The Finance Minister of Sri Lanka has presented the national budget 2016 on 20 November 2015. The Budget includes some changes related to the corporate income tax rate structure, several tax incentives for selected industries, the Economic Service Charge (ESC), Nation Building Tax (NBT) and Value Added Tax (VAT) rate changes. The proposed changes will become effective for taxable years beginning on or after 1 April 2016 for income tax and ESC amendments and 1 January 2016 for VAT and NBT amendments.

Tax proposals under Budget 2016:

Corporate Tax

– 30% – Betting and gaming, liquor, tobacco and banking and financial services, including insurance and leasing industry and the trading activities

– 15% – All other sectors

– Quoted companies to distribute minimum of 15% of distributable profits as dividends

Surtax on Tobacco, Liquor and Casinos

– Surtax at the rate of 25 percent of income tax liability

Personal Income Tax

– PAYE tax free annual threshold increased from LKR750,000 p.a. to LKR2.4 mn

– Above this limit to be charged at a uniform 15%

– This method and rate will also be applied for individual income earners instead of the present progressive rate of up to 24%

– Abolish applying 2.5% withholding tax on deposits with effect from 01st of January, 2016.

Value Added Tax (VAT)

– Minimum threshold for the liability for VAT will be LKR12.0 mn p.a.

– Wholesale and retail trade will be excluded from VAT

– Current single rate of 11% would be revised to 3 bands

0% – for export of goods and provision of services for payment in foreign currency outside Sri Lanka

12.5% – Services sector

8% – Manufacturing or import of goods (with the limitation of input tax)

– Present exemptions on the import or supply of telecom equipment or machinery, high-tech equipment including copper cables for telecom industry will be removed

Transfer pricing

Administration of the transfer pricing (TP) on domestic transactions will be simplified and the areas will be specified, limiting the scope. Penalty provisions will be introduced to ensure proper implementation of TP regulations.

Refund

The Budget 2016 proposes that, for a refund claim for any year of assessment commencing on or after 1 April 2016, issuance of such refund should be made within three years from the claim shown on the return; otherwise, the refund would be credited against future tax liability.

Tax incentives

A 50% tax reduction for a period of 5 years will be given to companies that set up in lagging regions of the country through a minimum investment of USD10.0 mn (excluding land and building) or 500 new employment opportunities. The period will be extended to 8 years if more than 800 jobs are created.