Nov Tue 2020

Team Simplebooks

2021 Budget Update

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It’s that time of year again. 

The 2021 budget for the country has been brought forward to the parliament by the sitting Minister of Finance.

They’ve discussed everything from new tax administrations, changes to relief packages for organizations affected by covid. 

Now, we know the annual budget meeting can get a little complex and hard to follow at times. 

That’s exactly why we’ve written this blog to cover everything you need to know about this year’s meeting. 

Let’s get right to it!

In this blog, we’ll talk about:

  1. Key budget highlights for different industries 
  2. Tax concessions 
  3. Technical budget highlights 

Key Budget Highlights for Different Industries

We’re going to look at the different key highlights brought up in the budget meeting 

Different industries:

  1. Agriculture 
  2. Automobile
  3. Hotels and Tourism 
  4. Investments 
  5. Telecommunications
  6. Information Technology 
  7. Construction 
  8. Educational and Vocational Training 
  9. Real Estate 
  10. Banking and Finance 

Agriculture 

  1. The most important highlight to remember is that:

If you’re an individual or a company that is engaged in farming, agriculture, fisheries or livestock farming; you will be exempted from taxes for the next 5 years. 

  1. Local Dairy Industry: 
  • For capital investments of over USD 250 million, it’s proposed to provide strategic investment tax concessions for a period of 5 years. 

This is done to facilitate milk powder exports and take prominence away from milk powder imports. 

  1. Fishery 
  • Taxes on importing dried fish, maldives fish and canned fish to be maintained on a high level to encourage domestic production of fish. 

Automobile 

Proposals: 

  1. Reduce import taxes on vehicle spare parts needed for new production sectors. 

This is proposed to incentivize entrepreneurs in vehicle repairing and assembly in the automobile industry. 

Hotels and Tourism 

Local Government Institutions will simplify the taxes and fees it charges on tourism. They will also be provided with an upper cap. 

The Central Bank of Sri Lankan will extend the repayment and refinancing loan schemes until September 2021.

Investments

Proposals:

  1. Interest income of welfare societies and institutions will be exempted from income tax.
  2. Companies listed in the Colombo Stock Exchange before 31st December 2021 will:
  • Receive a 50% tax concession for the 2021/2022 financial year
  • Maintain a 14% corporate tax rate for the following 3 years
  1. Capital Gains Tax will be based on the:
  • Sale price of a property or
  • Assessed value of a property 

the price will be decided based on the highest amount.

  1. Dividends of forgien companies will be exempted from tax if the dividends are reinvested into:
  • The expansion of the business or;
  • In to the money market or;
  • Stock market or;
  • In the Sri Lanka International Sovereign Bonds
  1. Tax concessions for a maximum of 10 years will be provided to investments of over USD 10,000,000 that has the potential to change the landscape of the economy in the areas;
  • Export industries 
  • Dairy 
  • Fabric 
  • Tourism 
  • Agricultural products 
  • Processing 
  • Information technology 
  1. Investments in bonded warehouses and warehouses related to offshore businesses will be exempted from all taxes. 

Telecommunication 

Proposals: 

  1. A five year tax concession from 1st January 2021. This will be available for domestic industrialists who provide labour and products to construct and install the communications towers. 

Information Technology 

Proposals: 

  1. Income for businesses that are involved in Information Technology and enabling services both 
  • Domestic and;
  • Foreign 

will be exempt from income taxes regardless of whether they were earned while being a resident or non resident in Sri Lanka. 

Construction 

Proposals: 

  1. Exempt import taxes when importing machineries with modern technology. 
  2. Ten year tax holiday for investments in select recycling sites. 

Educational and Vocational Training 

Proposals:

  1. Provide Rs 500,000 loans with 4% interest rates as start up capital. This will be provided for young women and men that start their own businesses after successfully completing vocational training courses. 

A commitment fee of 0.25% will be charged to make sure that this start up capital is invested in the approved businesses.

These businesses will also be given tax exemptions for 5 years.

  1. If Private Sector institutions double their intake, a 5 year tax holiday will be given. This is to encourage the Private Sector institutions that will be standardized under the TVET concept. 

Real Estate 

Proposal: 

  1. If investments are made in the housing market through the Sri Lanka Real Estate Investment Fund (SLREIT),
  • Capital gains tax will be exempted 
  • Dividend from Income Tax will be exempted 
  • Stamp duty will be reduced up to 0.75%

Banking and Finance 

Proposals:

  1. The government will issue specific instructions under the Inland Revenue Act to ensure better, transparent management.

These instructions will help prepare for the anticipated loss of loans and doubtful loans when it comes to calculating the taxes of banks and financial institutions in the coming months/years. 

  1. The 
  • Profits from capital and 
  • Interest income 

will be interest free when Sri Lankan commercial banks purchase “Sri Lanka International Sovereign bonds”. 

This also only applies if the bonds are worth a minimum of USD 100,000,000. 

Additionally, the “risk weighted provisioning” will be suspended under the Central Bank Regulations for three years. 

  1. To:
  • Merge finance companies functioning under commercial banks with the respective commercial banks to strengthen the finance sector. 
  • Merge subsidiary finance companies that have not been cancelled by the Central Bank of Sri Lanka with its parent company. 
  • Consider investment expenditure in acquisitions to be considered as deductible expenditure. 

Tax Policy and Tax Administration 

  1. A consistent tax policy for the next 5 years will be implemented. 
  2. Tax laws will be amended to facilitate online tax administration.
  3. A special tax appeals court will be established to resolve tax appeals 
  4. Proposal to settle outstanding dues on taxes such as;
  • Economic service charge and,
  • The Nation’s Building Tax 

to be settled through a mechanism which includes a concessionary payment plan that will result in the closure of those files. 

  1. It’s mandatory for all Companies to file their taxes only through an “E-Filing system”. This will be effective from the 01st of April. 

The Tax Identification Number (TIN) will have to be used in all tax related transactions. 

  1. An online managed single Special Goods and Service Tax will be introduced to replace various goods and services taxes. 

This will be imposed on:

  • Alcohol
  • Cigarettes
  • Telecommunication
  • Betting and gaming 
  • Vehicles 
  1. Proposal: Strengthen the legal provisions relating to the establishment of specific time frames.

This will be used to implement the rulings and settle appeals submitted against the tax administrative decisions made under the Inland Revenue Act. 

  1. The large taxpayers will be brought to operate under the direct responsibility of the Commissioner General of Inland Revenue  Department. This will be done by bringing the various units under one Large Tax Payer Unit (LTPU). 
  1. Punitive legal provisions will be introduced against the private tax consultants and auditors that prepare and certify fraudulent tax reports. 
  1. Entrepreneurs will be provided with a tax pardon to utilize funds for any investment facilitated by the budget under the payment of taxes amounting to 1%. 

Other Tax Exemptions 

Aside from the tax concessions we mentioned earlier, there are a few 

  1. Warehousing in ports is exempted from all taxes. 
  2. Pharmaceutical manufacturers are to receive tax concessions under the Strategic Development Projects Acts. 
  3. Local boating and ship-building compa nies get tax holidays of 7 years. 
  4. MultiNational Companies will receive a reduction in tax on dividends by 25% in 2021 and 50% in 2023. This is under the condition that they increase their exports by 30% in 2021 and by 50% in 2023.
  5. Samurdhi will be exempted from income tax on interest income derived from investments in the government securities by the Samurdhi Bank. 

Technical Notes on the Budget 2021

1. Income Tax (Amendments to Inland Revenue Act No. 24 of 2017) 

1.1 Removal of Withholding Tax (WHT) 

Following payments are exempt from Withholding tax with effect from January 1, 2020 

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

(ii). Employment income. 

(iii). Partners’ share of a Partnership profit. The taxable income of the partnership excluding Rs. 1 million per annum is subjected to Partnership Tax at the rate of 6%. 

1.2 Exemptions from income tax 

(i). Profits and income earned by any person from farming including agriculture, livestock and fish farming, with effect from April 1, 2019. 

(ii). Profits and income earned from providing Information Technology and enabling services, with effect from January 1, 2020. The enabling services will be prescribed by regulations by the Minister in charge of the subject of Finance. 

(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, with effect from January 1, 2020. 

(iv). Interest income earned on Non-Resident Foreign Currency (NRFC) and Resident Foreign Currency (RFC) accounts, with effect from January 1, 2020. 

(v). Interest paid on loans obtained from any person outside Sri Lanka, with effect from April 1, 2018.

(vi). Any income earned by any non-resident person on any Sovereign Bond denominated in foreign or local currency, with effect from April 1, 2018.

(vii). Interest or discount paid or allowed to any person on Sovereign Bonds denominated in foreign currency, with effect from April 1, 2018. 

(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, with effect from April 1, 2018. 

(ix). Dividends paid by a resident company to any non-resident person, with effect from January 1, 2020. 

(x). Dividends distributed by Commercial hub Enterprises, with effect from January 1, 2020. 

(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 with effect from January 1, 2020 

(xii). Amounts derived by any non-resident person from laboratory services or standards certification services, with effect from January 1, 2020. 

(xiii). Amounts received by any religious institution by way of grants and donations, with effect from January 1, 2020. 

(xiv). All aircraft related payments, software licenses and other overseas payments made by SriLankan Airlines with effect from April 1, 2018. 

(xv). Exemption or variation of the applicability of the provisions of the Inland Revenue Act, No. 24 of 2017, in respect of projects approved under the Strategic Development Projects Act, No. 14 of 2008 

1.3 Qualifying Payments 

(i). Personal relief for residents or non-residents but citizens for each year of assessment is Rs. 3,000,000/- with effect from January 1, 2020. 

(ii). Payments made to Consolidated Fund by any Public Corporation is deductible in calculating income tax of such Corporation, with effect from April 1, 2019.  

(iii). Following payments subject to maximum of Rs.100,000/- per month or Rs. 1.2 million per annum is deductible, with effect from January 1, 2020 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 
1.4 Income Tax Rate Changes 

(i). Revision of Personal Income tax rates on taxable income with effect from January 1, 2020 as follows 

  • First Rs. 3 million – 6% 
  • Next Rs. 3 million – 12% 
  • Balance – 18% 

(ii). Income tax rate applicable on the terminal benefits is revised with effect from January 1, 2020, as follows: 

  • First Rs. 10 million – Exempt 
  • Next Rs. 10 million – 6% 
  • Balance – 12% 

(iii). Payments to non-residents where such payments has a source in Sri Lanka is treated as final withholding payments, with effect from January 01, 2020 and subjected to tax as follows: 

  • Interest payments – 5% 
  • Any other payment – 14% 

(iv). Corporate Income Tax Rate is revised, with effect from January 1, 2020, as follows:- 

  • Exports, Tourism, Education, Medicare, Construction, and Agro processing 14% 
  • Manufacturing 18% 
  • Trading, Banking, Finance, Insurance, etc. (Standard Rate) 24% 
  • Liquor, Tobacco, Betting and Gaming 40%
1.5 Advance Income Tax 

(i). Advanced Personal Income Tax can be deducted from regular fixed income (remuneration, interest etc.) of individuals, subject to the written consent of such individuals with effect from April 1, 2020. 

(ii). Advanced Income tax can be collected at the source, subject to the written consent of the taxpayer with effect from April 1, 2020. 

1.6 Tax Relief Measures to Facilitate Post-COVID-19 Economic Recovery 

(i). Consideration of the income generated from the supply of Health Protective Equipment 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 as ‘Deemed Exports’ and to consider the said quantities for the calculation of 80% export requirement for the tax purposes, to become eligible for reduced tax rates. 

(ii). Waiver of Income tax in arrears, payable by the SMEs as defined in the Inland Revenue Act No. 24 of 2017, on the assessments issued up to the year of assessment 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. 

(iii). The income tax return furnished by the SMEs for the year of assessment 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. 

(iv). 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 Revenue Administration Management Information System (RAMIS) Unit of the Department of Inland Revenue. 

(v). The payment or/and submission of the returns of any tax administered by the CGIR, which is due for the period from March 1, 2020 to June 30, 2020, proposed to be treated as paid or/and submitted on the due date if such payment/submission is made on or before December 31, 2020.

2. Value Added Tax (VAT) (Amendments to VAT Act, No. 14 of 2002)

(i). Increase of threshold for the registration for Value Added Tax (VAT), from Rs. 3 million per quarter or Rs. 12 million per annum to Rs.75 million per quarter or Rs. 300 million per annum with effect from January 1, 2020.

(ii). Granting permission for the voluntary registration for VAT 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 VAT registration threshold.   

(iii). Exemption of the sale of Condominium housing units from VAT with effect from December 1, 2019. 

(iv). Exemption of information technology and enabling services with effect from January 1, 2020. 

(v). Reduction of VAT Rate on the import and/or supply of goods or supply of services other than financial services from 15% to 8% with effect from December 1, 2019.

(vi). Exemption of the supply of services in respect of inbound tours, by a travel agent registered with the Sri Lanka Tourism Development Authority with effect from April 1, 2020. 

(vii). 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. 

(viii). 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 from May 20, 2020 to December 31, 2020. 

(ix). Reduction of piece based VAT Rate applicable on domestic sale of certain garments by the export oriented Board of Investment (BOI) companies from Rs. 100 to Rs. 25 in line with the removal of Nation Building Tax and reduction of VAT rate. 

(x). Removal of the provisions permitting to treat the supplies made by the suppliers who are not registered for VAT as VAT inclusive supplies, introduced in respect of the wholesale and retail trade, in line with the increase of threshold for registration for VAT and introduction of voluntary registration.

3. Technical Rectifications 

Relevant amendment will be made to the Inland Revenue Act No. 24 of 2017 and Value Added Tax Act No. 14 of 2020 to rectify certain ambiguities (include differences in translations).

Source: Budget Speech 2021

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