2 Income Tax
In the Budget speech delivered in Parliament today the Hon. Minister of Finance made the following proposals in relation to the taxation of corporates and individuals.
2.1 Corporate income tax
Qualified export profits
Under sections 51 and 52 of the Inland Revenue Act the concessionary rate of tax of 12% granted for qualified export profits which was to expire on 31st March 2014 and 2015 has been extended. Relief is granted under sections 51 and 52 for profit and income from an undertaking engaged in the export of non-traditional goods, performance of any ship repair, ship breaking repair and refurbishment of marine cargo and containers, the provision of computer software, computer programs or such other services as specified by the Minister by gazette.
Profits from certain services to exporters
Services which could be essentially treated as services provided to manufacturers of goods for export or the export of services or services provided to foreign principals directly and payment received in foreign currency will be taxed at the concessionary rate of 12%. Currently only services provided to garment exporters are taxed at the reduced rate of 12% under this section.
Services under section 13 (ddd)
Currently services provided by a person or partnership in or outside Sri Lanka to a person outside Sri Lanka are exempt from income tax if the income from such services is remitted to Sri Lanka. No change has been proposed to this concession but it was proposed that such services must be utilized outside Sri Lanka. Currently the law does not make any reference to the utilization of such services outside or in Sri Lanka.
Small and medium industry tax rate
Currently undertakings engaged in the manufacture of goods or the provision of services and whose turnover is less than Rs. 500 million per annum is liable to income tax at the rate of 10% on their profits and income. It has been proposed to increase the rate to 12%. There is no change proposed to current law with regard to group companies and as such group companies will not be entitled to the reduced rate.
Companies listing in the CSE
Currently a concession is available for companies listing in the CSE which maintain a minimum public float of 20% to pay income tax at 50% of the corporate income tax rate for any company that obtains a listing on or before 31st March 2014 for a period of three including the year of listing. It has been proposed to extend the listing period by a further three year period if the Company is paying income tax at the rate of 28%. Thus, in respect of those companies paying tax at rates below 28% will not be entitled to the proposed concession.
Concessions to acquire financial institutions
The cost of acquisition or merger of financial services companies by the main company will be allowed as deduction over a period of three years. It is not known whether the deduction will be available as a deduction against income under section 25 as a normal expense incurred in the production of income and also available as a qualifying payment relief under section 34.
2.2 Incentives for professional services Income tax rates
The Hon. Minister has proposed the following incentives for professionals in employment and those providing professional services.
Up to Rs. 25 million - maximum rate 12%
Rs. 25 million to Rs. 35 million - maximum rate 14%.
Above Rs. 35 million - maximum rate 16%
For this purpose a professional in employment has been defined to mean a medical doctor, engineer, architect, lawyer, pilot, navigation officer, software engineer, accountant and a researcher or senior academic.
Construction of residential apartments
A professional who sets up a consortium with a bank and a construction contractor for the construction of residential apartments for his own use is entitled to the following concessions.
Qualifying payment relief of Rs. 50,000/= per month on the repayment of the loan.
Stamp duty on the transfer of the land reduced by 25%
Such bank will also qualify for a rebate of 50% on the applicable tax rate on interest earned from a loan granted for such project.
Concessions for creation of corporate entities for hub service:
The following concessions will be granted to professionals who establish corporate entities that will provide international services for providing high end BPO services in accounting, law, finance and procurement.
- 50% rebate on corporate income tax for a period of five year.
- Concessions of 10% of applicable taxes on the import of a motor vehicle if more than US$ 100,000 is remitted to Sri Lanka in any consecutive period of three years.
2.3 Other corporate tax concessions
International and regional office
In order to promote the relocation of regional operating headquarters or regional offices of international establishment the following concessions were proposed.
- Income tax holiday for a specific period
- Deduction of expenses connected with incorporation
- Relief from VAT and NBT for receipts in foreign currency
Acquisition of international brand names and IP rights
The following concessions will be available to any establishment which acquires any internationally recognized intellectual property and earns income in foreign currency by way of royalty.
- total cost of acquisition will be allowed as a deduction
- Income earned in foreign currency will be exempted for a specific period.
A deduction of 10% of income tax payable by a ship operator or any agent of a foreign ship will be allowed in consideration of skills development of trainees engaged in the shipping industry based on the number of individuals trained.
Exemptions from income tax on profits and income except dividend and interest is granted to the following institutions.
- National Enterprise Authority
- Sri Lanka Institute of Marketing
- The Institute of Physics
Marginal relief - It has been proposed to grant an exemption from income tax to an employee of Rs 48,000 per annum to an if he is not engaged in any trade business, profession or vocation other than for income from employment or any source from which tax has been deducted at source.
Payments for software - Computer Software payments made by SriLankan Airlines and Mihin Lanka on special requirements of such airline to non-resident persons will be exempt from income tax.
Dividends - Dividends paid by a company out of dividends received on an investment made outside Sri Lanka if such distribution is made within one month of receipt such dividend Will be exempt tax.
2.5 Employment income
An individual employed by more than one employer or serving in different places and receiving the benefit of using a private motor vehicle or receiving an allowance from more than one employer then the excess of the aggregate of such benefits or allowance over Rs. 50,000 per month will be taxable.
It has also been proposed to increase the limit to Rs. 50,000 for the application of the 10% tax rate for public sector employees employed in more than one place of employment.
It has also been proposed to change the definition of an executive from a person receiving a monthly emolument of Rs. 25,000 per month to Rs. 75,000 per month.
2.6 Restriction on the qualifying payment reliefs and tax holidays
It has been proposed to restrict the qualifying payment relief granted under section 34 for the expansion of an existing undertaking up until 31st March 2014. It appears that any unclaimed qualifying payment relief as at 31st March 2014 will be permitted to be carried forward as at present.
Although, there are no specific details it has been proposed to remove some of the existing tax holidays granted under sections 16 and 17 of the Inland Revenue Act for new undertakings including the triple deduction of research and development expenses and the depreciation rates.
It has also been proposed to restrict the income tax exemption granted under section 22 of the Inland Revenue Act for research and development companies until 31st March 2014.
All amendments to the Inland Revenue Act will be effective from 1st April 2014.
2.7 Corporate tax rates amended
It was also proposed to abolish with effect from 1st April 2014 the concessionary tax rate of 10% that is applicable to SME undertakings whose profits are below Rs. 5 million per annum since the concessionary tax rates to the SME sector is reduced to 12% based on a turnover threshold. Hence, the rate of tax of such companies earning less than Rs. 5 million per annum and turnover exceeding Rs. 300 million per annum will be taxable at the normal rates unless marginal relief based on profits is provided.
2.8 Insurance industry
The one off transaction relating to the segregation of composite insurance business under the Insurance Industry Act will be treated as a continuation of the business and the same position with regard to the life insurance and general insurance businesses will be maintained with regard to the following.
- Carried forward losses of the existing business - Set off of unabsorbed VAT
- Set off of ESC
- Transfer of the asset and the continuation of the claimability of the depreciation allowance.
However tax proposals have not addressed issues pertaining to setting off of notional tax credits and stamp duties.
3 Value Added Tax
3.1 Wholesale and retail trade
The imposition of VAT on wholesale and retail trade which was introduced as a ground breaking change to the VAT law in the previous budget has now been extended to such businesses having a turnover exceeding Rs. 250 million per quarter. This is a reduction of the threshold from Rs. 500 million to Rs. 250 million per quarter thereby expanding the VAT net to medium scale wholesale and retail traders as well.
The threshold of Rs. 250 million is to be ascertained by considering the turnover of all companies within a group including subsidiaries and associate companies engaged in wholesale and retail trade. Therefore group companies would have ensure that the turnover of all companies within the group, engaged in wholesale and retail trade, are aggregated in ascertaining the liability to VAT of each company within the group.
In a move to further tax this sector, the eligibility to claim exemption on goods, specifically exempt under the VAT law, sold by a wholesaler and retailer would be restricted to a maximum of 25% of the total sales. This means that even if the majority of the items sold by a wholesaler or retailer are specifically exempt from VAT such exemption would not be allowed in full on the sale of such items but would be limited to only 25% of the total sales of that entity.
Whilst it has been proposed that the input VAT attributable to the supplies from the above adjustment would be allowed this may not have a direct impact since such exempt items would not have input tax at the point of purchase. Therefore the price of such goods (over and above the 25% exemption limit) would now increase by 12%. However common inputs such as common overheads on which input is paid could now be claimed up to 75% of the turnover based on the above adjustment.
3.2 Removal of exemptions
Goods on which the Special Commodity Levy (SCL) is levied at import point are exempt from VAT at both import point and at the point of sale. It has been proposed that this exemption on such products be limited only to import point in the case of traders whose quarterly turnover exceeds Rs. 250 million from such imported goods.
SCL is generally imposed at import point on several essential items and the removal of this exemption at the point of sale would result in the price of such goods increasing by 12%. This is due to the fact that there would be no input VAT that can be claimed as SCL is paid at import point instead of VAT. It is unlikely that the SCL paid at import point would be allowed as a claim against the VAT.
The following items which were specifically exempt from VAT at the point of import and sale (of such imported goods) have been proposed to be made liable to VAT at both points with effect from January 1, 2014. Whilst this would result in the supply of such goods being liable to VAT this would mean that such suppliers would now have to register for VAT and the input VAT incurred by such suppliers would be claimable. The date from which the input invoices can be claimed is not specified and it is assumed that inputs from January 1, 2014 would be allowed in full.
- Paddy, rice, rice flour
- Wheat, wheat flour, bread
- Cardamom, cinnamon, cloves, nutmeg, mace, pepper
- Desiccated coconuts, fresh coconuts
- Rubber, latex
- Tea including green leaf
- Liquid milk or powdered milk
- Agricultural tractors or road tractors for semi- trailers under HS Code Nos: 8701.10.10, 8701.10.90, 8701.20.10, 8701.90.10, 8701.90.20
- Machinery and equipment for the tea and rubber industry under HS Code Nos: 8438.80.40, 8429.10
- Machinery for modernization of factories by the factory owner
- Plant and machinery by an undertaking qualified for a tax holiday under section 24C of the Inland Revenue Act No 10 of 2006
- Pharmaceutical preparations falling under HS Code Nos: 3003.90.11, 3003.90.12, 3003.90.13, 3003.90.15, 3003.90.19, 3004.90.11, 3004.90.12, 3004.90.13, 3004.90.15, or 3004.90.19
The input VAT paid on any goods used in an exempt supply would be claimable as input at the point such supplies subsequently become liable to VAT provided such goods are used in making taxable supplies (subject to certain conditions).
The following supplies would be made exempt from VAT with effect from January 1, 2014.
Import or supply of copper cables exclusively for the telecom industry and imported or purchased by any operator of telecommunication services. The exemption for importation would depend on the non-availability of such cables locally.
The local supply of gully bowsers, semi-trailers for road tractors, any machinery or equipment used for garbage disposal activities carried out by any local authority, for the purposes of provision of such services to the public as approved by the Secretary to the relevant Ministry.
Import or supply of the following goods:
- Ties and bows under HS Code Nos: 62.15.10, 62.15.20, 62.15.90
- Designer pens under HS Code No: 96.08.30
- Frozen Bait , Fish Hooks/rods/reels, Fishing tackle under HS Code Nos: 0511.91.90, 9507.10, 9507.20,9507.30 and 9507.90
- Marine Propulsion Engines under HS Code Nos: 8407.21, 8407.29
3.4 Zero rated supplies
It is proposed that the transportation of goods and passengers between International Airports situated within Sri Lanka would be defined to be international transportation which in effect would result in the zero rating of such services under the VAT law. Whether such services between such airports would be limited to transportation via air is not clear.
It is also proposed that aviation services and related activates be zero rated. It is presumed that this would cover all aviation services both domestic and international.
The contribution to the VAT Refund Fund by the Customs is to be reduced to 6% from 10% of VAT collected at import point due to the reduction in VAT refund claims as a result of the SVAT scheme.