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Navigating through UncertaintyBudget 2021 Analysis and Insights

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Budget Proposals – 2021

17 November 2020

To Clients of PricewaterhouseCoopers

Dear Client

We are pleased to forward you a Summary and Analysis of the Budget Proposals for 2021, presented in the Parliament on 17 November 2020 by Prime Minister, Hon. Mahinda Rajapaksa, Minister of Finance.

If you would like further information on any of the taxation changes and other measures announced in the Budget, please do not hesitate to get in touch with us.

Yours truly

Charmaine TillekeratneDirector – Tax ServicesFor and on behalf of PricewaterhouseCoopers (Private) Ltd

Connect With UsColombo PricewaterhouseCoopers100, Braybrooke Place, Colombo 2, Sri Lanka. Tel: (94) 117719700/ 117719838Fax: (94) 112303197 www.pwc.com/lk/en [email protected]

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Budget Proposals 2021

Budget Proposals 2021 Sri Lanka Budget Focus – 2021 ................................................................................................ 1

Overview of Key Taxation Proposals ...................................................................................... 2

Chapter 1 – Income Taxation ................................................................................................. 10

Chapter 2 – Value Added Tax (VAT) ..................................................................................... 17

Chapter 3 – Import Duties ...................................................................................................... 19

Chapter 4 – Miscellaneous Taxes and Levies ..................................................................... 21

Chapter 5 – Tax Administration ............................................................................................ 22

Chapter 6 – Special Goods and Services Tax ...................................................................... 23

Chapter 7 – Other Industry Related Proposals and Concessions ................................. 24

Tax Facts at a Glance ................................................................................................................ 26

Sri Lanka Economy at a Glance ............................................................................................. 30

Budget Estimates ....................................................................................................................... 31


PwC 1

Sri Lanka Budget Focus – 2021

Budget speech 2021 presented by Prime Minister, Hon. Mahinda Rajapaksa, Minister of Finance ,

focuses on strengthening the 2021-2023 medium term programme of poverty alleviation and

economic revival as envisaged within the “Vistas of Prosperity and Splendour”, the policy

framework of the government of HE the President Gotabaya Rajapaksa.

The proposals are aimed at facilitating a self-sufficient, in house economic growth and

development strategy, minimizing the disparities in income levels between provinces and the

urban rural inequalities. Proposals contain export development strategies, increase in FDIs and a

consistent tax policy.


PwC 2

Overview of Key Taxation Proposals

1. Income Tax

1.1 Withholding tax (WHT) (Effective from 01 January 2020)

Removal of WHT

Interest, specified fees, dividend, charge, natural resource payment, rent, royalty, premium or

retirement payments made to residents.

Employment income.

Partners’ share of a Partnership profit (The taxable income of the partnership excluding

LKR 1 Mn per annum is subjected to Partnership Tax at the rate of 6%).

1.2 Income tax exemptions

w.e.f. 01 April 2018 w.e.f. 01 April 2019 w.e.f. 01 January 2020

Interest paid on loans obtained from any person outside Sri Lanka.

Profits and income earned by any person from farming including agriculture, livestock and fish farming.

Profits and income earned from providing Information Technology and enabling services. The enabling services will be prescribed by regulations by the Minister in charge of the subject of Finance.

Any income earned by any non-resident person on any Sovereign Bond denominated in foreign or local currency.

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.

Interest or discount paid or allowed to any person on Sovereign Bonds denominated in foreign currency.

Interest income earned on Non-Resident Foreign Currency (NRFC) and Resident Foreign Currency (RFC) accounts.

Tax relief measures introduced to facilitate post COVID-19 economic recovery


PwC 3

w.e.f. 01 April 2018 w.e.f. 01 April 2019 w.e.f. 01 January 2020

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.

- Dividends paid by a resident company to any non-resident person.

All aircraft related payments, software licenses and other overseas payments made by Sri Lankan Airlines.

Dividends distributed by Commercial hub Enterprises.

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.

Amounts received by any

religious institution by way of grants and donations.

Amounts derived by any non-resident person from laboratory services or standards certification services.

Exemptions - effective date to be specified

Interest income derived by Samurdhi Life Savings Accounts from investment in Government

Securities.

Interest income of the welfare societies and institutions.

Exemption on CGT and dividend tax on investments in the housing market through the SLREIT

regulated by the Securities and Exchange Commission.

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.

Tax exemption of 5 years on start-up businesses upon the successful completion of vocational

education.

A tax holiday of five years to private vocational institutions that double their intake.

A tax holiday of 7 years for all renewable energy projects.

A tax holiday of 7 years for local boat and ship building.

Ten-year tax holiday for investments in selected recycling sites.


PwC 4

Exemptions - effective date to be specified

Three-year exemption to commercial banks on capital and interest income from investments in international sovereign bonds, subject to a minimum investment of USD 100 Mn.

1.3 Income tax concessions

Companies that are listed before 31 December 2021:

- 50% tax concession for the years 2021/2022.

- corporate tax rate of 14% for the subsequent three years.

50% capital allowance on investments made on latest technology for collection of local milk.

1.4 Qualifying payments

w.e.f. 01 April 2019 w.e.f. 01 January 2020

Payments made to Consolidated Fund by

any Public Corporation is deductible in

calculating income tax of such Corporation.

Personal relief for residents or non-residents

but citizens for each year of assessment is

LKR 3 Mn.

Following payments subject to maximum of

LKR 100,000 per month or LKR 1.2 Mn per

annum is deductible 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


PwC 5

1.5 Income tax rates (Effective from 01 January 2020)

Source Rate

Personal Income tax

First LKR 3 Mn

Next LKR 3 Mn

Balance

6%

12%

18%

Terminal benefits

First LKR 10 Mn

Next LKR 10 Mn

Balance

Exempt

6%

12%

Payments to non-residents having a source in Sri Lanka (final

withholding payments)

Interest payments

Any other payment

5%

14%

Corporate Income Tax

Exports, Tourism, Education, Medicare, Construction and Agro processing

Manufacturing

Trading, Banking, Finance, Insurance, etc. (Standard Rate)

Manufacture and selling or import and selling Liquor, Tobacco, Betting and Gaming

14%

18%

24%

40%

1.6 Advance income tax (Effective from 01 April 2020)

Advanced Personal Income Tax and Advanced Income tax can be collected at source,

subject to the written consent of the taxpayer.

1.7 Tax Relief Measures to Facilitate Post COVID-19 Economic

Recovery

Tax reliefs

Income generated from the supply of Health Protective Equipment to arms of Government 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 to be

considered "Deemed Exports" (Tax rate - 14%).


PwC 6

Tax reliefs

Waiver of Income tax in arrears, payable by the SMEs, on the assessments issued up to the

Y/A 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.

The income tax return furnished by the SMEs for the Y/A 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.

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 RAMIS Unit of the IRD.

The payment or/and submission of the returns of any tax administered by the CGIR, which is

due for the period from 01 March 2020 to 30 June 2020, proposed to be treated as paid or/and

submitted on the due date if such payment/ submission is made on or before

31 December 2020.

1.8 Deductible expenditure (Effective date to be specified)

Instructions to be issued under the Inland Revenue Act with regard to the provisions for

anticipated losses of loans and doubtful loans in calculating taxes of banks and financial

institutions.

2. Value Added Tax

w.e.f. 01 Dec 2019 w.e.f. 01 Jan 2020/

01 Apr 2020 Other

Exemption on the sale of

Condominium housing units.

Increase of threshold for

registration from

LKR 3 Mn per quarter or

LKR 12 Mn per annum to

LKR 75 Mn per quarter

or LKR 300 Mn per

annum.

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

(effective date to be specified).

Exemption on health protective equipment and similar products


PwC 7

w.e.f. 01 Dec 2019 w.e.f. 01 Jan 2020/

01 Apr 2020 Other

Reduction of rate on the

import and/ or supply of goods

or supply of services other

than financial services from

15% to 8%.

Grant of permission for

voluntary registration

upon a written request

made by any person who

carries on or carries out a

taxable activity, even if

such person is not within

the registration

threshold.

Reduction of piece based VAT

rate applicable on domestic sale

of certain garments by the export

oriented BOI companies from

LKR 100 to LKR 25 (effective

date to be specified).

Exemption on

information technology

and enabling services.

Removal of the provisions

relating to deemed input claim in

respect of the wholesale and

retail trade (effective date to be

specified).

Exemption of the supply

of services in respect of

inbound tours, by a

travel agent registered

with the Sri Lanka

Tourism Development

Authority.

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 (effective from 20

May 2020 to 31 December

2020).

3. Special GST

(Effective date to be specified)

Online managed single Special GST to be imposed in place of the various goods and service taxes and levies, imposed under multiple laws and institutions on alcohol, cigarettes, Telecommunication, betting and gaming and vehicles.

A special Goods and Services Tax to be imposed


PwC 8

4. Duties and fiscal levies on imports

(Effective date to be specified)

Revisions

Impositions of high import duties on fisheries industry to encourage domestic production.

Import duty concessions on agriculture industry.

Reduction of import duties on import of spare parts in order to encourage vehicle repair and

assembly.

Relaxation of imports and new tariff systems to encourage development of local garment

industry.

Exemption of import taxes on raw materials and machinery related to construction industry.

Removal of import taxes raw material and machinery/ equipment not available in the country.

Introduction of CESS to protect domestic production.

Customs duty rate changes.

5. Miscellaneous (Effective date to be specified)

Outstanding dues on the taxes such as the Economic Service Charge and the Nation Building Tax administered by the IRD are proposed to be settled through a mechanism

which includes a concessionary payment plan.

All Companies to file their taxes only on an “E-Filing” system and the use of the Tax Identification Number (TIN) in all tax and tax related transactions (effective from 01 April

2021).

Reduction of stamp duty up to 0.75% on investments in the housing market through the SLREIT regulated by the Securities and Exchange Commission.

Concessions for agriculture and construction industry

COVID-19 tax

0.25% of the turnover to be contributed to a proposed

insurance fund


PwC 9

Export industries, dairy, fabric, tourism, agricultural products, processing and information technology to be provided concessions up to a maximum of 10 years under

the Strategic Development Law.

Businesses and factories with more than 50 employees, to contribute 0.25% of the turnover to the proposed insurance fund.

Creation of Colombo Port City Special Economic Zone and Modern Investment Zone.

Simplify the taxes and levies by the Local Government institutions on tourism with an upper cap.

Tax concessions for a period of 5 years for capital investments over USD 25 Mn in diary industry.

Tax Amnesty on utilising undeclared funds for investment by payment of a 1% tax.

Establish a special tax appeals court to resolve tax appeals.

Large Taxpayer Unit (LTPU) directly under the Commissioner General of Inland Revenue.

Punitive legal provisions to ensure that the private tax consultants and auditors representing the taxpayers and prepares and certifies fraudulent tax reports.

Non-residents could purchase super luxury condominiums utilising, foreign currency earnings made in Sri Lanka, earnings in foreign countries or a loan obtained from a Bank

outside Sri Lanka.


PwC 10

Chapter 1 – Income Taxation

1. Re-iteration of income tax amendments made under web notices

During the first half of 2020, the Department of Inland Revenue (DIR) issued a series of web

notices, administratively implementing various amendments to income tax law. Several of these

amendments, as given below, are re-iterated in Budget 2021.

1.1 Individual Income Tax

Tax free allowance of a resident or citizen is increased to LKR 3 Mn

Personal Income tax rates on taxable income are amended as follows:

Taxable Income (other than terminal benefits) Rate (%)

On the 1st LKR 3 Mn 6%

On the 2nd LKR 3 Mn 12%

On the balance 18%

Terminal benefits from employment Rate (%)

On the 1st LKR 10 Mn 0%

On the 2nd LKR 10 Mn 6%

On the balance 12%

For a resident individual, following expenditure up to a total of LKR 1.2 Mn per year of assessment could be deducted as relief in arriving at the taxable income:

(a) health expenditure including contributions to medical insurance;

(b) educational expenditure incurred locally;

(c) interest paid on housing loans;

(d) contributions made to an approved pension scheme;

(e) expenditure incurred for the purchase of equity or security.

Note: Reference to education expenses of children as given in the web notices have been

omitted in the budget proposals.

As per budget proposals, “purchase of equity or security” is limited to investment

in listed shares and government securities.

(Effective from 01 January 2020)


PwC 11

1.2 Tax rate for partnerships

Taxable Income Rate (%)

Gains on realization of

investment assets

10%

Balance Taxable Income Not exceeding LKR 1 Mn 0%

Exceeding LKR 1 Mn 6% on the excess over LKR 1 Mn


1.3 Tax rate for Companies

Tax Rate (%) Business activity Comment

14 Exports,

Tourism,

Education,

Medicare,

Construction, and

Agro processing.

As per previously issued DIR Web notices, the 14%

rate also applied to SMEs, Dividend income

earned by resident companies as well as specified

undertakings.

While it is assumed that the term “exports” given

in the budget proposals include “specified

undertakings” as defined in the Inland Revenue

Act, the reason for omitting SMEs and dividend

income is unclear.

18 Manufacturing.

24 (Standard

Rate)

Trading,

Banking,

Finance, Insurance,

etc.

40 Liquor,

Tobacco,

Betting and Gaming.



PwC 12

1.4 Introduction of new qualifying payments

Payments made to Consolidated Fund by any Public Corporation is deductible in

calculating income tax of such Corporation.

(Effective from 01 April 2019)

1.5 Withholding Tax (WHT)

Following payments are exempt from Withholding tax;

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

Employment income.

Partners’ share of a partnership profit.

Payments to non-residents where such payments have a source in Sri Lanka is treated as

final withholding payments and subjected to tax as follows:

Interest payments (other than exempt interest) - 5%

Any other payment - 14%


1.6 Advance Income Tax

Advanced Personal Income Tax (APIT) can be deducted from regular fixed income

(remuneration, interest etc.) of individuals, subject to the written consent of such

individual.

Advanced Income Tax (AIT) can be collected at the source, subject to the written consent

of the taxpayer.

Note: As per web notices, APIT needs to be deducted from remuneration of non -

resident or non - citizen employees irrespective of consent.

As per web notices, APIT solely refers to collection of tax from remuneration.

Collection of tax from interest will occur under AIT.


1.7 Exemptions from Income Tax

i. Profits and income earned by any person from farming including agriculture,

livestock and fish farming, with effect from 01 April 2019.


PwC 13


ii. Profits and income earned from providing Information Technology and enabling

services (to be prescribed).


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.


iv. Interest income earned on Non-Resident Foreign Currency (NRFC) and Resident

Foreign Currency (RFC) accounts.


v. Interest paid on loans obtained from any person outside Sri Lanka


vi. Any income earned by any non-resident person on any Sovereign Bond

denominated in foreign or local currency.


vii. Interest or discount paid or allowed to any person on Sovereign Bonds

denominated in foreign currency.

Note: The specific reference to Sri Lanka Development Bonds as given in web

notices has been omitted in the Budget proposals.


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.


ix. Dividends paid by a resident company to any non-resident person.

Note: While the Technical notes to the Budget Speech reiterates the blanket

exemption given in web notices as above, the Budget speech proposes

that “Tax on dividends of foreign companies will be exempted for 3

years, if the money is reinvested on expansion of their businesses,

money/stock market or in Sri Lanka International sovereign bonds.”

Thus it appears the above exemption will be of limited application.


x. Dividends distributed by Commercial hub Enterprises.



PwC 14

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.


Note: The budget proposal omits reference to pass through dividends as given

in the web notices.

xii. Amounts derived by any non-resident person from laboratory services or standards

certification services.


xiii. Amounts received by any religious institution by way of grants and donations.


2. New income tax exemptions/ concessions proposed under 2021 budget

i. Dividends income derived through investment via the Sri Lanka Real Estate

Investment Trust (SLREIT) will be exempt from income tax.

ii. All aircraft related payments, software licenses and other overseas payments made

by Sri Lankan Airlines will be exempt from income tax with effect from 01 April

2018.

iii. Interest income derived by welfare societies and institutions will be exempt from

income tax.

iv. Companies listed in the Colombo Stock Exchange prior to 31 December 2021 will

receive a 50% tax concession for the year of assessment 2021/2022 and will be

eligible to maintain a corporate tax rate of 14% for the subsequent 3 years.

v. In order to encourage 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% in 2021 and 50% in 2023 under the condition that they

increase their exports by 30% and 50% in the respective years.

vi. Interest income from investment of funds from proposed Samurdhi Life Savings

Account – SLSA will be exempt from Income tax.

vii. In order to maintain the import expenditure in foreign exchange in domestic

banks, the interest income of such deposits will be exempted from taxes.

viii. Profits on capital and interest income of the investments made by the Commercial

banks in Sri Lanka International Sovereign bonds subject to a minimum of

USD 100 Mn, will be exempt for a period of three years.


PwC 15

3. Tax holidays granted under the budget proposals

i. Individuals and companies engaged in farming, including agriculture, fisheries and

livestock farming will be exempted from taxes for the next 5 years.

ii. Investments exceeding USD 10 Mn 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.

iii. In order to promote the Colombo and Hambantota ports as commodity trading

hubs in international trading, and to encourage investments in bonded warehouses

and warehouses related to offshore business such investments will be exempted

from all taxes.

iv. Strategic investment tax concessions will be granted for a period of 5 years for

capital investments of over USD 25 Mn in the dairy industry with the view of

facilitating such entities to process milk powder exports instead of importing milk

powder.

v. New business ventures commenced by entrepreneurs who have successfully

completed vocational education will be eligible for a tax exemption of 5 years.

vi. Private educational institutions which will be standardized under TVET concept

are eligible for a five year tax holiday if the intake is doubled.

vii. All renewable energy projects will be granted a tax holiday of 7 years.

viii. Local boat and shipbuilding enterprises will be granted a tax holiday of 7 years.

ix. A 10 year tax holiday will be granted for investment in selected recycling sites.

x. A five year tax concession will be made available from 01 January 2021 to domestic

industrialists who engage in construction and installing of new communication

towers.

4. Expenses deductible for income tax

i. Relevant instructions under the Inland Revenue Act will be issued to ensure better

and transparent management with regard to the provisions for anticipated losses

of loans and doubtful loans in calculating taxes of banks and financial institutions.

ii. Cost of Funds provided as start-up capital of the entrepreneurs who have

completed vocational education will be considered as a deductible expenditure in

the calculation of taxes.


PwC 16

iii. For local entrepreneurs of mineral sand, phosphate, fertilizer and graphite

involved with the Institute of Nanotechnology, expenditure on research and

development will be allowed as a deductible expense.

iv. Capital investments done on latest technology to collect local liquid milk in

collaboration with local dairy farmers for enhancements to milk related

productions and promotion of liquid milk can be claimed as capital allowances on

an accelerated basis over a period of two years.

v. The investment expenditure of finance company amalgamations will be considered

as a deductible expenditure.

5. Relief for capital gain tax

i. Taxes on Capital Gains will be simplified, where such taxes will be calculated based

on the sale price of a property or the assessed value of a property whichever is

higher.

ii. Investment in housing via SLREIT will exempt from capital gains tax

6. Tax relief measures to facilitate post COVID-19 economic recovery

(1) Eligible to reduced tax rates

The income generated from the supply of Health Protective Equipment and similar

products by BOI companies on the request of relevant government entities to be

deemed exports eligible for concessionary tax rates.

(2) Waiver of Income tax in arrears

There will be a waiver of income tax in arrears payable by SMEs on assessments

issued up to the year of assessment 2018/2019 provided there is no fraud or wilful

default.

(3) No additional assessments

No additional assessment will be issued for the year of assessment 2019/2020 for

SMEs that furnish and Income Tax Return for the year and pay the tax declared in

the Return.

(4) A grace period

A grace period will be granted to settle taxes in arrears/ default.

(5) The payment of tax/ submission of the returns

Any returns and payments which were due for the period from 01 March 2020 to

30 June 2020 will be considered as paid and/ or submitted on the due date if such

payment/ submissions are made on or before 31 December 2020.


PwC 17

Chapter 2 – Value Added Tax (VAT) Quantities supplied/ donated of health protective equipment and similar products (on the

request) by export oriented BOI companies to the below government organizations will be exempt

from VAT:

Ministry of Health and Indigenous Medical Services

Department of Health Services

Tri Forces and Sri Lanka Police

Exemption of importation, importation and supply, 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 20 May 2020 to

31 December 2020.

The following change has been made in the piece-based VAT rate applicable on domestic sale of

certain garments by the export oriented BOI companies.

Description Piece rate as per the VAT Act Piece rate as per the budget proposal

The supply of panties, socks, briefs and boxer shorts

LKR 100 for six pieces of any such item

LKR 25 for six pieces of any such item

The supply of each garment other than panties, socks, briefs and boxer shorts

LKR 100 per one piece of any such item

LKR 25 per one piece of any such item

Removal of the deemed inputs which were claimable by wholesale and retail suppliers on

purchases made from Non-VAT registered persons.

As per the Gazette No. 2151/52 dated 29 November 2019, VAT is applicable at 8% on the import

and/ or supply of goods or supply of services other than financial services with effect from 01

December 2019.

As per the VAT bill issued on 10 February 2020, the threshold for VAT registration has been

increased from LKR 3 Mn per quarter or LKR 12 Mn per annum to LKR 75 Mn per quarter or

LKR 300 Mn per annum with effect from 01 January 2020.

As per the administrative notice issued by IRD dated 08 April 2020, supply of information

technology and enabling services are exempt from VAT with effect from 01 January 2020.

As per the administrative notice issued by IRD dated 07 January 2020, any person whose taxable

supply is less than LKR 75 Mn rupees per quarter or LKR 300 Mn per annum can request for

registration of VAT on a voluntary basis.

As per the administrative notice issued by IRD dated 27 December 2019, supply of residential

accommodation by way of sale of a Condominium housing unit by any person is exempt from VAT

with effect from 01 December 2019.


PwC 18

As per the administrative notice issued by IRD dated 15 May 2020, supply of service in respect of

inbound tours by a travel agent registered with the Sri Lanka Tourism Development Authority is

exempt from Value Added Tax (VAT) with effect from 01 April 2020.

There is a proposal to exempt the VAT on the domestic production of a commodity, if that same

commodity has been exempted from VAT at the time of importation.


PwC 19

Chapter 3 – Import Duties

1. Agriculture Industry

Import duty concession for cold room facilities for preservation of fruits and vegetables.

Limit on importation of agricultural commodities except for items that cannot be produced

domestically (negative list).

Imposition of Special commodity levy to balance the supply and demand of domestic production

for selected agricultural products.

Relief on custom duties for import of modern equipment by entrepreneurs investing in value

additions to local crops such as pepper, cloves, cardamom and coffee, making them suitable for

the export market. Further, such entrepreneurs will be provided with financing facilities to obtain

land.

Import of Ginger and Turmeric have been completely terminated to encourage the cultivation of

those, while the Budget also proposes a support scheme to promote the cultivation of ginger and

turmeric as additional crops in coconut and rubber lands.

2. Fisheries

A mechanism will be developed to import fish that are not available in Sri Lanka to produce dried

fish, Maldives fish and canned fish while maintaining high import duties on such items to

encourage domestic production.

3. Garment Industry

Relaxation of imports and new tariff system, to develop the local garment industry as a local and

international garment manufacturing hub with high quality garment and leather products

demanded by foreigners and tourists.

Ban on importation of batik products under national subheadings in order to develop batik and

related fashion as a national industry.

4. Automobile Industry

Reduction of import taxes levied on vehicle spare parts required for new production sectors to

incentivize entrepreneurs engaged in vehicle repairing and vehicle assembly.


PwC 20

5. Construction Industry

Removal of import duties on bulk import of raw materials related to construction industry which

cannot be produced locally and used for the construction of mega housing schemes and highways.

Exemption from import taxes on the import of machinery with modern technologies.

6. General

Removal of import taxes on raw materials not available in the country and machineries/

equipment with modern technology, to boost exports and to facilitate domestic industries to

produce value added goods.

Applying CESS to provide the required protection on the imports and exports of domestic

production.

7. Rate Change

For Customs Duty purposes, all imports other than above will be classified under the following

rate categories:

0%

5%

10%


PwC 21

Chapter 4 – Miscellaneous Taxes and Levies

1. Contribution of o.25% on Revenue

Businesses and factories with more than 50 employees are required to contribute 0.25% of their

revenue to a newly proposed “Covid unemployment insurance scheme”.

The insurance scheme is intended to be utilized for those employed at retail and wholesale shops

with more than five (5) employees and hotels.

2. Tax Amnesty

New legal provisions to be introduced, to provide a tax pardon to entrepreneurs who utilize

undeclared funds (maintained locally or outside Sri Lanka), for any investment facilitated by this

budget, by payment of a tax of 1%.

Note: Similar provision exists under Foreign Exchange Act No 12 of 2017.

3. Other Concessions

Concessions up to a maximum of 10 years under the Strategic Development Law for investments exceeding USD 10 Mn in the areas of export industries, dairy, fabric, tourism,

agricultural products, processing and information technology.

Strategic investment tax concessions for a period of five (5) years for capital investments exceeding USD 25 Mn in processing milk powder exports.

Stamp duty will be reduced up to 0.75 percent for investments in the housing market through the Sri Lanka Real Estate Investment Trust (SLREIT).

Concessionary payment plan to be introduced to collect the outstanding dues on taxes such as the Economic Service Charge (ESC) and Nation Building Tax (NBT).

Simplify the taxes and fees levied on tourism by the Local Government Institutions by way an upper cap.


PwC 22

Chapter 5 – Tax Administration

Tax law to be amended to reflect e-filing mandatory for all companies with effect from

01 April 2021 and the use of the Taxpayer Identification Number (TIN) in all tax related matters.

Proposal to strengthen the legal provisions relating to the establishment of specific time frames

for the implementation of rulings and for the settlement of appeals submitted against the tax

administrative decisions made under the Inland Revenue Act.

A special Tax Appeals Court to be established to resolve appeals pertaining to tax administration.

Proposal to make the RAMIS system more effective by introducing technical and legal provisions

into tax laws.

Strengthening the tax administration by bringing together at high earnings and large-scale

businesses, banks and financial institutions in various units under one Large Taxpayer Unit

(LTPU) in order to operate under the direct responsibility of the CGIR.

Proposed changes to the Department of Inland Revenue to facilitate enhanced self-compliance of

taxpayers and strengthen tax audits.

In order to discourage private tax consultants and auditors from preparing/ certifying fraudulent

tax accounts, it is proposed to introduce punitive legal provisions which includes barring such

practitioners from practicing.

Proposal to assign officials of required regulatory bodies to the Department of Import and Exports

in order to provide required services efficiently.

Tax Relief Measures to Facilitate Post COVID-19 Economic Recovery

Income tax in arrears on the assessments issued by the CGIR to SMEs, as defined in the IRA, up

to the Y/A 2018/2019, is to be waived off in the event the CGIR is satisfied that there is no fraud

or wilful neglect involved in the disclosure of income or any claim for any deduction or relief.

It is proposed to accept the income tax return furnished by SMEs for the Y/A 2019/2020 and not

issue additional assessments for that year on such taxpayers who furnish the income tax return

for the year and pay the tax declared in the return.

Proposal to grant a grace period in order to settle taxes in arrears/ default as agreed with the

Legacy Unit, Default Tax Recovery Unit and the RAMIS Unit.

Proposal to treat payments/ returns administered by the CGIR that were due from 01 March 2020

to 30 June 2020 as paid/ submitted on the due date if such payments/ returns are paid/ submitted

on or before 31 December 2020.


PwC 23

Chapter 6 – Special Goods and Services Tax

To improve the efficiency of tax collection, the government will introduce a separate common tax

termed “Special Goods and Services Tax” in lieu of various Goods & Services Taxes and levies

imposed under multiple laws and institutions on alcohol, cigarettes, telecommunication, betting,

gaming and vehicles.

However, the budget proposals do not provide for an effective date or the applicable tax rate.

The tax is expected to be administered online.


PwC 24

Chapter 7 – Other Industry Related Proposals and Concessions

Proposal to permit non-residents to purchase super luxury condominiums utilising foreign currency earnings made in Sri Lanka in addition to earnings in foreign countries or a loan

obtained from a Bank outside Sri Lanka.

New laws and organizational structures in relation to data security, cyber security and intellectual property rights will be established to assist the drive towards a technology-

based entrepreneurial economy.

In line with the government’s vision of ‘Technology based society and digitally inclusive Sri Lanka” 100 percent 4G/fibre broadband coverage is expected to be expanded to the

entire country during the period 2021-2022.

Proposal to establish five fully fledged plug and play Techno Parks in Galle, Kurunegala, Anuradhapura, Kandy and Batticaloa districts. These will be developed as eco-friendly new

cities connected to the expressway network and other infrastructure facilities.

A modern investment zone for local and foreign private investors will be developed under the Strategic Development Act for the purpose of manufacturing medicine.

Under tourism sector, the budget proposes to extend the concessions and recovery of loans granted under the re-financing facilities of the Central Bank of Sri Lanka until

30 September 2021. Further, Banks will be provided with a Treasury guarantee covering

50 percent of such loans.

LKR 2 per USD above the normal exchange rate is proposed to be provided for foreign exchange remittances sent by foreign workers to the banks in Sri Lanka.

Export, cultivation and processing zones will be established for Ceylon True Cinnamon.

Proposal to develop Rathnapura as the “International Gem Industry City” and enhance the gem and jewellery industry.

Investment incentives to be provided for rubber and coconut related industries, building materials, office equipment and furniture industries.

Proposal to provide separate docks, dockyard access facilities and long-term credit facilities to promote boat and shipbuilding activities.

Leasing companies to be provided with a treasury guarantee for the leasing payments with regard to any facilities provided to SME entrepreneurs in the construction industry for

purchase of equipment.


PwC 25

TIEP scheme provides temporary import facilities for raw materials not available in Sri Lanka, spare parts, processing and packing materials etc. to facilitate export of high

quality goods through high value addition to local inputs. The budget proposes to operate

this scheme by a special “Export Facilitation Centre” established by Export Development

Board and Sri Lanka Customs for Small and Medium Scale exporters and the inspection of

all documents including import/ export declarations will be carried out by relevant

institutions at this unit.

Proposal to implement an insurance scheme through Sri Lanka Export Insurance Corporation with the contribution of an insurance premium of 1 percent of the export

revenue to accelerate the financing facilities through export receipt confirmation.

Ban of “Single use polythene and plastics” with effect from 01 January 2021.

A contributory pension scheme to be introduced for employees’ in production sectors; services such as agriculture, fisheries; small enterprises; in apparel, tourism, plantation

sectors; those self - employed and employed overseas.

Private sector retirement age for both men and women to be extended up to 60 years.


PwC 26

Tax Facts at a Glance

1. Personal Income Tax

Reliefs

Residents, or non-residents but citizens for each year of assessment - personal relief of LKR 3,000,000 for all sources of income.

(effective from 01 January 2020)

Resident individual - additional expenditure relief of LKR 1,200,000.

(effective from 01 January 2020)

(a) health expenditure including contributions to medical insurance;

(b) educational expenditure incurred locally, for such individual or on behalf of his

children;

(c) interest paid on housing loans;

(d) contributions made to an approved pension scheme;

(e) expenditure incurred for the purchase of equity or security.

Rates of Tax – 2020/2021

Taxable Income (LKR) Rate (%) Maximum Cumulative Tax (LKR)

First 3,000,000 6 180,000

Next 3,000,000 12 540,000

Balance 18 540,000+18% x Balance

2. Corporate Income Tax

Rates of Tax – 2020/2021 On taxable income, business gains and profits (LKR) Rate (%)

On gains and profits from following businesses,

- Small and Medium enterprises (as defined in section 195, gross income less than LKR 500 Mn, not an associate entity [as defined in section 196])

14

- Company conducting a business of sale of goods or merchandise where the payment for such sale is received in foreign currency and remitted through a bank to Sri Lanka

14


PwC 27

On taxable income, business gains and profits (LKR) Rate (%)

- Company engaged in specified undertaking (as defined in section 195) 14

- Company engaged in educational services 14

- Company engaged in promotion of tourism 14

- Company engaged in construction services 14

- Company engaged in agro processing 14

- Company engaged in health care services 14

- Dividends received from a resident company 14

- Company engaged in Manufacturing 18

- Company engaged in betting and gaming 40

- Company engaged in manufacture and sale or import and sale of any

liquor or tobacco products 40

On taxable income of unit trusts or mutual funds 24

On taxable income of charitable institutions 14

On taxable income of non-governmental organization 24

On taxable income of Employee Trust Funds, Provident or Pension Funds and

Termination Funds 14

Remittance Tax 14

On taxable income of a company (other than the above) 24

3. Withholding Tax Withholding Tax (LKR) Rate (%)

WHT on the payments made to any Persons

- Amounts as winning from lottery (more than LKR 500,000), reward, betting or

gambling 14

- Sale price payable to the seller of any gem sold at an auction conducted by the

National Gem & Jewellery Authority 2.5

WHT on the payments to Non-Resident Persons (Subject to the provisions of

relevant Double Tax Avoidance Agreement (DTAA)

- Amounts as charge, natural resource payment, rent, royalty, premium,

retirement payment and other similar payment (excluding exempt amounts)

which has a source in Sri Lanka

14

- Interest (excluding exempt interest) and discounts which has source of Sri

Lanka 5

- Payment with respect to land, sea, air, transport and telecommunication 2


PwC 28

4. Terminal Benefits

Concessionary rates ( Commuted pension, retiring gratuity, ETF, approved compensation )

Standard rate

First LKR 10,000,000 00%

Non CGIR approved compensation & EPF, non- cash benefits and other payments Next LKR 10,000,000 06%

Balance 12%

5. Capital Allowances Depreciable Assets No of Years

Buildings, structures and similar works of a permanent

nature.

20

Vehicles, Plant, Equipment, Machinery, office furniture, Fixtures any other depreciable asset not included in another class

5

Computers and data handling equipment together with

peripheral devices.

5

Intangible assets, excluding goodwill. The actual useful life of the

intangible asset, or where

useful life is indefinite, 20

6. Qualifying payments

Qualifying payments Limitations

Carry forward of

any unabsorbed

balance

Donation to specified institutions. Full. None

Donations to approved charitable

institution for providing institutionalized

care for sick or needy.

Aggregate of LKR 75,000 or

1/3 of taxable income,

whichever is less

(individual).

LKR 500,000 0r 1/5 of

taxable income, whichever is

less (entity).

None


PwC 29

Qualifying payments Limitations

Carry forward of

any unabsorbed

balance

Any sum paid to the consolidated Fund

by a public corporation as required by

the law by or under which such

corporation is established (effective from

01 April 2019).

Full. None

7. Value Added Tax (VAT)

8. Goods and Services Tax (GST)

A special Goods and services Tax on cigarettes, gaming, telecommunication and motor vehicles

will be introduced.

9. Economic Service Charge (ESC) ESC was abolished with effect from 01 January 2020.

10. Nation Building Tax (NBT) NBT was abolished with effect from 01 December 2019.

Registration threshold

Liable turnover LKR 75 Mn per quarter or LKR 300 Mn per annum (effective from 01 January 2020)

VAT rates

- Standard rate – 8% (effective from 01 December 2019)

- Supply of Financial Services -15%

- Export of goods and services - zero rated

- Exemptions apply for specified goods and services


PwC 30

Sri Lanka Economy at a Glance 2019 (a) 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Budget deficit (% of GDP) (6.8) (5.3) (5.5) (5.3) (7.6) (5.7) (5.4) (5.6) (6.2) (7.0) (9.9) (7.0) (6.9) (7.0) (7.0) (7.5)

Current account (deficit) (USD Mn) (1,808) (2,799) (2,309) (1,742)

(1,883) (1,988) (2,541) (3,982) (4,615) (1,075) (214) (3,885) (1,401) (1,498) (650) (648)

Balance of payments (deficit)/ surplus (USD Mn) 377 (1,103) 2,069 (500)

(1,489) 1,369 985 151 (1,059) 921 2,725 (1,384) 530 203 501 (205)

Total international reserves (USD Mn) 10,401 9,582 10,436 8,433

9,336 9,884 8,573 8,585 7,991 8,620 7,030 3,639 4,956 4,005 4,200 3,439

Total Foreign Assets (USD Mn) (Month of same year imports) 6.3 5.2 6.0 5.3 5.9 6.1 5.7 5.4 4.7 7.7 8.3 3.1 5.3 4.7

5.7 5.2

Unemployment % 4.8 4.4 4.2 4.4 4.7 4.3 4.4 4.0 4.2 4.9 5.8 5.40 6.0 6.5 7.7 8.3

GDP at market prices (LKR Bn) 15.016 14,366 13,328 11,996 10,951 10,361 9,592 8,732 7,219 6,414 4,835 4,410 3,578 2,938 2,452 2,090

GDP at market prices (USD Bn) 84.0 88.4 87.4 82.4 80.6 79.4 74.3 68.4 65.3 56.7 42.0 40.7 32.4 28.3 24.4 20.7

Mid-year population (Mn persons) 21.8 21.6 21.4 21.2 20.9 20.7 20.5 20.4 20.8 20.6 20.5 20.2 20.0 19.9 19.6 19.4

Per capita GDP at market price (LKR) 688,719

662,949621,531

565,773522,204

498,660 465,976

427,538 345,544

310,214 236,144

217,855 178,586

147,985 124,862

107,581

Per capita GDP at market price (USD) 3,852 4,079 4,077 3,886

3,841 3,819 3,609 3,351 3,125 2,744 2,054 2,011 1,614 1,423 1,242 1,063

Real GDP growth rate 2.3 3.3 3.6 4.5 5.0 5.0 3.4 9.1 8.4 8.0 3.5 6.0 6.8 7.7 6.2 5.4

Interest Rate

- AWDR(Average Weighted Deposit Rate) - Monthly 8.20 8.81 9.07 8.17

6.20 6.20 9.37 10.10 7.24 6.23 8.01 11.63 10.31 7.60 6.24 5.30

- AWPR (Average Weighted Prime Lending Rate) - Monthly 9.74 12.09 11.55 11.52

7.53 6.26 10.13 14.40 10.77 9.29 10.91 18.50 17.95 15.19 12.24 10.20

Exchange rate LKR/ USD (Annual Average) 178.78 162.54

152.46 145.60 135.94 130.56 129.11 127.60 110.57 113.06 114.94 108.33 110.62 103.96 100.50 101.19

Capital Market Index

- All Share Price Index 6,129 6,052 6,369 6,228 6,894 7,299 5,912 5,643 6,074 6,635 3,385 1,503 2,541 2,722 1,922 1,506

- Milanka Price Index - - - - - - - 5,119 5,229 7,061 3,849 1,631 3,291 3,711 2,451 2,073

- S&P Index 2,937 3,135 3671 3,496 3,625 4,089 3,263 3,085 - - - - - - - - (a) Provisional


PwC 31

Budget Estimates

The budget 2020 estimates total revenue and grants of LKR 1,588 Bn (2019 – LKR 2,464 Bn)

consisting of tax revenue from income tax LKR 324 Bn (2019 – LKR 385 Bn), taxes on goods and

services LKR 631 Bn (2019 – LKR 1,293 Bn), taxes on external trade LKR 403 Bn (2019 –

LKR 399 Bn) non-tax revenue LKR 162 Bn (2019 – LKR 267 Bn), provincial councils tax sharing

and devolved revenue LKR 60 Bn (2019 – LKR 107 Bn) and grants of LKR 8 Bn (2019 –

LKR 13 Bn) against a total estimated expenditure of LKR 2,854 Bn (2019 – LKR 3,149 Bn). The

estimated expenditure consists of recurring expenditure LKR 2,445 Bn (2019 – LKR 2,415 Bn)

and public investment of LKR 419 Bn (2019 – LKR 756 Bn).

The resulting budget deficit of LKR 1,266 Bn (2019 – LKR 685 Bn) is expected to be financed by

foreign financing of LKR 225 Bn (2019 – LKR 55 Bn) and domestic financing of LKR 1,491 Bn

(2019 – LKR 630 Bn).

The pie charts below depict the revenue and expenditure estimates of 2019 and 2020 respectively.

Total Expenditure 2019 Total Revenue 2019

Total Expenditure 2020 Total Revenue 2020

Income tax16%

Tax on goods and services

52%

Tax on external trade

16%

Non tax revenue

11%

Provincial corporate tax

4%Other

1%

Salaries and wages30%

Interest30%

Subsidies and transfers

20%

Other goods and services

6%

Public investments

14%

Salaries and wages24%

Interest29%

Subsidies and transfers

17%

Other goods and services

6%

Public investments

24%

Income tax20%

Tax on goods and services

40%

Tax on external trade

25%

Non tax revenue

10%

Provincial corporate tax

4%Other

1%

Charmaine TillekeratneDirector - Tax ServicesT: +94 11 771 9700 ext. 4201M: +94 77 020 8016E: [email protected]

Sujeewa Mudalige Chief Executive Officer/ Managing PartnerT: +94 11 7719838 ext: 5001E: [email protected]

Rishini ManatungaAssociate Director - Tax ServicesT: +94 11 771 9700 ext. 4701M: +94 77 530 6730E: [email protected]

Tharanga AmarasenaAssociate Director - Tax ServicesT: +94 11 771 9700 ext. 4401M: +94 77 289 0634E: [email protected]

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