There are many areas where tax incentives are available. Section 3.3 above details some of the areas where incentives are available for foreign investments.In general, the preferred areas are exports of goods or services, tourism, agriculture, infra-structure development, construction, Information Technology & software.
Value Added Tax (VAT)
Income Tax (Personal and Corporate)
Economic Service charge (ESC)
Others-Social Responsibility levy.
A Value Added Tax system was introduced on 1st August 2002. Value Added Tax is charged on the destination principle & is liable on supply of goods & services in Sri Lanka. It is a consumption tax, thus goods imported into Sri Lanka and goods & services supplied within the territorial limits of Sri Lanka are the subject matter of this tax. For clarity, the table below states the rates applicable. For clarity, the table below states the rates applicable.
Category Rate Input Credit
Essentials 5% Not entitled (except for motor vehicles for transport & production machinery)
Standard Rate 15% 15%
Luxury Rate 18% Limited to 15%
Zero Rate is applicable on Exports and Supply of services in Sri Lanka to be consumed outside
Sri Lanka (includes services provided by a Garment Buying office).
VAT is not collected on listed Exempt Supplies of Goods & Services and no input credit is available.
A special rate of 25/= per piece of garment supplied to the Local market by a BOI manufacture cum Exporter with the approval of BOI/Director General of Customs.
In 1981, the Business Turnover Tax introduced by Finance Act No.11 of 1963 was replaced by the Turnover Tax Act No. 69 of 1981 and is effective from 13th November 1981.
Goods & Services Tax was introduced w.e.f. 01.04.1997 (and presently Value Added Tax) to mitigate the cascading effect on domestic consumption Goods & Services. Turnover Tax is collected only from Wholesale & Retail sector and payable to Provincial Councils. Turnover Tax is charged for every quarter from every person who carries on any Wholesale or Retail business in Sri Lanka. The tax is payable for a quarter in respect of any business, if the Turnover for that quarter is not less than Rs.25,000.
The main rationale and the primary function of Income Tax is the raising of revenue for Government expenditure. The other functions include social & economic purposes such as;
A more equitable income re-distribution
Increasing savings and Capital formation
Channelling investment in desired directions through the allocation of resources
The existing income Tax in Sri Lanka is based on the Inland Revenue Act No: 38 of 2000 and up to 31st March 2000 it was based on Inland Revenue Act No: 28 of 1979 with its subsequent amendments
The principles of Taxation and its main characteristics are as follows
The Tax is levied on the Income of any person arising in or derived from Sri Lanka. A resident is taxable on world income, and any other person is taxable only on income arising or derived in Sri Lanka.
The Tax is based on Global System, i.e income from all sources are aggregated, except
Interest & Dividend Income is Taxable on Scheduler system w.e.f. 2002/2003.
The Income Tax is based on self assessment system, where every person has to make his own Return of Income, compute his Tax liability and pay taxes estimated on previous year tax payable on quarterly basis.
The Statutory date for filing of Return of income is 30th November immediately succeeding the year of assessment.
There are number of Tax holidays and Investment incentives, and exemptions and reliefs for emoluments and Income derived from abroad.
Concessionary tax rates are applicable for Charitable Institutions, Insurance Companies Trusts, Executors, Clubs and Associations etc.
A system of Withholding Tax is also in use, where Tax is levied at source.
Where the Company’s Taxable Profit over Rs.5,000,000, the tax is follows
Public Quoted @ 30%
Others @ 32.5%
Where the Companies Taxable Profit is less than Rs.5,000,000, the tax is at 20%
Generally, Companies with tax concessions, exports, construction, Tourism are taxed at 15%.
Agriculture is exempt for five years from 2005/06.
All Dividends paid will be liable for a Tax of 10%.
Interest and Dividend Income
Dividends received does not form part of Assessable Income.
Gross Interest is liable for Income Tax and the 10% withholding Tax can be deducted.
Interest Income on Secondary Market transactions should gross up and taxed and withholding tax deductible.
A new tax was introduced called ESC from 1st April 2004, which could be setoff against Income Tax of the same year, with the provision to carry forward the unutilized balance for the next two years.
Every person or Partnership in every business, profession or vocation other than trading, which has been operating for three years or more, whose aggregate Turnover (excluding sale proceeds of capital assets & VAT) is Rs.50 million in the relevant year is liable, and ESC Payable is limited to Rs.50.mn in that year. The relevant year refers to the turnover of the previous year. Trading becomes liable even below three year rule.
In terms of section 57 (1) of the Inland Revenue Act, a Non- Resident Company is liable to pay remittance tax at 10% on total remittances for that year, from year of assessment 2003/04.
Under the Finance Act No 5 of 2005 a Fund was established for the National Action Plan for Children. For this purpose a Social Responsibility Levy of .25% on all Tax payable is charged w.e.f.2005/06 except on GST, VAT & ESC.
Capital Gain arising on a transaction was treated as a different source of Income in Sri Lanka up to 31st March 2002 and was withdrawn since then.
Non Citizen Employees are deemed to be non-residents for a period of 3 years from the commencement of employment in Sri Lanka. In this period they will be liable on employment income at concessionary rate of 15% and if they continue to be employed for a further 2 year period the 15% tax continues. Any other income in Sri Lanka is taxed at normal rates.
There is also a system of withholding Tax where tax is levied at source.
Following are some of the withholding tax rates applicable at present:
All Dividends 10%
Lottery Prize > Rs.500,000 10%
Treasury Bills 10%
Non Residential Rental Income > Rs.50,000 p.m 10%
Specified Fees paid by Specified Persons 5%
Sri Lanka’s tax treaties have generally followed the following two basic principles for granting relief:
(a) the foreign tax credit principle, (b) the exemption principle
Under the foreign tax credit principle the country of residence imposes tax on a resident’s total income inclusive of foreign income but allows a set off or credit against the foreign tax paid by the resident on his foreign source of income. Where the foreign tax is lower than the domestic tax, only the excess of such tax is payable to the country of residence, where the foreign tax is high, no tax is collectible in the country of residence.
Under the exemption method, income exempted is not taken in to consideration for the determination of tax to be imposed on the taxpayer’s other income.
Tax Sparing Credit relief is also provided in some double taxation agreements, to prevent the loss of double taxation credit negating the incentives offered to taxpayers in the form of tax holidays and tax concessions in developing countries. Such credits are generally given for Dividends, Interest or Royalties or tax spread under a tax holiday or on the profits of subsidiaries out of which dividends have been paid.