration and for economic depreciation to compute the value remuneration and for economic depreciation to compute the value additionaddition
VAT rate is 20%VAT rate is 20%
Credit is available for normal VAT paidCredit is available for normal VAT paid
2929
CHALLENGESCHALLENGES
InflationInflation
Interest ratesInterest rates
Rupee depreciationRupee depreciation
Heavy dependence on womenHeavy dependence on women
External shocksExternal shocks
3030
THANK YOUTHANK YOU