KPMG in Sri Lanka explains recent changes to the country’s Economic Service Charge (ESC) and Nation Building Tax (NBT), along with developments involving the new Inland Revenue Act, Foreign Exchange Bill and Special Deposit Accounts.
The ESC Amending Act2 was certified by the Speaker on 17 May 2017 incorporating budget proposals announced in 2016 and 2017. The following key changes are proposed to have effect from 1 April 2016:
As of 1 April 2017, the ESC threshold will be reduced to LKR12.5 million.
A NBT bill issued on 12 May 2017 eliminates certain exemptions, as proposed in the Budget 2017.
As a result of the bill, NBT exemptions for construction contractors and the business of real estate improvements of construction and sale of residential accommodation are withdrawn.
Further, the scope of exemption granted to inbound tour operators and for services rendered outside Sri Lanka is redefined. Among these changes:
The NBT amendments are proposed to have effect from 1 April 2017, although the enabling bill is not yet enacted.
A new Inland Revenue Act led by the International Monetary Fund (IMF) is expected to be issued in July 2017. According to the IMF, the new Inland Revenue Act will aim to:
The new tax law is expected to introduce capital gains tax in Sri Lanka on sale of immovable property. A new Tax Administration Act will also be included. The New Inland Revenue Bill was issued on 19 June 2017 and yet to be enacted by the Parliament.
A bill to repeal and replace the current Exchange Control Act was issued on 24 March 2017. The new Foreign Exchange Bill fully liberalizes foreign exchange flows. Any restrictions/limitations will be imposed by way of gazette notifications. Currently, no such notifications have been published.
The Foreign Exchange Bill is pending enactment and expected to be legislated by July 2017.
A bill issued on 29 May 2017 and pending legislation introduces a special deposit account (SDA) for foreign nationals to remit foreign exchange to Sri Lanka.
The bill specifies that SDAs should be opened by foreign nationals (including dual citizens) with a minimum of USD500,000 or equivalent convertible currencies. Account holders will be granted a residency visa for up to 10 years, provided the account holder:
The spouse of the account holder will also be provided with the residency visa if an additional sum of USD300,000 or equivalent in the convertible currencies is deposited in the SDA. No additional deposit is required for minor children under age 18. Visas of the spouse and minor children are conditional on validity of the visa of the main account holder.
The account holder will not be permitted to engage in paid employment unless they receive a valid work visa.
The account holder will be exempt from any taxes3 on income or profits derived from outside Sri Lanka and on interest on income accrued or capital of the SDA. Further, the exchange control regulation limiting remittances into Sri Lanka will not apply to an SDA holder.
Finally, the provisions of the Immigrants and Emigrants Act will apply on issuing, cancelling or amending any visa granted for the SDA holder.
2 ESC (Amendment) Act No 07 of 2017
3 That is, taxes levied under the Inland Revenue Act no 10 of 2006.