The Inland Revenue Department (IRD) of Sri Lanka has issued a notice to taxpayers announcing the tax proposals in the 2021 Budget recently presented in parliament. As per the National budget of 2021 presented in Parliament, following new tax proposals have been made. These proposals will be implemented after formal amendment to the Inland Revenue Act No. 24 of 2017 (IRA).

Exemptions from Income Tax

i. Remittance tax (at the rate of 14% on remitted profits) is not required to be paid by a nonresident company carrying on a business in Sri Lanka through a Sri Lankan permanent establishment which earns profits and income on or after April 1, 2021 and retained such total profits for minimum of three years period by investing in Sri Lanka to expand its business or to acquire shares or any securities from Colombo Stock Exchange or to acquire treasury bills, treasury bonds or Sri Lanka International sovereign bonds issued on behalf of the Government of Sri Lanka. The exemption is applicable on such retained and invested profit is remitted whenever after that three years.

ii. Gains and profits earned or derived by any person from the sale of produce of an undertaking for agro farming, without subjecting such produce to any process of production or manufacture within the period of five years of assessment commencing on April 1, 2019. “Agro farming” means the tillage of the soil and cultivation of land with plants of any description, rearing of fish or animal husbandry, including poultry farms, veterinary and artificial insemination services. [This exemption has already been administrated as informed by Notice dated 08.04.2020(PN/IT/2020-03(Revised)]

iii. Gains made by a person on or after April 1, 2021 from the realization of land which were sold, exchanged or transferred to a Sri Lanka Real Estate Investment Trust (SLREIT) listed in Colombo Stock Exchange and licensed by the Security Exchange Commission of Sri Lanka.

iv. Dividends or gains on the realization of units or amounts derived as gains from the realization of capital asset of a business or investment by a unit holder from SLREIT.

v. Interest accruing to or derived on or after April 1, 2021 by any welfare society formed or setup by Sri Lanka Army, Sri Lanka Navy, Sri Lanka Air Force or Sri Lanka Police.

vi. Interest accruing to or derived by any multi-national company on or after April 1, 2021 from the deposit opened by utilizing the foreign sources and maintained such deposit in foreign currency in any domestic bank, if such deposit is maintained to cover its import expenditure for that year of assessment.

vii. Interest or discount accruing to or derived on or after April 1, 2021 by any Samurdhi community-based banks established under the Department of Samurdhi Development, from security or Treasury bonds under the Registered Stocks and Securities Ordinance (Chapter 420) or Treasury bills under the Local Treasury Bills Ordinance (Chapter 417).

viii. Gains from the realization of Sri Lanka international sovereign bonds issued by or on behalf of the Government of Sri Lanka and received or derived by a commercial bank or authorized dealer who made aggregate investment not less than USD 100 million in such bonds on or after April 1, 2021.

ix. Gains and profits earned or derived by any Vocational Education Institution which is standardized under TVET concept (Technical and Vocational Education and Training) and regulated by the Tertiary and Vocational Education Commission, if such institution has doubled their student intake for such year of assessment compared to the student intake in the year of assessment immediately preceding that year of assessment. Exemption is available for a period of five years commencing on April 1, 2021. For the above purpose, if any such institution which doubled the student intake as provided in for first year and maintained the same student intake of the first year for the period of next four years shall be deemed as an institution which fulfilled the requirement of exemption in each year of such period of four years.

x. Gains and profits received or derived from business (other than any gains from the realization of capital assets and liabilities of the business as calculated under Chapter IV of the IRA) by a person from following new undertakings (which is not formed by splitting-up or re-construction of an existing undertaking) commenced on or after April 1, 2021. Tax exemption can be claimed during the specified period subject to the stated conditions.

  • Ten-year tax exemption period for an undertaking which sells construction materials recycled in a selected separate site established in Sri Lanka to recycle the materials which were already used in the construction industry. (In any case, if recycled materials are used by the same person for construction services, this exemption can be claimed by deeming such materials as have been sold to the construction service business at market price)
  • Five-year tax exemption period for any business commenced on or after April 1, 2021 by an individual after successful completion of vocational education from any institution which is standardized under TVET concept and regulated by the Tertiary and Vocational Education Commission.
  • Seven-year tax exemption period for an undertaking commenced by a resident person in manufacturing of boats or ships in Sri Lanka and received or derived any gains and profits from the supply such boats or ships.
  • Seven-year tax exemption period for any “renewable energy project” established with a capacity to generate not less than one hundred Mega Watts solar or wind power and supplies such power to national grid.
  • Five-year tax exemption period for any undertaking commenced on or after January 1, 2021 by any resident person who constructs and installs the communication towers and related appliances using local labours and local raw materials in Sri Lanka or provide required technical services for such construction or installation.
  • Any undertaking for letting bonded warehouses or warehouses related to the offshore business in Colombo or Hambanthota ports, if such person has invested on such warehouses on or after April 1, 2021.

Tax exemption period provided in above item x [(a) to e)] shall be reckoned from the year of assessment in which the undertaking commences to make profits from transactions entered into in that year of assessment or from the commencement of the year of assessment immediately succeeding the year of assessment in which the undertaking completes a period of two years reckoned from the date on which the undertaking commences to carry on commercial operations, whichever occurs earlier.

Tax rate changes

i. Aggregate income tax payable by any company (other than on gains from the realization of investment assets) which lists its shares on or after January 1, 2021 but prior to December 31, 2021 in the Colombo Stock Exchange licensed by the Securities and Exchange Commission of Sri Lanka shall be reduced by fifty per centum for the year of assessment commencing from April 1, 2021 (2021/2022).

Further, gains and profits of such company (other than gains from the realization of investment assets) shall be taxed at the rate of 14% for three years of assessment commencing from April 1, 2022 (2022/2023 to 2024/2025).

ii. Income tax payable on gains and profits from dividend by multi-national companies shall be reduced by twenty five percent for the year of assessment commencing from April 1, 2021 (2021/2022) and fifty percent for the two years of assessment immediately succeeding that year of assessment (2022/2023 and 2023/2024) subject to the fulfillment of conditions either,

  • Increase in exports (other than specified undertakings) by thirty per centum in year of assessment commencing from April 1, 2021 (2021/2022) compared to the immediately preceding year of assessment; or
  • Increase in exports (other than specified undertakings) by fifty per centum in year of assessment commencing from April 1, 2022 (2022/2023) and maintains such status in the subsequent year of assessment, compared to the years of assessment 2020/2021.

Tax computation, deductions and qualifying payments

i. Simplify the calculation of gains from the realization of investment assets (Capital Gains). Accordingly, the consideration received for the purpose of capital gain will be calculated based on the amount received or receivable or the assessed value at the time of realization of such asset, whichever is higher.

“Assessed value” means the value at the time of realization, certified by a professionally qualified valuer in a valuation report.

ii. Relevant instructions will be issued to ensure the better and transparent management with regard to the specific provisions for a debt claim by the banks and financial institutions.

iii. Capital allowance will be granted within two years for Milking Machines with latest technology, used to manufacture the local liquid milk related products. iv. Temporary concession provided for Research and Development expenses under the Sixth Schedule to the IRA has been extended to another two years. Accordingly, additional deduction which is equal to the 100% of actual research and development expenditure incurred and deductible in line with Section 15 of the IRA in each year can be deducted during the years of assessment 2021/2022 and 2022/2023 respectively.