Guide to 2022 Interim Budget

The new President of Sri Lanka introduced an Interim Budget in Parliament on 30th August 2022! The 2022 Interim Budget will serve as a means to counter the ongoing effects of the economic crisis.

Here are some key points and takeaways on tax proposals from the 2022 Interim Budget that you need to know.

Table of Contents

1. Corporate Income Tax
      Changes to the Tax Rates
      Changes to Tax Holidays
      Changes to Dividend Payments to Non-Residents
      Changes to Marketing and Communication Expenses
      Other Changes
2. Personal Income Tax
3. Withholding Tax
      Changes to Advance Personal Income Tax (APIT)
      Changes to Advance Income Tax (AIT)
      Other Changes
4. Value Added Tax
      Changes to the Tax Rates and Threshold
      Other Changes
5. Betting & Gaming
6. Import Levies
7. Tax Administration
8. Other Proposals

Corporate Income Tax

Changes to the Tax Rates

• The standard corporate income tax rate is proposed to increase from 24% to 30%. This will be effective from 01st October 2022.

However, the concessionary rate of 18% applicable on gains and profits from manufacturing and the higher rate of 40% applicable on gains and profits from betting and gaming and manufacture and sale or import and sale of any liquor or tobacco products will remain the same.

Changes to Tax Holidays

The government has proposed to remove the following tax holidays that were granted as per the Inland Revenue (Amendment) Act No.10 of 2021 from the 01st April 2023,

• A 10-year tax exemption period granted for an enterprise that sells recycled construction materials at a selected separate site established in Sri Lanka to recycle construction materials.
• A 05-year tax exemption period granted to any individual who starts a business on or after 1st April 2021, after successfully completing vocational education from any institution that is standardised under the TVET concept and regulated by the Tertiary and Vocational Education Commission.
• A 07-year tax exemption period granted for an enterprise started by a resident person for the manufacturing of boats or ships in Sri Lanka and receives or derives any gains or profits from the supply of such boats or ships.
• A 05-year tax exemption period granted to any resident person who constructs and installs communication towers and related appliances in Sri Lanka using local labour and local raw materials, or who provides required technical services for such construction or installation, from or after 1st January 2021.
• Any agreement to lease bonded warehouses or warehouses for offshore business in the ports of Colombo and Hambantota, if such person has invested in such warehouses, effective from 1st April 2021.

Note –  The above will not be applicable to any projects that commenced prior to 31st March 2023.

Changes to Dividend Payments to Non-Residents

• A proposal to implement an income tax on all dividend payments made by resident companies to non-residents has been presented. This will be effective from 01st April 2023.

Changes to Marketing and Communication Expenses

• The removal of additional 100% deduction for marketing and communication expenses that was applicable for 03 years (from the Year of Assessment 2021/22), effective from 01st April 2023.

Other Changes

• Redefine the definition provided for “multi-national companies” under the Inland Revenue Act, No. 24 of 2017 to help understand the term better and reduce tax evasion.

Personal Income Tax

• The existing personal relief threshold is proposed to be reduced from LKR 3 mn to LKR 1.8 mn, effective from 01st October 2022. 
• The individual income tax slab is proposed to be reduced to LKR 1.2 mn from LKR 3 mn, effective from 01st October 2022. 
• The personal income tax is proposed to be charged at the following progressive rates, effective from 01st October 2022:

Note – Individual relief of LKR 1.8 mn will be deducted from the taxable income.

Withholding Tax

Changes to Advance Personal Income Tax (APIT)

• It was proposed that APIT or withholding tax on employment income (PAYE) be made mandatory for all taxpayers exceeding the qualifying relief of LKR 1.8 mn per year of assessment. This will be effective from 01st October 2022.

Changes to Advance Income Tax (AIT)

• It was proposed that AIT or withholding tax be mandatory for all taxpayers. The proposed rates are as follows, effective from 01st October 2022:

Other Changes

• Individual taxpayer’s interest payments and dividends that have had withholding tax or AIT applied to them should be regarded as Final Withholding Payments, effective from 01st October 2022. 
• Reinstatement of the senior citizen’s relief on interest income of LKR 1.5 million, effective from 01st October 2022. 
• Reinstatement of 5% withholding tax rate on service payments exceeding LKR 100,000 per month made to individuals such as professionals, effective from 01st October 2022.

Value Added Tax

Changes to the Tax Rates and Threshold

• It was proposed that the rate of VAT on the import and supply of goods or supply of services be increased from 12% to 15%, effective from 01 September 2022.
• It was proposed that the VAT threshold of LKR 300 mn per annum or LKR 75 mn quarter be reduced to LKR 120 mn per annum, effective from 01st October 2022.

Other Changes

• A proposal to remove the exemption of VAT on condominium residential apartments, effective from 01st October 2022. 
• A proposal to evaluate the VAT exemption schedule and remove unproductive exemptions based on the economic benefits, effective from 01st April 2023. However, there is no further information available on this.

Betting & Gaming

• The Annual Levy for carrying on the business of gaming was proposed to be increased from LKR 200 mn to LKR 500 mn, effective from 01st October 2022. 
• The Annual Levy for betting was proposed to be increased, effective from 01st October 2022:
  – From LKR 4 mn to LKR 5 mn when it is carried on through agents.
  – From LKR 0.6 mn to LKR 1 mn when it is carried on using live telecast facilities
  – From LKR 50,000 to LKR 75,000 when it is carried on without the use of live telecast facilities
• The rate of the levy on gross collection was proposed to be increased from 10% to 15%, effective from 01st October 2022.

Import Levies

Food Packaging

• A proposal to impose a 50% import duty concession on the import of advanced new technology equipment or accessories for food packaging.

Electric Bicycles

• A proposal to impose tax concessions of more than 50% value addition on imported accessories or parts required in the manufacture of electric bicycles locally.

Tax Administration

Changes to Tax Registration

• A proposal to require all residents above 18 years of age regardless of their annual income and tax-free thresholds, to register for tax.