BUDGET HIGHLIGHTS

Transcription

1 BUDGET HIGHLIGHTS 2012

2 VISION To be the preferred Accounting and Business Advisory firm MISSION Exceed client expectations by providing solutions through dedicated people CORE VALUES Integrity We have only one level of service Excellence The power of our people Commitment to each other Strength from cultural diversity Carrying out what is promised at the right time Innovation and upgrading of procedures Keep up-to-date with modern developments Continually growing to provide a wide sphere of services

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4 21 st November 2011 Dear Client B U D G E T P R O P O S A L S 2012 This booklet includes the salient features in the budget proposals for 2012, delivered by His Excellency the President Mahinda Rajapakse in his capacity as Minister of Finance & Planning. This has been prepared as a general guide exclusively for the information of our clients and staff. Contents included may be subject to alteration during the passage of the legislation, through the Parliament. Since the information provided are proposals, no final conclusion on any issues should be drawn without further consideration and consultation. For additional information or guidance on the issues dealt within the comments, the Tax & Business Advisory Division of SJMS Associates, an Independent Correspondent Firm to Deloitte Touche Tohmatsu will be pleased to assist you. This memorandum may be accessed on our website at Yours faithfully, SJMS ASSOCIATES Chartered Accountants P. E. A. Jayewickreme, M. B. Ismail, Ms. A. M. J. Patrick, T. Krishnakumar, Ms. S. L. Jayasuriya, D. S. W. Andradi, G. J. David, Ms. F. M. Marikkar, Ms. M. S. J. Henry, Ms. A. U. M. Keppetipola

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6 Budget Highlights 2012

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8 Budget Highlights 2012 Contents 1. INCOME TAX ECONOMIC SERVICE CHARGES NATIONS BUILDING TAX VALUE ADDED TAX MISCELLANEOUS CUSTOMS DUTIES OUR COMMENTS Appendix A Summary of Corporate Tax Rates B Comparisons of Current Corporate Taxes, Withholding Taxes, Indirect Taxes etc. 34 C Comparison of effective tax rates for resident individual 35 D Retiring Benefits 35 7

9 1. INCOME TAX 1.1 a. Exemptions Proposed A tax holiday of three years available under section 16c of the Inland Revenue Act will be extended to new enterprises engaged in any of the following activities provided that an investment of not less than Rs. 50 million is made on or before 31 st March Agricultural and/or agro processing Animal husbandry and/or processing Fisheries and/or fish processing Information technology Business/knowledge process outsourcing Healthcare Education Beauty care Cold room and storage Tourism Sports and fitness centres Creative work including artwork Present Exemption from income tax for a period of three years of the profits and income of any new undertaking engaged in or manufacturing of any articles investing not less than Rs. 50 million. b. Investment limit (for new enterprises) Proposed Small scale enterprises engaged in the following activities investing a minimum sum of Rs. 25 million are eligible for a 4 year tax holiday. agriculture and/or agro processing animal husbandry and/or processing fisheries and and/or fish processing creative work including artwork Medium scale enterprises engaged in any specified activity, to be notified in the future, will be eligible for a tax holiday, as indicated below: Investment Rs. 50 million - Rs. 100 million Rs. 100 million - Rs. 200 million Over Rs. 200 million Tax Holiday 4 years 5 years 6 years 8

10 Large scale enterprises engaged in specified activities including any processing and solid waste management will be eligible for tax holiday as follows. Investment Rs.300 million - Rs. 500 million Rs.500 million - Rs. 700 million Rs.700 million - Rs. 1,000 million Rs.1,000 million - Rs. 1,500 million Rs.1,500 million - Rs. 2,500 million Over Rs.2,500 million Tax Holiday 6 years 7 years 8 years 9 years 10 years 12 years Present Certain industries were eligible for tax holiday not exceeding seven year with a minimum investment not exceeding USD 3 Million. c. Strategic Import Replacement enterprises Proposed The production of the following items to replace imports by a new enterprise or by way of an expansion of an existing enterprise with the corresponding investment will be eligible for a 5-year tax holiday followed by a concessionary income tax rate. Product Investment limit Concessionary Tax rate Cement USD 50 million 12% Steel USD 30 million 12% Pharmaceuticals USD 10 million 12% Fabric USD 5 million 12% Milk Powder USD 30 million 12% A ruling mechanism will be introduced in advance, for investors eligible for tax exemptions, to ensure consistency in the application of respective provisions of relevant tax laws. Present No exemptions for import replacement activities. d. Tax exemptions for Institutions Proposed Profits and income (other than dividends and interest) of the following will be exempt from income tax: The Institute of Certified Management Accountants of Sri Lanka; The Child Protection Authority. Present Presently, No such exemptions are available. 9

11 e. Tax exemptions from specific sources Proposed Royalty received from outside Sri Lanka will be exempt, if remitted to Sri Lanka through a bank; Profits and income from the redemption of a unit of a Unit Trust or a Mutual Fund; Interest accruing to any person or partnership outside Sri Lanka on a loan granted to any person or partnership in Sri Lanka; Profits and income from the administration of any sports ground, stadium or sports complex; Profits and income of a trainer of any sport, being a non-citizen individual who is brought to Sri Lanka for that purpose. Present Presently, No such exemptions are available. 1.2 CONCESSIONARY RATES a. Development activities carried out by specified bank branches Proposed The profits and income of a newly set up branch of a commercial bank dedicated to development banking will be taxed at a lower rate of 24%. Present The current tax rate is 28%. b. Research and development Proposed The profits and income from the activities carried out as research and development by a person other than a company will be reduced to a maximum rate of 16%, and in the case of a company the rate will be reduced to 20%. Present There is no concessionary rate of tax for persons who carry out research and development activities. The rates applicable at present are as follows: Company tax rate 28%. Individuals - Progressive rate. c. Value Added Tea Proposed A grower cum manufacturer or a manufacturer of tea, who establishes a joint venture with a tea exporter for the purposes of exporting pure Sri Lankan tea (Ceylon Tea), in value added form, with a Sri Lankan brand name, will be eligible to be taxed at the rate of 12% on the manufacturing income attributable to the quantum of tea purchased for that purpose by the joint venture. Present There is no concessionary rate of tax for manufacture of value added tea. Present rate applicable to a company is 28%. 10

12 d. Handloom Industry Proposed The rate of tax applicable on the profits and income of a person or partnership from locally manufactured handloom products will be reduced to 12% (maximum). Present Company tax rate 28%. Individuals - Progressive rate. e. Health Care Services Proposed The rate of tax applicable on the profits and income from the health care services will be reduced to a maximum of 12%. Present Company tax rate 28%. 1.3 Ascertainment of Profits and income The following expenses are allowed to be deducted under Section 25: a. Capital Allowance Cost of any high tech plant, machinery or equipment. b. Travelling Expenses I. Expenses incurred by the employer in respect of vehicles used by the employee will be allowed irrespective of whether the benefit is taxable on such employee. This change is applicable with effect from II. Foreign travelling expenses of a company providing the following services, will be allowed in full if the expenditure is related to such services: - Design development - Product development, or - product innovation c. Maintenance and management expenses incurred by any person in respect of a sports ground, stadium or sports complex will be allowed in full. 1.4 Deduction from total statutory income (Section 32) Pre-commencement expenses of SME The pre-commencement expenses of SME, with the expected turnover not exceeding Rs. 500 Million incurred in the immediately year prior to the year in which commercial operations commenced, will be allowed to be deducted from its total statutory income of the year of commercial operation. 11

13 1.5 Qualifying payments (Section 34) Expansion of existing enterprises Investment by an enterprise in its own business (expansion) of not less than Rs. 50 million made prior to 31 st March 2015 will be treated as a qualifying payment deductible from assessable income subject to a maximum of 25% of the investment for each year of assessment falling within a period of 4 years commencing from the year of investment. Expenditure incurred under any community development project carried out in most difficult villages as identified and gazzeted by the Commissioner General. Maximum deductible - Individual Rs. 1 Million - Company Rs. 10 Million 1.6 Audit Certificate Presently, all quoted public companies are required to submit audit certificates, while other companies have to submit only if the turnover exceeds Rs. 250 Million or if the net profit exceeds Rs. 100 Million. According to the proposal, the requirement of furnishing the audit certificate is extended to all companies within the group, irrespective of the turnover or profit. 1.7 Definition of Dividends Scrip dividends have also been included under the interpretation of the word dividend. 2. Economic Service Charge (ESC) 2.1 Exemptions Proposed The turnover of following businesses are exempt from ESC : any business of which the profits are subject to Income Tax except those incurring losses sale of locally manufactured clay roof tiles and pottery products by the manufacturer Present Presently there are no such concessions. 2.2 Threshold Proposed The present threshold of Rs 25 Million per quarter has been increased to Rs 50 Million per quarter. Present The threshold is Rs 25 Million per quarter. 12

14 3. NATION BUILDING TAX (NBT) 3.1 Exemptions Proposed Exemptions have been proposed for the following 4 categories: The following articles have been included under excepted articles. Article Importation of air craft or ships Importation of artificial limbs, crutches, wheel chairs, hearing aids, accessories for such aids, white canes for the blind, Braille typewriters and parts,braille writing papers and boards Importation of timber logs Importation of yarn except sewing thread and vegetable fibre based yarn Importation of fabric Tax Holiday Wholesale or retail sale of Printed books ( with effect from 1 st July 2011) Goods to exporters Fresh milk, green leaf, cinnamon, rubber (latex, crepe or sheet rubber) by collectors Petrol, diesel or kerosene in a filling station Sale of locally manufactured clay roof tiles and pottery products by the manufacturer Sale of paintings by the creator of such paintings Present The above categories are liable. 3.2 Definition of exporter broadened The definition of exporter for the purpose of the NBT Act will be adjusted to also cover a manufacturer of goods who exports produce through a Trading House established for purpose of export. (effective from 2009) 13

15 4. VALUE ADDED TAX (VAT) 4.1 Exemptions (a) Import Item Speakers & amplifiers, digital stereo processors & accessories, cinema media players and digital readers for the improvement of film theatres with digital technology (the present exemption applicable to the import of equipment for the cinema industry will be extended by addition of the above items) Pharmaceutical machinery and spare parts by manufacturer of pharmaceuticals (w.e.f. June 1, 2011) Machinery for the manufacture of bio mass briquettes and pallets by the manufacturer of such products (w.e.f. June 1, 2011) Green houses, poly tunnels and materials for the construction of green houses and poly tunnels by the growers HS codes (b) Supply of: (i) Locally manufactured goods : Hydropower machinery and equipment Products using locally procured raw materials for the required specification of the tourist hotels and airlines which promote local value added products Canned fish Turbines Specified products to identified State Institution replacing imports Pottery product by the manufacturer (ii) Research and development services Services by the Department of Commerce Paintings by the creator of such painting 14

16 (c) Import or the Supply of the following items Item Lorries and trucks Buses Sport equipment Machinery used for the production of rubber and plastic products Wood sawn HS codes Sunglasses Perfumes Mammoties and fork Artemia eggs and peat moss Moulding (steel, glass, rubber and plastic) Items and spares needed in the poultry industry Photo sensitive semi conductor devices The raw materials exclusively used for the manufacture of following articles, Item for the manufacture of spectacles For the manufacture of spectacle frames (d) VAT on Financial Services: HS codes The value addition attributable to a Unit Trust or a Mutual Fund from interest, dividend or dealing in debt instruments 15

17 4.2 Input tax restriction Proposed The mechanism introduced in 2011 to deduct unabsorbed input tax as at 31st December 2010, will be further extended to facilitate claiming the balance (if any) in the following manner: a. effective from July 13, 2011, up to December 31, 2011 the set off is permitted against taxes payable at the point of Customs subject to the limit of 5% specified in the VAT Act, if no liability to VAT; b. effective from January 1, 2012, the 5% restriction will be removed and the tax payers will be permitted to claim the balance against any tax administered by the Commissioner General of Inland Revenue, or the Director General of Telecommunication Regulatory Commission subject to the limit of 10% of the unabsorbed balance as at December 31, 2010, until the residue of the unabsorbed balance as at December 31, 2010, (after deducting the amount already set off up to December 31, 2011) is fully absorbed; c. In addition, in the case where there is no liability to VAT, the set off is extended to cover up the taxes payable at the point of Customs, subject to the same restriction. Present Presently, the unabsorbed balance on 31st December 2010 is restricted to 10% per month or 5% of the net tax payable for that period whichever is low. 4.3 VAT Suspension Scheme Certain changes will be incorporated to the VAT Act, which are already being administratively carried out and communicated to tax payers through guidelines for the proper implementation of the Simplified VAT (SVAT) system. 4.4 VAT Deferment Proposed VAT on the importation of plant, machinery or equipment by enterprises referred under paragraph number (1.1. c) in this booklet, will be deferred during the project implementation period, and such deferment will be treated as an exemption on the fulfillment of the conditions specified by the Board of Investment of Sri Lanka with the concurrence of the Commissioner General of Inland Revenue. Present Presently no such concession is available 16

18 5. MISCELLANEOUS 5.1 Telecommunication Charges Description Proposed Present Levy on outgoing international calls Rs.3.00 per minute Rs per minute Rate of incoming international calls US$ 0.09 per minute US$ 0.07 per minute 5.2 Levy on rooms of Five Star Hotels under the Finance Act The application of levy will be subject to the concessionary rate specified for Airline crews in the Gazette Order under Section 53 of the Tourism Act No 38 of Visa Fee The Visa Fee has been proposed to be charged as follows. Countries Proposed In US$ SAARC 10 Other Hub Service (Special Provisions) Act The government will be introducing a new Finance Act to exempt the application of the following Acts to certain enterprises recognized by the Board of Investment (BOI) Customs Ordinance Import Export Control Act (including regulations there under) Exchange Control Act These enterprises so recognized by BOI are companies engaged in: Entrepot trade in apparel involving import, simple processing and re-export Transshipment business in apparel clothing where goods can be procured from one country or manufactured in one country and shipped to another country without bringing into Sri Lanka maritime operation. Providing front end services to the apparel manufacturers in the region. Promoting leading buyers to establish headquarters operations in Sri Lanka for management of finance, supply chain and billing operations. Promoting logistics services such as multi country consolidation in Sri Lanka. Provisions will be made in that to ensure the following : Where an enterprise is engaged in an activity involving physical import of goods for re-export under any of the activities referred to above, such operations shall be carried out either in a free port operated under the supervision of the Sri Lanka Ports Authority or a bonded area declared under the BOI law or Customs Ordinance. 17

19 Any movement of goods from and to the identified free port or to a bonded area from or to the domestic territory will be considered either as an export or import as appropriate. Enterprises which are not involved in such physical movement of goods, but engaged in regional headquarter operations, supply chain management, etc., can be located outside such demarcated area. 5.5 Yarn All yarn except sewing thread and vegetable fibre based yarn, for value addition and import replacement by handloom manufacturers and fabric manufacturers are exempt from all taxes. Fabric Imported fabric for domestic consumption Sale of excess fabric by export oriented manufacturers However, the sale by small industrialist engaged in manufacture of various items such as soft toys, hand bags etc, if such cut pieces of fabric are not more than 2 meters Fabric sold in the local market by export oriented textile mills will be permitted to sell 25% of their production, if they do not opt to be under the import replacement programme. - All inclusive tax of Rs.75 per Kg. - All inclusive tax of Rs.75 per Kg. - Rs.25 per Kg. - All inclusive tax of Rs.40 per Kg. Apparel All imports of branded apparel products including - All inclusive tax at the point of sportswear. Customs to a maximum of 35%. Export oriented apparel manufacturers have to export a minimum of 75% of their product and permitted to sell the balance in the local market on the payment of; - All inclusive taxes at - Rs.25 per piece. -For a bundle of 6 pieces of selected categories - Rs.25 per bundle. 5.6 Time bar provisions for taxes at the point of customs A two year time bar provision applicable to taxes collected by the Director General of customs has been introduced. 5.7 International Financial Reporting Standards (IFRS) Changes to the respective tax laws would be made after a study of the tax implications on financial statements prepared under IFRS. 18

20 6. CUSTOMS DUTY Customs Duty has been exempted or reduced or increased for certain articles having the following H.S. Codes. The policy of Customs Duty structure remains unchanged except for the revisions proposed. H S Code Prevailing Customs Duty Proposed Customs Duty (%) 1. To strengthen caring society Rate of incoming international calls US$ 0.09 per minute US$ 0.07 per minute Braille typewriters % Free Parts for Braille typewriters % Free 2. To reduce the upfront cost of raw materials Prepared glues and other prepared adhesives % Free % Free % Free Saturated other polyesters % Free Polymers of vinyl acetate % 5% Hardened gelatin capsules % or Rs. 20/kg Free Compounded rubber, unvulcanised % Free % Free Vulcanised rubber thread % 5% Raw materials for spectacles % Free % Free % Free % Free 3. To encourage local value addition industries Food preparations based on maize, soya bean and green gram Free 15% Free 15% Free 15% Pneumatic tyres of rubber % or Rs. 90/Kg 30% or Rs. 100/Kg Steel & parts of structures % 5% 19

21 Razor blades % Free % 5% Easy open lids % Free Refrigerators % 15% % 15% % 15% % 15% % 15% % 15% % 15% % 15% % 15% Moulds for rubber and plastics % 5% % 5% Prefabricated buildings % 5% 4. To boost the sport economy and to build a healthy society Sports footwear % or Rs.100/pair Free % Free % or Rs.100/pair Free % Free % or Rs.100/pair Free 5. To support transport ( passengers and goods ) Buses / Lorries % or Rs 90 /kg 15% or Rs 50 /kg Diesel engines (New) % Free Motor vehicles for the transport of goods/lorries % 5% % Free % Free % Free % Free % Free % Free 20

22 6. To promote the use of energy saving lamps Lamps/LED mounted in one housing & solar lanterns & sets for decorative lightning % Free % Free % Free % Free % Free % Free % Free 7. To promote ICT and BPO Sector Automated data processing machines/ computers % Free % Free % Free % Free % Free % Free % Free % Free % Free 8. Branded and other goods of interest to tourists Footwear % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % Rs. 100/pair % Rs. 100/pair % or Rs. 100/pair Rs. 100/pair % or Rs. 100/pair Rs. 100/pair 21

23 % or Rs. 100/pair Rs. 100/pair Ornamental porcelain & ceramic products % or Rs 25/kg Free % or Rs 20/kg Free % or Rs 20/kg Free Glassware % 5% % 5% % 5% % 5% % 5% Cutleries % Free % Free % Free % Free % Free Sunglasses % Free % Free Hair accessories % Free % Free % Free - Importation of goods by the following institutions will be exempt from Customs Duty. Sri Lankan Air Lines Limited, Air Lanka Catering Services Ltd., Mihin Lanka (Pvt) Ltd., - The import of plant and machinery or equipment by an enterprise with an investment not exceeding the following amounts will be exempt from Customs Duty on the fulfilment of the conditions specified by the B.O.I. in concurrence with the C.G.I.R. Product Cement Steel Pharmaceuticals Fabric Milk Powder Investment Limit US$ 50 Mn US$ 30 Mn. US$ 10 Mn. US$ 5 Mn US$ 30 Mn - Changes to Customs Duty will be implemented with immediate effect. Ports and Airports Development Levy ( PAL) (Amendments to PAL Act No. 18 of 2011 ) 22

24 The importation of following goods will be exempt from PAL.: Item Artificial limbs, crutches, wheel chairs, hearing aids, accessories for such aids, white canes for the blind, Braille typewriters and parts, Braille writing papers and boards Timber logs Yarn except sewing thread and vegetable fibre based yarn H S Heading / Code 87.13, 90.21, , and , 50.02, 50.03, 50.04, 50.06, 51.01, 51.02, 51.03, 51.04, 51.05, 51.06, 51.07, 51.08, 51.09, 51.10, 52.01, 52.03, , 53.01, 53.02, 53.03, 53.06, 53.07, 54.02, 54.03, 54.04, 54.06, 55.01, 55.02, 55.03, 55.04, 55.06, 55.07, 55.09, 55.10, 55.11, 56.04, and Fabric , , , 51,11, , 52.08, 52.09, 52.10, 52.11, , 53.10, 54.07, 54.08, 55.12, , 55.15, 55.16, 58.01, 58.02, , 58.09, 58.11, 60.01, 60.02, 60.03, 60.04, and Importation of goods by the following institutions will be exempted from Ports and Airport Development Levy Sri Lankan Air Lines Limited, Air Lanka Catering Services Ltd., Mihin Lanka (Pvt) Ltd., - The import of plant and machinery or equipment by an enterprise with an investment not exceeding the following amounts will be exempt from Ports and Airport Development Levy on the fulfilment of the conditions specified by the B.O.I. in concurrence with the C.G.I.R. Product Cement Steel Pharmaceuticals Fabric Milk Powder Investment Limit US$ 50 Mn US$ 30 Mn. US$ 10 Mn. US$ 5 Mn US$ 30 Mn - Changes to Ports and Airport Development Levy will be implemented with immediate effect. 23

25 Special Commodity Levy To simplify the taxation at the point of Customs in lieu of all the applicable taxes, one single tax will be imposed for the following items. Item H S Code Maldive fish Dried fish Oranges Mandarin Grapes Apples Corriander and Saffron and Changes to Special Commodity Levy will be implemented with immediate effect. New Registrations and licensing of Motor Vehicles (a) New Registration Charges for Motor Vehicles In order to simplify the charges payable on registration of vehicles, the presently applicable relevant withholding tax would be amalgamated with vehicle registration charges. Vehicle Category Existing (Rs.) Proposed (Rs.) Hand Tractor 1,500 1,500 Motor Coach (Bus) 3,000 3,000 Motor Lorry 3,000 3,000 Tractor Trailer 6,000 6,000 Four Wheel Tractor 7,000 7,000 Land Vehicle 7,000 7,000 Lorry Trailer 7,500 7,500 Hearse 10,000 10,000 Motor Ambulance 10,000 10,000 Motor Cycle 1,500 2,000 Motor Tricycle 2,000 2,500 Motor Tricycle Van 2,500 3,000 Motor Car ( not exceeding 1600 cc) 10,000 15,000 Motor Car ( exceeding 1600 cc) 10,000 20,000 Prime Mover 10,000 15,000 Forklift 15,000 20,000 Dual Purpose Vehicle 10,000 15,000 24

26 (b) Revenue Licensing Annual Fee for Motor Vehicles Vehicle Category Change in revenue licence fee Lorries, tractors, buses and trailers ( for tractors or No change lorries ) Motor bicycles, three-wheelers Existing fee increased by Rs. 150 Other vehicle categories Existing fee increased by Rs. 500 Mandarin Grapes Apples Corriander and Saffron and (c) Luxury, Semi Luxury and Dual Purpose Motor Vehicle Taxes Year Vehicle Category and Cylinder Capacity Vehicle Category and Cylinder Capacity Luxury Diesel cars over 2,500 and Petrol cars over 2,000 Existing Rate (Rs) New Rate (Rs) Semi Luxury Diesel cars 2,201 to 2,500 Jeeps over 2,201, Petrol cars over 1801 to 2,000 Jeeps over 1801 Existing Rate (Rs) New Rate (Rs) Dual Purpose Diesel cabs over 2,200 Petrol cabs over 1,800 Existing Rate (Rs) New Rate (Rs) Year 1 100, ,000 50,000 60,000 20,000 40,000 Year 2 78, ,000 39,375 50,000 15,750 25,000 Year 3 68,000 75,000 34,000 40,000 13,600 20,000 Year 4 57,000 60,000 28,875 30,000 11,550 12,000 Year 5 48,000 50,000 24,000 25,000 9,600 10,000 Year 6 38,750 40,000 19,375 20,000 7,750 8,000 Year 7 30,000 30,000 15,000 15,000 6,000 6,000 Cess To reduce the upfront cost of local manufacturers, Cess on the import of following raw materials has been removed / reduced: Item H S Headings / H S Code Starch Polymers of ethylene in primary form , , , , , 3904, , , , , , , , , , , and Pipes for mini hydropower project and Butyle rubber and rubber threads , and Scrap iron

27 Sanitary ware of plastic, steel sinks and baths , and Buckles Easy open ends for metal cans To enhance the availability of branded products, Cess on the import of following items has been reduced / removed: Item H S Headings / H S Code Beauty or make-up preparations 33.04, 33.05, and Luggage, travel bags, hand bags and belts 42.02, and Apparel through 61.17,62.01 through 62.16, through Footwear through Hats through Ornamental porcelain and ceramic products through Glass ware 70.09, 70.13, Cutlery and razors 82.11, 82.12, 82.14, Toys To encourage the local value added industries, Cess has been increased or imposed on the import of following items: Item H S Headings / H S Code Dried vegetables / dried fruit 07.12, , , , , , , , , , , , and Wheat flour Thriposha , and Gauze and bandage Joss sticks Vinyl chloride Refrigerators , , , , , and Bicycle rim

28 To boost the sport economy and to build a healthy nation, Cess on the import of following items has been reduced / removed: Item H S Headings / H S Code T shirts and shorts 61.09, and Track suits and swim wear and Shoes through To encourage local value addition, Cess has been increased / imposed on the export of following items: Item H S Headings / H S Code Raw rubber and Natural graphite Clay Sand Phosphate Stones Granite, sand stones , Mica Ilmanite Rutile Titanium Zirconium Timber logs , 44.07, and Importation of goods by the following institutions will be exempted from Cess. Sri Lankan Air Lines Limited Air Lanka Catering Services Ltd Mihin Lanka (Pvt) Ltd. - The import of plant and machinery or equipment by an enterprise with an investment not exceeding the following amounts will be exempt from Cess on the fulfilment of the conditions specified by the B.O.I. in concurrence with the C.G.I.R. Product Cement Steel Pharmaceuticals Fabric Milk Powder Investment Limit US$ 50 Mn US$ 30 Mn. US$ 10 Mn. US$ 5 Mn US$ 30 Mn - Changes to Cess will be implemented with immediate effect. 27

29 Excise Duty - Liquor produced from local plant material or plant product will be subject to a lower excise duty of Rs. 100/- per proof litre. - Importation of goods by the following institutions will be exempted from Excise Duty and Excise ( Special Provisions ) Duty: Sri Lankan Air Lines Limited, Air Lanka Catering Services Ltd Mihin Lanka (Pvt) Ltd. - The following articles are exempted from Excise (Special Provisions ) Duty; Electric motor bicycles ( H S Code ) Polymers of ethylene in primary forms ( H S Heading ) - Changes to Excise Duty and Excise ( Special Provisions ) Duty will be implemented with immediate effect. 28

30 Our Comments Economic growth The 2012 budget focused on maintaining economic growth at 8 percent, improving domestic productivity to reduce the cost of living and creating employment to drive consumer demand. To improve the competitiveness of the export industry, the rupee will be devalued by 3 percent with immediate effect. Creating a self sufficient economy was resonant, and to this effect the budget proposed to maintain the high Cess to discourage imports of consumer produce that can be locally cultivated. To shift Sri Lanka s status as a net importer, a 5 year tax holiday period and a concessionary income tax rate of 12 percent are offered to cement, steel, milk powder and pharmaceutical replacement industries. Increased investment impetus To increase employment opportunities by encouraging new investment by local and foreign investors, a 3 year tax holiday for investments of more than Rs 50 million given to the manufacturing industry is expanded to include information technology, beauty care, fisheries, agriculture and tourism related industry. Further it proposes investment limits for new enterprises as small, medium and large. Small scale enterprises have a minimum investment of Rs 25 million proving a maximum 4 years tax holiday. A medium and large scale enterprise requires a minimum investment of Rs 50 million and Rs 300 million respectively. Medium scale companies investing more than Rs 200 million and large scale companies investing more than Rs 2,500 million will enjoy a maximum of a 6 year and 12 year tax holiday respectively. The activities qualifying for the medium and large scale enterprises are yet to be specified. The budget takes further strides to build investor confidence by providing existing companies the opportunity to expand its operations. It is proposed to allow this as a qualifying payment deductable for income tax at 25% per year over a 4 year period. Infrastructure investment Identifying that expansive infrastructure is vital to drive and maintain economic growth, Rs 30 billion is proposed to improve the rural and agricultural road network as well as the provincial and inter-district road network. The budget also proposed Rs. 750 million to be allocated in the next year to commence the construction of airports in Iranamadu, Nuwara Eliya and Kandy to further integrate the country. 29

31 Concessionary tax rates The budget identified specific industries integral to development and requires support to prosper. Therefore the tax rate applicable to locally manufactured handloom products, health care services and value added tea exporting will enjoy a 12 percent income tax rate. Research and development activities carried out by a person will be taxed at a maximum rate of 16%, and 20% for a company. Social welfare Recognizing the invaluable contribution of the armed forces during the ethnic conflict, the budget proposed to continue the grant of Rs. 100,000 at the birth of the third child of any member of the security forces extending to those serving in the Police force. A sum of Rs 3,000 million will be allocated to support the low income families and improve the welfare of women and children, expanding these services to the north and the east regions. Economic Service Charge Any persons whose profits are subject to income tax will be exempted from the Economic Service Charge. Also, the Economic Service Charge threshold will be expanded from Rs 25 million to Rs 50 million per quarter. The changes proposed above will generate free cash flow for investment by the private sector which is essential for economic growth. 30

32 Appendix A Summary of Corporate Rates of Taxes Y/A 2007/ /2013 Income Tax Quoted Companies Taxable Income > Rs. 5 Mn. 2012/ / / / / /08 First 5 years / / / / 3 Thereafter Manufacture & sale or imports and sale of products of tobacco and liquor / / / / 3 Taxable Income <Rs. 5 Mn Unquoted Companies Taxable Income >Rs. 5 Mn <Rs. 5Mn Any Holding Company Subsidiary or Ass.Company Taxable Income <Rs. 5 Mn Small Medium Industries (SMI) with turnover <Rs. 300 Mn Provident Funds Clubs and Associations Non Government Organizations Partnership Manufacture & sale or imports and sale of products of tobacco and liquor Operations & Maintenance of Facilities for Storage, local Development Software or supply of Labour Educational Services Deemed Dividend Tax Profit Remittances - (Non Resident Companies) (as a % of remittance) Foreign Dividends Exempt Exempt Exempt Exempt Exempt 10 31

33 2012/2013 % Note : (1) To be paid by both buyer and seller (2) Of turnover (3) Divisible profit in excess of Rs. 600,000/- 2011/12 % 2010/11 % 2009/10 % 2008/09 % 2007/08 % Concessionary Rate Qualified Export Profits /Construction/Tourism Agriculture Exempt Exempt Exempt Exempt Venture Capital Companies Petroleum Exploration Exports with 65% value addition Share transaction levy on sale of shares of quoted companies ESC (2) (2) (2) (2) (2) (2) Partnership 8 (3) 8 (3) 10 (3) 10 (3) 10 (3) 10 (3) 2012/ / / / / /08 Withholding Tax Interest &Royalty paid Interest & Royalty paid - to a person outside Sri Lanka ( subject to DTTA ) Rent, annuities and ground rent - Non residents Dividends Interest on listed debentures & debt securities Management fees Reward payments by Govt.- Lottery Prizes, Winning from- Betting and Gambling Capital Allowances Buildings / / / / 3 Plant, Machinery & Fixtures 33 1 / / 3 12 ½. 12 ½ 12 ½ 12 ½ Software Software (locally developed) Commercial vehicles and office furniture Bridges, Railway 6 2 / / / / / / 3 Plant & Machinery for healthcare, printing on paper, gem cutting, polishing, rice milling & packaging 33 1 / / / / / / 3 Energy efficient high tech plante machinery and equipment

34 2012/2013 % 2011/12 % 2010/11 % 2009/10 % 2008/09 % 2007/08 % Deduction of Losses (restricted) Life Insurance business Loss restricted to Life Insurance business profit Loss restricted to Life Insurance business profit Loss restricted to Life Insurance business profit Loss restricted to Life Insurance business profit Loss restricted to Life Insurance business profit 35 of statutory income Finance Leasing business Loss restricted to finance leasing profit Loss restricted to finance leasing profit Loss restricted to finance leasing profit Loss restricted to finance leasing profit 35 of statutory income 35 of statutory income Limited to 35 of total Statutory Income 35 of total Statutory Income 35 of total statutory income 35 of total statutory income 35 of total statutory income 35 of total statutory income Value Added Tax Standard Zero Luxury or 20 NBT Standard Retail & Wholesale business Distributors 2 of 50 of turnover 2 of 25 of turnover 2 of 50 of turnover of 25 of turnover 33

35 Appendix B Comparison of Current Corporate Taxes, Withholding Taxes, Indirect Taxes etc., Y/A 2011/2012 Sri Lanka % India % Bangladesh % Singapore % Malaysia % Corporate Tax Quoted Company Unquoted Company Clubs and Associations (Income from members not liable) Foreign Dividends Exempt Exempt Exempt Exempt Remittance Tax ( Non resident company) Capital Gains (Listed) (Short term) 15 Exempt Exempt - Liable only on sale of land & building Partnership Tax Exempt - Withholding Tax Interest Royalty 10 or Dividends Exempt Exempt Rent Management Fee Directors Fees 10 or 16 Taxed at normal rates Capital Allowance Buildings General 20 Factory 25 Initial 3 Annual 10 Initial 3 Annual Plant & Machinery 33 1 / / 3 20 Initial (General) 14 Annual (General) 20 (Heavy) Furniture / 3 20 Initial 10 Annual Motor Vehicles / 3 20 Computers Initial 80 Annual Indirect Taxes Value Added Tax (VAT) 12 0 & or 10 Nation Building Tax (NBT) (Retail / Wholesale ) 2 2 of 50 of T/O Economic Service Charge (ESC) 0.1 to Customs Duty average Excise Duty

36 Appendix C Comparison of Effective Tax Rates for Resident Individuals Y/A 2002/ /2013 An Employee whose salary is Rs. 100,000 per month (1) Rs. 150,000 per month (2) Y/A Personal Allowance Taxable Income Income Tax Average Effective Rate Rs. (1) Rs. (2) Rs. (1) Rs. (2) Rs. (1) Rs. (2) Rs. 2002/ , ,000 1,560, , , / , ,000 1,560, , , / , ,000 1,500, , , / , ,000 1,500, , , / , ,000 1,500, , , / , ,000 1,500, , , / , ,000 1,500, , , / , ,000 1,500,000 75, , / , ,000 1,500,000 75, , / , ,000 1,300,000 36,000 96, /2013 Appendix D Retiring Benefits Rate Y/A Nil 5% 10% 2007/2008 (1)(A) First Rs. 5,000,000 Next Rs. 1,000,000 Balance 2007/2008 (2)(A) First Rs. 2,000,000 Next Rs. 1,000,000 Balance 2008/2009 (1)(A) First Rs. 5,000,000 Next Rs. 1,000,000 Balance 2008/2009 (2)(A) First Rs. 2,000,000 Next Rs. 1,000,000 Balance 2009/2010 (1(A)) First Rs. 5,000,000 Next Rs. 1,000,000 Balance 2009/2010 (2)(A) First Rs. 2,000,000 Next Rs. 1,000,000 Balance 2010/2011(1)(A) First Rs.5,000,000 Next Rs.1,000,000 Balance 2010/2011(2)(A) First Rs. 2,000,000 Next Rs ,000 Balance 2011/2012 (1)(A) First Rs. 5,000,000 Next Rs. 1,000,000 Balance 2011/2012 (2)(A) First Rs. 2,000,000 Next Rs. 1,000,000 Balance (A) Government Sector - All Retiring Benefits are exempt from tax. (1) If the period of Provident Fund contribution is over 20 years. (2) If the period of Provident Fund contribution is below 20 years. (3) Provident Fund - Retiring benefits exempt from 2011 /

37 SRI LANKA TAX DATA 2011/2012 PERSONAL TAX Employee Benefits Benefit Value for Tax Purpose Motor Vehicle Vehicle provided or allowance paid up to Rs. 50,000/- will be exempt House Employment income < Rs. 150,000/- p.m. Lower of actual rent or Rs. 120,000/- p.a. Employment income > Rs. 150,000/- p.m. Lower of actual rent or Rs. 180,000/- p.a. Telephone 50% of actual cost Other benefits At actual cost Value of shares received under employee share option plan - Normal Rate Qualifying Payments o Deduction from Assessable Income Donation to Government Investments in specific projects Donation in money to approved charity that provides institutional care for the sick and needy. o Qualifying payments limited to Donations to approved charity & Insurance - 1/3 of assessable income or Rs. 75, 000/- whichever is lower. o An individual is not entitled to deduct Qualifying payments from any employment income included in the assessable income o Tax Free Allowance Rs. 500,000/- Income Tax & Rate Taxable Cumulative Rate Tax Cumulative Income (Rs.) Income Tax On the first 500,000 1,000,000 4% 20,000 20,000 On the next 500,000 1,500,000 8% 40,000 60,000 -do- 500,000 2,000,000 12% 60, ,000 -do- 500,000 2,500,000 16% 80, ,000 -do- 1,000,000 3,500,000 20% 200, ,000 Balance 24% o Concession & Exemption Resident person who is engaged in a profession and earning in foreign currency by rendering services to persons outside Sri Lanka - Exempt Profit from construction work outside Sri Lanka (Payment made in foreign currency) - Exempt Profit from sales of Textile, Leather products footwear or bags by manufactures in foreign currency to a buyer whose headquarters established in Sri Lanka (Sec 13) - Exempt Employment income if exceeds Rs. 500,000/- p.a, the excess up to Rs. 100,000/- - Exempt Profits from Tourism and Construction Industry, Qualified Exports, and deemed exports - 12% Entertainer or artist - 12% Expatriate Employment income - Normal rates Entertainers and Artists - 12%. Sri Lankan holding dual citizenship, foreign income is not taxable during the stay in Sri Lanka. Terminal Benefits Government - Any Retiring Benefits Exempt Private Sector- Provident Fund Exempt Compensation for loss of employment maximum rate 20%. Compensation paid under Voluntary Retirement Scheme (VRS), up to Rs. 2 million with conditions. Exempt CORPORATE TAX Income Tax Companies Taxable Income > Rs. 5 million 28% Taxable income < Rs. 5 million 12% Qualified Export profits and deemed exports, Tourism & Construction industry 12% Profits and income earned in or outside Sri Lanka providing any services other than discount, commission or similar payments for such service rendered in Sri Lanka to a person outside Sri Lanka and earnings remitted in foreign currency to a resident person or partnership in Sri Lanka Exempt Provident funds, charities 10% Clubs and associations undertaking for operation and maintenance of facilities for storage, local software development or supply of labour 10% Foreign Dividends remitted in foreign currency Exempt Profit remittance - Non-resident Companies 10% Profit attributable to transshipment agency fee received in foreign currency by shipping agency 15% Interest income of charities applied for children homes, homes for elders and disabled Exempt Deemed dividend in excess profit of 1/3 of the distributable profit less dividend distributed 15% Profit or income from manufacture or import of liquor or Tobacco products 40% Venture capital companies, petroleum exploration 12% Profits from any agricultural seeds or planting materials and thire primary processing, and fishing undertaking. Exempt (5Y) Small & medium enterprises with less than Rs. 300M turnover 10% Investment not less than Rs. 50M in any new manufacturing undertaking Exempt (3Y) Investment not less than US $ 3M in selected projects Exempt (5-7Y) Export or deemed export with 65% value additions of Sri Lankan brand name 10% WITHHOLDING TAX On corporate debt interest 10% On interest - Individuals 2.5% to 8% On interest - Charitable institutions if exceed Rs. 500,000/- 8% On interest - Companies 10% On interest and royalties paid outside Sri Lanka 15% (or the rate applicable under Double Tax Treaty) Royalties paid in Sri Lanka * 10% (For royalty if exceed of Rs. 50,000 p.m or Rs. 500,000 p.a.) Dividends 10% Reward payments by Government to informant & others 10% Payment of shares of fine etc. by Government 10% Payment of Lottery prizes, betting & gaming when payment is more than Rs. 500,000 10% Management Fee 5% * Will not be applicable to any person or partnership paying ESC CAPITAL ALLOWANCE Rate Building (constructed) 10% Plant & Machinery 33 1/3% Information technology equipment & software 25 % Software developed in Sri Lanka 100% 36

38 Commercial vehicles & office furniture 20% Bridges, railways, reservoirs, electricity or water distribution & toll roads 6 2 / 3 % Scientific industrial, agricultural research expenditure 200% DEDUCTION ON LOSSES Losses on leasing business only against leasing business profit and losses on life insurance only against life insurance profit. Other losses - limited to 35% of the total statutory income. PARTNERSHIP TAX On divisible profit in excess of Rs. 600,000/- 8% LEVIES UNDER OTHER ACTs Economic Service Charge (ESC) 0.1% to 1% Share transaction levy - Buyer as well as Seller. 0.3% Nations Building Tax (NBT) 2% VALUE ADDED TAX (VAT) Taxable supplies including Imports Standard rate 12% Direct exports of goods & specified services Zero Financial Services 12% THRESHOLD VALUE ADDED TAX (VAT) Rs. 2,500,000 per annum / Rs. 650,000 per quarter ECONOMICS SERVICE CHARGE (ESC) Rs. 25 million per quarter NATION BUILDING TAX (NBT) Rs. 500,000 per quarter Retail & Wholesale business liable for NBT on 50% of turnover Distributors liable for NBT on 25% of turnover SOCIAL RESPONSIBLE LEVY (SRL) SRL payable by companies on income tax abolished from the Y/A 2011/2012 Important Tax Dates Y/A 2011/2012 April Withholding Tax on specified fees and interest, PAYE - Tax payments - March th Quarter self-assessment payment to obtain the 10% discount in the final tax. 20 VAT, NBT & ESC returns and payments for Month / Quarter ending 31st March PAYE annual declaration for the Y/A 2010/2011. May Payment of income tax 4th quarterly installment for Y/A 2010/ Withholding Tax on interest, PAYE - Tax payments - April VAT return and payment - April NBT payment - April June Withholding tax on interest, PAYE - Tax payments - May VAT return and payment - May NBT payment - May July Withholding Tax on interest, PAYE - Tax payment - June st Quarter self-assessment payment to obtain the 10% discount in the final tax. 20 VAT & NBT returns and payment - Month / Quarter ending 30th June ESC payment - Quarter ending 30th June Half year VAT return on Financial Sector August Payment of income tax 1st quarterly installment for Y/A 2011/ Withholding Tax on interest, PAYE - Tax payments - July VAT return and payment - July NBT payment - July September Withholding Tax on interest, PAYE - Tax payments - August VAT return and payment - August NBT payment - August Income tax final payment for the Y/A 2010/ Last date for the profit distribution to avoid deemed dividend tax for 2011/2012 October Withholding Tax on interest, PAYE - Tax payments - September nd Quarter self-assessment payment to obtain the 10% discount in the final tax. 20 VAT & NBT returns and payment - Month / Quarter ending 30th September ESC payment - Quarter ending 30th September Deemed dividend tax for the Y/A 2011/2012. November Payments of income tax 2nd quarterly installment for 2011/ Withholding Tax on interest, PAYE - Tax payments - October VAT return and payment - October NBT payment - October Last date for the income tax return /2011 December Withholding Tax on interest, PAYE - Tax payments - November VAT return and payment - November NBT payment - November January Withholding Tax on interest, PAYE - Tax payments - December rd Quarter self-assessment payment to obtain the 10% discount in the final tax. 20 VAT & NBT returns and payment - Month / Quarter ending 31st December ESC payment - Quarter ending 31st December February Payment of income tax 3rd quarterly installment for the Y/A 2011/ Withholding Tax on interest, PAYE - Tax payments - January VAT return and payment - January NBT payment - January March Withholding Tax on interest, PAYE - Tax payment - February VAT return and payment - February NBT payment - February