In the last quarter of 2016, Sri Lanka’s government enacted 2016 budget proposals related to the country’s Value Added Tax (VAT) and NationBuilding Tax (NBT) and introduced new proposals to Parliament in its budget for 2017.
Changes to Sri Lanka’s VAT that passed into law on 1 November 2016 include an increase of standard VAT rate to 15 percent (from 11 percent), changes in registration thresholds, the removal of VAT exemptions on healthcare services, telecommunication services, lease or rental of residential accommodation (subject to conditions) and imports of milk powder, perfumes and certain other goods.
On O1 November, changes to the NBT Act were enacted. Such changes includes a reduction to the threshold for application of the tax and the removal of certain exemptions, including the exemptions on telecommunication, electricity and petroleum.
Ports and Airport Development Levy (PAL)
Further PAL, which applies at the point of importation, increased to 7.5 percent (from 5 percent).
Highlights of Sri Lanka’s budget proposals for the year 2017, which were read in Parliament on 20 November 2016 and are pending legislation, are as follows.
Although an earlier budget indicated that the standard corporate income tax will be reduced, this budget stated that the standard income tax rate would remain at 28 percent. The lower corporate income tax rates of 10 percent and 12 percent that apply to certain sectors such as exports, agriculture, small and medium sized enterprises and unit trusts are proposed to increase to 14 percent.
Further, the current 10 percent withholding tax rate that applies to certain sources of income (such as dividends and interest income from deposits, treasury bills and bonds) will increase to 14%. Some currently available exemptions are expected to be eliminated as of April 2017, but these exemptions have not been specified.
The 2017 budget proposes to grant concessions in the form of an accelerated depreciation allowance for investments of more than 3 million US dollars (USD) and for the creation of more than 250 employment opportunities in the country’s Northern, Uva and Eastern Provinces. Additionally, an incentive package will be designed for landmark projects with investments between USD100 and 500 million and for projects with investments over USD500 million. These incentives will include the issuance of 5-year multiple entry visas. Details about these incentives will follow in the legislation.
The budget proposes to introduce a capital gains tax on gains from sale of immovable properties, effective 1 April 2017.
Like most other countries, Sri Lanka’s government said it would attempt to regularize online transactions by creating a common platform governed by a government agency. The budget also indicated that online transactions will be brought within the current income tax chargeability.
Currently, foreigners (i.e., individuals, foreign companies and local companies with more than 50% foreign shareholding) are prohibited from purchasing condominium properties below the 4th floor. The budget proposes to remove this prohibition and to allow to foreign condominium purchasers to source up to 40 percent of the purchase price from a domestic bank.
Similar to VAT refunds offered in many foreign countries, a VAT refund mechanism will be introduced for tourists at the point of departure for VAT paid on goods they have purchased in Sri Lanka.
The 2017 budget confirmed that the current Exchange Control Act will be repealed and a new Foreign Exchange Act will be introduced. Further, a new Investment Inflow Management Act will be introduced to facilitate the inbound foreign exchange remittances with minimal restrictions.
Further, it is expected that there will be changes to the current Income Tax Act and the Customs Ordinance where new laws will be introduced replacing the current law.