Budget 2016 KPMG Publication

2016
Budget
Analysis
Tax Proposals
November 2015
KPMG
32A Sir Mohamed Macan Markar Mw
P O Box 186
Colombo 00300
Sri Lanka
Tel
Fax
E-mail
Internet
94 (11) 5426 426

94 (11) 2445 872
kpmgsl@kpmg.com
www.kpmg.com/lk
20th November 2015

For clients of KPMG in Sri Lanka
The budget proposals for 2016 were presented in Parliament today, focusing on simplifying the tax and regulatory environment and moving to a low tax regime.
This publication has been compiled on a high-level review of the proposals in the limited time available to us. We may also emphasize that these proposals need to be
enacted by Parliament for legal enforcement.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to
provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the
future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
Chartered Accountants
KPMG, a Sri Lankan partnership and a member

firm of the KPMG network of independent
member firms affiliated with KPMG
International Cooperative (KPMG
International), a Swiss entity.
Partners: M R Mihular FCA, FCMA (UK), P Y S Perera FCA, FCMA (UK),

C P Jayatilake FCA, MSc, BSc. (Hons), MBCS (CITP), T J S Rajakarier FCA, FCMA (UK), FCCA,
W W J C Perera FCA, CFE, B.Sc., Ms. S Joseph FCA, FCCA, ACMA (UK), ACIM(UK), MA, BSc.,
Ms. S M B Jayasekara ACA, MBA, W K D C Abeyrathne ACA, BSc., S T D L Perera FCA, FCMA,
G A U Karunaratne ACA, BSc., R M D B Rajapakse ACA, B K D T N Rodrigo ACA, MBA.,
R.H. Rajan ACA
Principals: S R I Perera LLB, ACMA(UK), H S Gonnewardene ACA.
Contents
Page
Direct Taxes
3 - 19
Indirect Taxes
19 - 38
Tax Administration
38 - 44
Direct Taxes
Income Tax
Economic Service Charge
New Investment Act
2015 KPMG, a Sri Lankan partnership, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Direct Tax
Income Tax New exemptions

Dividend income accruing
to non citizens or foreign
companies
Dividend income accruing to non-citizens or foreign companies from investments in listed shares will be exempt providing
investment made out of funds brought in to Sri Lanka.
Profits and income of

plantation companies
Profits and income from cultivation of tea or rubber by any planation company, in which shares are owned by the Government,
will be exempt from tax for a period of 2 years commencing from 01 April 2016.
Direct Tax
Income Tax - Removal of exemptions

Profits and income from
any undertaking for the
construction of any port
The tax exemption granted from 01 April 2011 on the profits and income accruing to any person from carrying out any
undertaking for construction of a port in Sri Lanka.

the administration of any
sports ground, stadium or
sports complex
The tax exemption granted from 01 April 2012 on the profits and income accruing to any person from the administration of any
sports ground, stadium or sports complex.

any service rendered
within the port
The tax exemption granted from 01April 2011 on the profits and income from any services rendered by any person or partnership
in any port in Sri Lanka in the course of any business carried on within such port.

operating any port
terminal in Sri Lanka
The tax exemption granted from 01 April 2011 on the profits and income accruing to any person from the operation of any port
terminal in Sri Lanka.
Profits and income

accruing to any company,
partnership or body of
persons outside Sri Lanka
The tax exemption granted from 01April 2014 on profits and income arising to any Company, partnership or body of persons
outside Sri Lanka from provision of any computer software designed to meet the special requirement of Sri Lankan Airlines Ltd
and Mihin Lanka (Pvt) Ltd.
Direct Tax
Income Tax - Removal of exemptions

Profits and income of local
institutions
Prevailing exemptions applicable to profits and income of certain local institutions specified in the statute will be withdrawn,
except for the following:
-
Government Departments
Foreign Government
University
Co-operative Society
Central Bank of Sri Lanka, including the Monetary Board
Charitable Institution (subject to conditions)
Government assisted schools
Direct Tax
Income Tax - Revision to existing exemptions

Interest income on
foreign loans granted on
or after 01 April 2012
The current tax exemption granted on interest income accruing to any person outside Sri Lanka on loans granted on or after 01
April 2012 will be revised and such exemption will be available only to foreign banks and financial institutions.
Tax holiday
Exemptions on dividends distributed by companies post tax holiday period to be removed.
Profits and income of

international institutions
The prevailing exemption granted on profits and income to be withdrawn other than on those arising from fees or contribution
from the public.
Direct Tax
Income Tax - New concessions

Investments made in
SMEs by Private Equity
Funds or Venture Capital
companies
50% reduction on tax payable by Private Equity Funds or Venture Capital Companies on profits earned by funding to upgrade
SMEs, registered with the SMEs Board of CSE up to the trading level, for a period of 5 years.
For this purpose the activities of Venture Capital Companies and Equity Funds and SME will be specified.
The benefit of reduction would apply to fees for services.
Provision of services to
new SMEs by existing
SMEs
Any SME which create incubators for another SMEs by investing in a designated area, will be granted a 50% reduction of tax
payable on profits from such activities, for a period of 3 years.
Manufacture of red clay

tiles
50% reduction on the tax payable on profits and income from locally manufactured red clay tiles, for a period of 3 years.
Companies incorporated
for MICE
50% reduction on the tax payable on profits and income of a company specifically incorporated for MICE (Meeting, Incentives,
Conferences and Exhibitions) for a period of 5 years from the commencement of commercial operations.
Modernization of existing
factories
50% reduction of the tax payable for a period of 3 years on profits and income attributable to a company on expansion carried
out by modernization of existing factories.
The pre condition to enjoy such concession would be based on the generation of new employment opportunities within a
period of one year from 01 April 2016. Necessary criteria for same is to be specified.
Direct Tax

Investments in lagging
regions
50% reduction of the tax payable for a period of 5 years on profits and income earned by a new company set up in a lagging
region, if the following conditions are satisfied.
- Minimum investment of USD 10 Mn or 500 new employment opportunities (with new EPF No.)
- Engaged in the business of manufacturing (other than liquor and tobacco) or provision of any services.
The tax concession period will be extended up to 8 years if new employment opportunities exceed 800, and up to 10 years, if
the investment is for the business of Theme Park.
Tax concessions will be effective from the date of commencement of commercial operations.
Provision of internationally
accredited courses or
training programmes
50% reduction of tax payable for a period of 5 years by any person on profits from carrying out an academic entity which offers
internationally accredited courses or training programmes aimed at geriatric care or child care.
Construction of houses for

elderly persons and
government employees
50% reduction of tax payable for a period of 5 years on profits of any person engaged in the business of construction of houses
for elderly persons (possibly senior citizen).
50% reduction of tax payable for a period of 5 years on profits of any person engaged in the business of construction and sale of
housing units in collaboration with the Government, to Government Sector employees.
Profits of companies listing

shares in CSE
Extend deadline of 31 March 2017 for listing of shares in Colombo Stock Exchange (CSE) by further 2 years (i.e. up to 31 March
2019).
Further, the deadline has been extended to shares listed in any foreign stock exchange. In terms of this section, 50% reduction
of tax rate is available for a period of 3 years. Ambiguity on the deadline whether it is 31 March 2019 or 31 March 2020.
10
Direct Tax

Profits from development
of seeds and planting
materials by a company
The tax payable on profits from locally developed seeds and planting materials would be reduced by 50%for a period of 5 years.
Currently, such profits are exempt from tax and the exemption would end on 31 March 2016.
Profits from agriculture

using drip irrigation,
greenhouse technology
and high yielding seeds
The tax payable by a company on the profits from agriculture carried on using drip irrigation method, greenhouse technology and
high yielding seeds would be reduced by 50% for a period of 5 years.
The terms greenhouse technology, drip irrigation and high yielding seeds are to be defined.
11
Direct Tax
Income Tax - Removal of existing concessions

Expansion of
manufacturing business
(other than liquor and
tobacco) outside western
province
Currently, a 50% up to reduction on tax rate (up to a maximum of LKR 500 Mn) is available for an existing company if the
following conditions are satisfied.
-
Investment in fixed assets (other than land and building) not less than LKR 300 Mn.
Investment should be made on or after 01 April 2015 but prior to 01 April 2017.
A company is currently liable to tax at 28%.
Expansion does not include relocation of an existing company or a part of its operations.
The proposal seeks to withdraw this concession.
Profits of a new company

Currently, the tax rate to be reduced by 50% for a new company , if the following conditions are satisfied;
engaged in the business of
- The company should register with the IRD on or before 31 December 2015.
manufacturing other than
liquor and tobacco
- Commit to an investment of not less than LKR 500 Mn.
Profits of local
manufacturers (other than
liquor and tobacco)
engaged in business since
1970
Investment should be made within the period as specified by the Commissioner General of Inland Revenue.
The entity should not be formed by splitting or reconstructing an existing undertaking
The applicable tax rate on business profits should be 28%.
Currently, tax liability is reduced by 10% for an existing company, if the following conditions are satisfied;
The company possesses the ability to compete with importers.
Should be liable to tax at the rate of 28%.

12
Direct Tax
Income Tax - Determination of tax profits

Qualifying payment
Triple deduction on
research & development
activities
Business of Life Insurance

- Deductibility of expenses
in the
It is proposed to allow, a deduction for the cost of acquisition of any machinery used in the business of canning fruits and
vegetables, in computing profits from such business. This is in addition to the depreciation allowance claimable on such
machinery.
It is proposed to allow, a deduction for the cost of acquisition of machinery necessary for purifying sea sand for the construction
industry, in computing profits from such business. This is in addition to the depreciation allowance claimable on such machinery.
It is proposed to remove with retrospective effect, the relief granted on cost of acquisition or merger of banks or finance
companies under the Banking and Financial institutions consolidation process.
The triple tax deductions available for research and development (R&D) activities will be extended to accommodate endowments
given to National Universities.
The triple deduction for R & D expenses will be allowed, only if a technology advancement and yield development are
established.
Profits from business of Life Insurance is determined by reference to the investment income of Life Insurance Fund less
management expenses attributable to that business. It is proposed to define the term management expenses.
13
Direct Tax
Income Tax - Tax rates

Corporate Tax
Rate structure will be limited to two tax rates i.e.15% and 30%.
The higher rate (30%) is applicable to the profits and income from:
- Betting & Gaming
- Liquor
- Tobacco
- Banking and Finance including insurance, leasing and related activities etc.
- Trading activities (other than manufacture or provision of services)
Surtax
Surtax will be imposed with effect from any Y/A commencing from 01 April 2016 at the rate of 25% of the income tax liability of
profit on business of Tobacco, Liquor and Betting and Gaming.
14
Direct Tax
Personal Tax
The prevailing withholding tax rate of 2.5% on interest income accruing to an individual will be removed and such income will be
considered as part of the taxable income of an individual.
In the event such interest accrues to a person outside Sri Lanka, same will be taxed at the rate of 15%, unless relevant Double
Tax Treaty provides for a lower rate.
Currently, the tax withheld at 2.5% is considered as final tax.
Tax on interest income

accruing to senior citizens
from deposits
Interest income accruing to senor citizens will continue to be exempt from tax.
Exemptions on profits
from employment
Exemptions from profits from employment would be limited to:
Tax on interest income

accruing to individuals
from deposits
- Retiring benefits and pension paid to Government employees out of the consolidated fund.
- Profits from employment earned in foreign currency outside Sri Lanka, provided such earnings are remitted to Sri Lanka.
- Profits from employment accruing to personnel of diplomatic missions.
- Compensation for loss of office subject to certain limitations.
- Provident fund balance due at the time of retirement.
Deductions from Total

Statutory Income and
Assessable Income
All other cash and non cash benefits will be taxed, if aggregate exceeds the tax free threshold.
Prevailing deductions will be removed except for setting off of losses incurred from trade, business, profession or vocation,
subject to specified limitations.
15
Direct Tax
Personal Tax
Changes to Income Tax

rates
Special privileges on tax

payers
Profits and income accruing to any individual in excess of LKR 2.4 Mn per annum, is to be taxed at a flat rate of 15%. This
applies to employees under the PAYE scheme and self employed persons. Presently, such income is liable to tax at progressive
rates ranging from 4%-24%.
Profits from employment accruing to employees who are employed under more than one employer is to be taxed at a rate of
15%. Presently such income is liable to tax at 10% or 16%.
Individuals who pay LKR 25 Mn or more will be granted special privileges, and such privileges will be regularized and specified
through a gazette notification.
16
Direct Tax
Income Tax Gain on disposal of listed shares

Exemption on trading
profits from disposal of
listed shares
Currently any gain on disposal of listed shares are exempt from tax, provided such transaction is subject to Share Transaction
Levy (STL).
It has been proposed to abolish STL and hence, there is an ambiguity whether the prevailing exemption on disposal gain will also
be removed. We are of the view that the exemption remains since the abolition of STL is to support the capital market and
further no revenue has been projected for this removal of exemption. Further to the contrary, removal of STL has been
accounted for as a loss of revenue.
17
Direct Tax
Economic Service Charge (ESC)

Extension of scope of
chargeability
Currently chargeability to ESC would arise only if a person is exempt from Income Tax or has incurred a loss from business
during the previous Y/A. The proposed amendment seeks to extend the tax base to cover persons who are liable to income tax.
Removal of ceiling of
maximum liability
The present maximum ceiling of LKR 120 Mn per year will be removed.
Increase of tax rate
The tax rate will be increased from 0.25% to 0.5%.
Set off of ESC against

income tax
The period provided for setting off ESC credits against Income Tax payable will be limited to 3 years (i.e. current Y/A and further
2 years). Currently, set off is permitted within 5 years.
18
Direct Tax
New Investment Act

Granting tax concessions
for new investments
Tax exemption for new investments will be granted under the New Investment Act with the direct supervision of the Ministry of
Finance.
Exemptions will not be granted in future under the Strategic Development Projects Act or the BOI law.
19
Indirect Taxes
Value Added Tax (VAT)

Nation Building Tax (NBT)
Betting and Gaming Levy
Land (Restrictions on Alienation) Act
Import/ Export Duties and Levies
Miscellaneous Taxes
Levies and charges
20
Indirect Tax
Value Added Tax

Threshold
The current threshold of LKR 3.75Mn per taxable period (one/three months) or LKR 15Mn per annum will be revised to LKR 3Mn
per quarter or 12Mn per annum.
Wholesale & Retail
The chargeability to VAT on wholesale & retail trade will be removed - VAT was extended to wholesale & Retail w.e.f. 1 January
2013 with a threshold of LKR 500 Mn per quarter, which was reduced to LKR 250 Mn w.e.f. 1 January 2014 and LKR 100 Mn
w.e.f. 1 January 2015.
Exemption Telecom
The exemptions applicable on import or supply of the following products will be removed;
- Telecom equipment or machinery
- High tech equipment including copper cables for telecom industry
Input Credit
Limitation would be introduced in claiming input tax credits on supply of goods chargeable at 8%. - Clarification also required
with regard to carry forward input credit as at 31 December 2015
VAT Rate
The present VAT rate of 11% and 0% will be revised to three bands;
Incidence
Export of goods / Provision of services outside SL, for payment in foreign
currency
Service Sector
Supply of goods (Manufactured / Imported (with the limitation of input tax)
Effective date
Rate
0%
12.5%
8%
The proposal fails to address the rate on import of goods specifically. Presumed the 8% rate will be applicable.
1 January 2016
21
Indirect Tax
Value Added Tax (VAT)

History of VAT rates
The following table depicts the changes in VAT rate

Year
Rate
1998 to 2002 (GST)
12.5%
w.e.f. 01 August 2002
10% and 20%
w.e.f. 01 January 2003
10% and 20% (including financial services)
15% (including financial services)
5%, 15% and 18% %(VAT on Financial Services 15%)
5%, 15% and 20%(VAT on Financial Services 20%)
12% and 20%
12% (including financial services)
11%
22
Indirect Tax
Nation Building Tax

Rate
The present NBT rate of 2% will be increased to 4%. NBT was initially introduced at 1% in 2009 which was increased to 3%
subsequently and reduced to 2% in 2011.
Threshold
The threshold of LKR 3.75Mn per quarter will be revised to LKR 3Mn per quarter Prior to 1 January 2015 the threshold was
LKR 3 Mn per quarter.
The currently applicable threshold of LKR 25Mn per quarter to hotels, guest house, restaurant , education services and supply of
labour will be removed. The current LKR 25Mn threshold applicable to any locally procured agricultural produce in the preparation
for sale would be continued.
The current exemptions applicable on following articles or services will be removed;
Exemption
- Telecommunication services
- Supply of electricity
- Lubricants
Effective date
1 January 2016
23
Indirect Tax
Betting & Gaming Levy

Entry Fee
The present casino entrance fee of USD100 per person will be removed this fee was introduced in the interim Budget
proposals presented in January 2015 (Betting and Gaming Levy (Amendment) Act No.14 of 2015)
Annual Fee
Revision of annual levy:

- business of playing rudjino will be reduced to LKR 5Mn per annum from LKR 200Mn
- business of casino will be increase to LKR 400Mn per annum from LKR 200Mn.
Personal liability imposed on directors and shareholders who fail to pay or attempt any act done to avoid payment of the LKR 1Bn
one off Casino Industry Levy introduced in the interim Budget 2015 (Finance Act No 10 of 2015)
Effective Date
1 January 2016
Chargeability criteria ( no
change)
Betting and Gaming Levy was introduced by Act No 40 of 1988. It is chargeable on persons carrying on the business of
bookmaker or gaming (lawfully or unlawfully).
If such business is carried on in different places by the same person, he is required to pay the levy for each such different place.
(Each place is considered as a separate business for tax purposes).
Personal liability
LKR 1Bn Casino Industry
Levy
24
Indirect Tax
Land (Restrictions on Alienation) Act No. 38 of 2014

Restrictions on Transfer
Removal of Land Lease

Tax (LLT)
Effective date
The restrictions imposed on transfer of land by foreigners will be removed for certain identified investments w.e.f. 1 January
2016.
Currently, the transfer of land to foreigners, resident companies whose foreign shareholding is greater than 50% and foreign
companies are prohibited subject to exemptions.
The Land Lease Tax (standard rate of 15% and concessionary rate of 7.5%) imposed on leasing of land by foreigners will be
removed w.e.f. 01 January 2016.
Currently leasing of land by foreigners, resident companies whose foreign shareholding is greater than 50% and foreign
companies are subject to Land Lease Tax. The tax is charged at 15% or 7.5% of the total rent payable for the duration of the
lease.
Currently, the following are taxed at the concessionary rate of 7.5%:

Land leased to a resident company, whose foreign shareholding is greater than 50%, operating for at least 10 years before
the transfer
Land leased to a subsidiary of holding company incorporated in Sri Lanka, where holding company owns at least 50% and
foreign shareholding of holding company is greater than 50%. Provided, such entity was in commercial operation for 10
years before the lease. If the shareholding of parent company falls, such will be taxed at 15%
Condominium above 4th floor where lease is for less than thirty five years
Condominium below 4th floor where lease is for less than 99 years
Lease of land situated within:
License Zone under BOI Law No.4 of 1998
Tourist Development Area
Industrial Estate
Area declared by Minister as an area where reduced rate is applicable
1 January 2016
25
Indirect Tax

Excise (Special Provisions)
Duty
The current concessions and rates will be revised.
Customs Duty (CD)
The present four band tariff structure of exempt, 7.5%,15%and 25%will be revised to three band structure of exempt, 15% and
30%.
The current CD will be revised on the following items:

- Beedi leaves, Beedi, Beer, Wine, Whisky & Ethanol
- Garments, Foot-wear
- Agriculture machinery & equipment, dairy industry machinery & equipment and fishing nets
- Sports equipment & musical instruments
- Yachts, caravan carriages, surfing equipment, mini cruise boats
Tiles, ceramic and sanitary wear will be removed from existing negative list.
The specific rate changes would be published in Gazette Notification.
Submission of Import Customs Declarations electronically to be introduced by June 2016.
New bonding warehouse after 1 April 2016 should have a minimum floor area of 50,000 square feet.
It has been proposed to ban the importation of used washing machines, used TVs and used mobile phones w.e.f. 1 January
2016.
All the regular importers should register with Sri Lanka Customs w.e.f. 1 January 2016.
Duty free shops at Ports or Airports should operate in a joint venture with a local or foreign counterparts.
It has been proposed to introduce a new Custom Law in place of existing Customs Ordinance.
Effective from 20 November 2016.
26
Indirect Tax

Port and Airports
Development Levy (PAL)
Special Commodity Levy

(SCL)
The existing PAL rate will be increased from 5% to 7.5% .
The PAL rate on certain electronic and electrical items will be reduced to 2.5%.
PAL on certain machinery will be removed (plant and machineries used for construction, dairy and agricultural industries).
Gazette to be issued for requisite changes.
SCL will be increased on import of fish and fish related products.
The current levy of LKR 175 per kg for vegetable fat will be reduced.
SCL reduced on
- Potatoes by LKR 25 per kg
- Big onion by LKR 25 per kg
Levy removed on Dhal
Rate on certain commodities will be revised.
Cess (imports)
A 10% Cess will be imposed on import of jewellery.
Cess (exports)
Cess applicable on export of pepper, cloves and nutmeg will be removed.
Import taxes on garments

and footwear
The present composite tax imposed on sale of garments to the local market by export oriented companies will be increased to
LKR 200 per piece. The same rate would apply to the sale of foot wear to the local market by export oriented companies.
The current rate for sale of fabric (LKR 40 per kg) and cut pieces (LKR 25 per piece) remain the same.
The sale of export quality products to the local market by export oriented BOI companies will be restricted to 5% of the total
turnover.
27
Indirect Tax

Agriculture
Import duties on agricultural machinery and equipment will be removed.
Fruit and vegetable

industry
Machinery utilized for dehydrated and canned fruit industry will be free from import duty.
Dairy industry
Import duties will be reduced on machinery and equipment.
Gem and Jewellery
A 10% cess on imported jewellery will be imposed.
Import duties will be relaxed on importation of gold to approved CBSL licensees of 50.
International trade
A new Act will replace the Import and Export Control Act to ensure efficient import export system for domestic industries.
Construction
Import duties on cranes and concrete mixtures will be removed.
Consumer goods
Import duties will be revised on garments, shoes, electronic and electrical items and other accessories.
Printed material
Import duties on printed books, magazines and journals will be exempted.
Motor vehicle
Tax Rate
- A simple unit rate of excise duty would be imposed on the basis of cubic centimeters based on the recently introduced tax base
of full option manufacturers price.
- Duties on certain vehicles will be revised.
- Excise duty is reduced to 2.5% for vehicles which are run entirely on Solar, Hydrogen or Helium.
28
Indirect Tax

Motor vehicle
Tax Rate
- A simple unit rate of excise duty would be imposed on the basis of cubic centimeters based on the recently introduced tax base
of full option manufacturers price.
- Duties on certain vehicles will be revised.
- Excise duty is reduced to 2.5% for vehicles which are run entirely on Solar, Hydrogen or Helium.
Vehicle Permits
- All the vehicle permits granted under different schemes will be abolished, including those of the Parliamentarians.
50% tax credit for importation

- 50% tax credit will be granted for the importation of one motor car to exporters of over 20 reconditioned vehicles.
Liquor manufacturers
Minimum excise duty of LKR 250 Mn per month is payable by liquor manufacturers who are having distilleries
LKR 50 Mn per month is payable by persons who are engaged only in liquor manufacturing
29
Indirect Tax
Miscellaneous Taxes
Share Transaction Levy
Construction Industry
Guarantee Fund Levy
The presently applicable levy of 0.3% on both the buyer and the seller on sale of listed shares will be abolished w.e.f. 1 January
2016
The Share Transaction Levy was introduced in 2005 under the Finance Act No. 05 of 2005.
Levy Collected by the relevant stock broker, stock dealers or custodian bank which responsible for the settlement of the share
transaction.
The levy will be abolished w.e.f. 1 January 2016, to encourage small and medium scale contractors.
The Construction Industry Guarantee Fund Levy was introduced in 2005 under the Finance Act No. 05 of 2005 on every
construction contract enforced in Sri Lanka by every construction contractor on the contract value.
The currently applicable rates are as follows:

The value of construction contract
Less than LKR 15Mn
Rate
Nil
LKR 15Mn 50Mn
0.25%
LKR 50Mn 150Mn
0.5%
More than LKR 150Mn
1%
30
Indirect Tax
Miscellaneous Taxes
Luxury & Semi Luxury
Motor Vehicle Levy
Excise Duty
Stamp Duty (SD)
The levy will be abolished w.e.f. 1 April 2016.
Luxury and Semi Luxury Motor Vehicle Levy was introduced under the Finance Act No. 16 of 1995.
Luxury motor vehicle" means diesel motor vehicle, the cylinder capacity of which exceeds-2,500 c.c or a petrol motor vehicle
the cylinder capacity of which exceeds 2,000 c.c. other than a land vehicle
Semi luxury motor vehicle" means any diesel motor vehicle the cylinder capacity of which exceeds 2,200 c.c. but does not
exceed 2,500 c.c. or a petrol motor vehicle the cylinder capacity which exceeds 1,800 c.c. but does not exceed 2,000 c.c.
The liquor manufacturing licence fee and duty rates will be revised (license fee LKR 150 Mn)
The excise duty on liquor manufacturing is governed by Excise Ordinance.
SD on usage of credit cards for foreign purchases will be increased to 2.5% from 1.5%.
New Exemptions
- local usage of credit cards
- share certificate
At present a share certificate on new or additional issue or on transfer or assignment subject to exemptions is liable to 0.5%
on the aggregate value of shares.
- Transfer of real estate asset to Real Estate Investment Trust (REIT) structure that distributes 90% or more of income to REIT
unit holders
A Gazette Notification will be published to notify the changes.
Effective from 01 January 2016
31
Indirect Tax
Miscellaneous Taxes
Tourism Development
Levy (TDL)
The currently applicable TDL of 1% will be removed.
Currently, the TDL is 1% on the turnover of the companies, on all institutions, licensed under the Tourism Development Act No.
14 of 1968.
Mansion Tax
The Mansion Tax of LKR 1 Mn, on condominium units will be removed.
The first instalment is payable on or before 31 March 2016.
The mansion tax is levied on every owner of a mansion constructed on or after April 1, 2000 in terms of Finance Act No 10 of
2015.
Mansion is defined to mean any building constructed on or after April 1, 2000 for residential purpose of which the floor area is
not less than ten thousand square feet as per the building plan approved by the local authority of the local authority area wherein
such building is situated or the value of such building, as at the first day of April of any relevant year, is not less than rupees one
hundred and fifty million as determined by the Government chief valuer or by an officer authorized by him, after making any
adjustment as may be prescribed.
International Telecommunication Operators Levy (ITOL) on incoming calls will be increased from USD 9 cents to USD 12 cents.
An Environmental Fee will be charged per tower at the rate of LKR 50,000 per annum.
Cess levied for international transit traffic at the rate of 2% will be exempted.
Telecommunication
(VAT exemptions applicable on import or supply of telecom equipment or machinery and high tech equipment including copper
cables for telecom industry is removed. NBT exemption on telecommunication services will also be removed).
32
Indirect Tax
Levies and Charges

Increase of Embarkation
Levy
The currently applicable levy will be increased from USD 25 to USD 35.
This will apply for both ship and air passengers.
Revision of Passport Fee
The passport fee will be revised w.e.f 1 January 2016 as follows:

- One day service Adult LKR 10,000 Child LKR 5,000
- Normal Services Adult LKR 3,000
Revision of Application Fee
Introduction of Residence
Visa Fee
Child LKR 2,000.
The currently applicable application fee for dual citizenship of LKR 250,000 will be increased to LKR 300,000.
The fee for SAARC Visa will be increased from USD 10 to USD 20.
New Residence Visa Fee for foreigners will be introduced to encourage foreign investments
- For three year visa, the fee will be USD 1 Mn (as per technical note) and USD 250,000 (as per Budget Speech) - discrepancy
between the technical note and budget exemption.
- For permanent residence visa, the fee will be USD 5 Mn.
33
Indirect Tax
Levies and Charges

Introduction of vehicle
valuation certificate fee
The following will be charged on valuation certificates obtainable for finance facilities.
- Three wheeler/Motor Cycle : LKR 5,000
- All other vehicles
Fee for registration of

unregistered vehicles
Introduction of Vehicle
Entitlement Fee
: LKR 25,000
w.e.f 1 January 2016
Unregistered locally assembled vehicles should be registered before 31 March 2016 and would be subject to the following fee
w.e.f 1 January 2016.
- Cars/Vans
:LKR 1 Mn
- other vehicles
:LKR 0.75 Mn
The Motor Vehicle Importers Registration Fee introduced by the Finance Act No.10 of 2015 of LKR 1.5 Mn will be removed.
The following fee will be imposed in lieu of Motor Vehicle Importers Registration Fee w.e.f 1 January 2016 prior to opening
letters of credits (LCs).
- Motor Cycle / Three wheelers : LKR 2,000
Introduction of Emission
Levy
Motor Vehicle License Fee
- Motor cars
:LKR 15,000
- Other vehicles
:LKR 10,000
This fee will be payable to the Commissioner General of Inland Revenue.
At the point of renewal of license fee of every vehicle over three years will be charged an Emission Levy of LKR 5,000 per
annum.
The levy is payable to the Divisional Secretariat.
The Motor Vehicle License fee will be revised w.e.f. 1 January 2016.
Auctioning of number plate
A unique life time number will be granted upon charging a one off fee of LKR 2.5 Mn.
34
Indirect Tax
Levies and Charges

Introduction of Annual Fee
/ Revision of Company
Registration Fee
Every company registered with the Registrar of Companies will be subject to an Annual License fee payable to the Registrar of
Companies as follows;
- Private companies
: LKR 60,000
- Public Quoted Companies : LKR 500,000

- Other
: LKR 100,000
Non functioning companies will also be liable to the annual registration fee.
The current company registration fee will be revised w.e.f. 1 January 2016.
The voluntary liquidation of a company will be charged LKR 250,000 on liquidation of the company. Discrepancy between the
technical notes (LKR 250,000) and the budget speech (LKR 500,000).
Requirement to register
Business Entities with
their respective local
councils
All business entities should be registered with the respective local councils at a nominal fee of LKR 100 per year.
Fine on road accidents
A fine of LKR 10,000 will be imposed on person who is responsible for road accidents. In addition, the cost to the Government
property damage (if any) is also payable. Similar fine on road accidents are being levied in India, South Africa, United Kingdom,
United Arab Emirates etc.
Beedi manufacturing
license fee
The currently applicable license fee will be increased from LKR 1,500 to LKR 5,000.
Charge on airline
A charge will be imposed on Airlines on the sale of international tickets at USD 2 per passenger.
35
Indirect Tax
Levies and Charges

Cash withdrawal charge
Following charges will apply on cash withdrawals;

Less than LKR 1 Mn
Nil
Between LKR 1 Mn and LKR 10 Mn
2%
Above LKR 10 Mn
3%
Fee on bank draft
Maximum fee on bank draft LKR 150 per draft
Tele drama, Film and

Commercials Levy
The current exemption available for Tamil tele dramas, films and advertisements will be extended to English tele dramas, films
and advertisements
36
Exchange Control
Regulations
37
Exchange Control Regulations

Foreign Exchange
Management Act
A new Act named Foreign Exchange Management Act will be introduced to facilitate foreign investments. The current
Exchange Control Act No. 24 of 1953 will be repealed.
Securities Investment
Account (SIA)
Proposed to abolish SIA , currently used by the foreign investors to route the investments to Sri Lanka and to allow the
investors to route money through any bank account existing in the banking system.
No criminal action against any person making inward remittances of monies held outside Sri Lanka through the banking channel
except where the proceeds are the result of terrorism, drugs, human trafficking and corruption.
Money Changers
Liberalize the foreign currency changing business, subject to a license fee and guidelines issued by the Central bank.
Banking
Proposed to revise the exposure on government securities for non-residents from 12.5% to 10% of the total outstanding stock
of treasury bills and bonds.
Foreign borrowing
Budget proposals refer to encouragement to local companies to borrow from overseas.
38
Tax Administration
39
Tax Administration
A Revenue Efficiency and Investigation Unit will be established at the Treasury with the view to enhancing the revenue in the
country.
This unit will investigate all revenue related matters, customs, Inland Revenue and valuations.
Revenue collection
Revenue collection will be initiated at Divisional Secretarial Level.
Tax refunds
Refunds claimed in the Return of Income should be finalized within three years of such claim.
Any refunds that are not finalized within the stipulated 3 years period, would be allowed as a set off against the future tax
payable.
Penal provisions
In order to ensure due compliance of tax and to enhance the tax collection, penal provisions will be amended to cover tax payers
and the tax practitioners.
Transfer pricing
The domestic transfer pricing administration will be simplified.
The penal provisions will be introduced with a view to ensure proper implementation of Transfer Pricing Regulations.
Improving treasury
operations
40
Tax Administration
The interpretation of an Approved Accountant has been extended to include an AAT Member and any individual who has been
granted approval by CGIR to perform such work.
Restriction is made for an AAT member to perform audits of companies where the turnover not exceeding LKR 100 Mn an
provisions will be introduced to grant approval by CGIR for such person.
Tax concessions
Tax concessions granted to any investments will be strictly under the supervision and monitoring of the Ministry of Finance.
RAMIS
The first phase of the Revenue Administration Management Information System (RAMIS) will be effective from 1 January 2016.
RAMIS will enable automated services for filing of returns, payment of taxes, etc.
TIN / BRN
Inclusion of the Tax Payer Identification Number (TIN) or the Business Registration Number (BRN) in all transactions would be
mandatory.
Income tax return
A tax payer friendly one page simplified return will be introduced.
Furnishing of statement of
accounts
41
Tax Administration
Strengthening tax
administration
The existing tax laws would be redrafted to bring necessary improvement to legal framework to ensure clarity, consistency and
simplicity to reflect the features of modern tax systems which will help taxpayers to understand the system easily and eliminate
loopholes that have been created by the ambiguities in laws while strengthening tax administration. For this purpose, technical
assistance will be obtained from IMF and proposed completion by end 2016.
One-stop-shop
Establish a "one-stop-shop at Sri Lanka Customs, which provides all the necessary permissions, clearances and approvals at a
single window platform.
Authorized officers from relevant government agencies, including Department of Import and Export Control, Sri Lanka Standards
Institution, Consumer Affairs Authority, Inland Revenue Department, Department of Commerce, Department of Registrar of
Companies Department of Agriculture, Department of Animal Production and Health etc., will be housed at the "one-stop shop.
Tax Appeals Commission
Steps will be taken to ensure the independency of the Tax Appeals Commission and the appellate procedure, adhering to the
principles of natural justice.
Technical Rectification
Requisite amendments to be introduced to following statutes with retrospective effect to rectify certain ambiguities and
unintended effect.
Inland Revenue Act No 10 of 2006
Value Added Tax Act No.14 of 2002
Nation Building Tax Act No 9 of 2009
Economic Service Charge Act No 13 of 2006
Finance Acts and Finance (Amendment) Acts
Betting and Gaming Levy Act No.40 of 1988
Default Tax (Special Provisions) Act No 16 of 2010
Telecommunication Levy Act No 21 of 2011
Ports and Airports Development Levy Act No 18 of 2011
Tax Appeals Commission Act No 23 of 2011
Imports and Exports (Control) Act No. 1 of 1969
Land ( Restriction on Alienation) Act No 38 of 2014
Strategic Development Projects Act No.14 of 2008
42
Effective Dates of Proposed Amendments

All statutory provisions relating to the following taxes are effective from the dates mentioned below unless specified otherwise;
Effective Date
1 April 2016
1 January 2016
Immediate effect
Type of Tax
Income Tax
Economic Service Charge
Value Added Tax
Nation Building Tax
Betting and Gaming Levy
Land (Restrictions on Alienation ) Act
Cess
Port and Airport Development Levy
Customs Duty
Excise (Special Provisions)
Special Commodity Levy
43
Notes
44
About KPMG
Contact Us
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Shamila Jayasekara
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KPMG in Sri Lanka
Tel: + 94 11 5426502
E-Mail: sperera@kpmg.com
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Budget 2016 KPMG Publication

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Budget 2016 KPMG Publication

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2016

94 (11) 5426 426

20th November 2015

KPMG, a Sri Lankan partnership and a member

Partners: M R Mihular FCA, FCMA (UK), P Y S Perera FCA, FCMA (UK),

Income Tax New exemptions

Profits and income of

Income Tax - Removal of exemptions

Profits and income from

Profits and income from

Profits and income from

Profits and income

Income Tax - Removal of exemptions

Central Bank of Sri Lanka, including the Monetary Board

Charitable Institution (subject to conditions)

Government assisted schools

Income Tax - Revision to existing exemptions

Exemptions on dividends distributed by companies post tax holiday period to be removed.

Profits and income of

Income Tax - New concessions

The benefit of reduction would apply to fees for services.

Manufacture of red clay

Income Tax - New concessions

Construction of houses for

Profits of companies listing

Income Tax - New concessions

Profits from agriculture

Income Tax - Removal of existing concessions

A company is currently liable to tax at 28%.

The proposal seeks to withdraw this concession.

Profits of a new company

The entity should not be formed by splitting or reconstructing an existing undertaking

The applicable tax rate on business profits should be 28%.

The proposal seeks to withdraw this concession.

The company possesses the ability to compete with importers.

Should be liable to tax at the rate of 28%.

Income Tax - Determination of tax profits

Business of Life Insurance

Income Tax - Tax rates

Currently, the tax withheld at 2.5% is considered as final tax.

Tax on interest income

Exemptions from profits from employment would be limited to:

Tax on interest income

Deductions from Total

Changes to Income Tax

Special privileges on tax

Income Tax Gain on disposal of listed shares

Economic Service Charge (ESC)

Increase of tax rate

The tax rate will be increased from 0.25% to 0.5%.

Set off of ESC against

New Investment Act

Value Added Tax (VAT)

Value Added Tax

Wholesale & Retail

Value Added Tax (VAT)

The following table depicts the changes in VAT rate

1998 to 2002 (GST)

w.e.f. 01 August 2002

10% and 20%

w.e.f. 01 January 2003

10% and 20% (including financial services)

w.e.f. 01 January 2004

15% (including financial services)