Setting up in Sri Lanka - How To Set Up?

Section 7: Definitions and Clarifications

This section defines and clarifies specific terminology as it relates to investing in Sri Lanka. For additional information please visit our Website or email us at help@investsrilanka.com.

Duty Free Imports

The BOI may exempt the following imports from customs duty.

  1. Raw Materials to be used in products meant for export

  2. Capital goods


    • If an Export Oriented Enterprise, exempted during the lifetime of the enterprise
    • If a Non-Export Oriented Enterprise, the exemption is during the project implementation period only
  3. Construction materials required for the construction of approved buildings (other than items in the negative list published on the website):

Export Oriented Enterprises are categorized into as follows:

  1. Manufacturing Enterprises: an enterprise that engages in the production or manufacture of goods for export including deemed indirect exports of not less than 90% of its output, as defined in the BOI agreement.

  2. Services Enterprises: Export Oriented Services include: Garment washing and finishing plants; Embroidery services, Ship repairing and ship breaking; Textile dyeing and finishing plant; Textile printing; Testing of fabric; Computer aided designs for garment and other industries; Bunkering services; Production of films; Air cargo services; International passenger services; Repairing of containers; and Vacuum packing of garments. To be eligible for tax incentive scheme, 70% of its turnover should be in convertible foreign currency.

  3. Agriculture Only Enterprises: An enterprise that engages in agriculture and/or agro processing with exports of not less than 70% of its production.

Non-export Oriented Enterprises are enterprises that cater to the domestic market and which cannot be classified as an Export Oriented Enterprise as defined above.

Enterprise Location

The investors may locate their enterprise either within Export Processing Zones (EPZs) and Industrial Parks (IPs) or Outside EPZs/ IPs. (For more information, visit http://www.investsrilanka.com).

For investors who locate their enterprise outside EPZs/ IPs, the BOI will assist in selecting an appropriate site. The investor may choose to lease or purchase the site.

Exports of Goods

There are 3 types of exports:

  1. Direct Exports: Exports made to an overseas buyer for payment in foreign currency.

  2. Indirect Exports: Supply to a direct exporter or an export trading house both approved under the BOI Law, subsequent to project in convertible foreign currency.

  3. Deemed Exports:

    • The production or manufacture and supply of any commodity (other than black tea in bulk, crepe rubber, sheet rubber, scrap rubber, latex and fresh coconuts) to any exporter of such goods without further production or manufacture by such exporter
    • The production or manufacture and supply of any goods to any exporter for the production, manufacture or packaging for export of any commodity which is a non traditional product.

Investment

The Investment in the enterprise is considered to be the aggregated value of the fixed assets and working capital.

Local Sale by an Export Oriented Enterprise

At the discretion of the BOI, an Export Oriented Enterprise approved under Sec. 17 of the BOI Law may be permitted to sell in the domestic market, up to a specified percentage of the value of exports. However, to maintain fair competition with local companies, domestic sales will be subject to income tax and any other charges that apply to such domestic companies.

Under the "Exemption from Exchange Control Act", export oriented enterprises operating under Sec. 17 of the BOI Law would be exempted from the application of Parts I-VI of the Exchange Control Act.

Reserved, Restricted or Regulated Economic Activities

Reserved Economic Activities – Activities where FDI is not permitted. Currently they are Money Lending, Pawn Broking, Coastal Fishing and Retail Trade where the foreign investment must not be less than US$ 1 million.

Restricted Economic Activities – Activities where FDI is permitted subject to certain restrictions.

Regulated Economic Activities – see BOI website for details.

Section 16 Enterprise

Under the Section 16 provision of the BOI law, BOI approves foreign Investment entry and permits the enterprise to operate under the normal laws of the country; As such the enterprise is not entitled to any special concessions available under section 17 of the BOI Law.

Section 17 Enterprise

Under the Section 17 provision of the BOI Law, the BOI enters into an agreement with an enterprise and grants special concessions that may include exemption from Customs Duty and Exchange Control Act. These concessions remain effective throughout the period covered by the agreement.

Strategic Development Projects

A Strategic Development Project is a project which is considered to be of strategic importance and which is likely to bring substantial economic and social benefit to the country. Such projects are also likely to change the landscape of the country, primarily through:

  1. The strategic importance attached to the proposed provision of goods and services, which will benefit the public

  2. A substantial inflow of foreign exchange to the country

  3. The substantial employment which will be generated and the enhancement of the income earning opportunities;

  4. The envisaged transformation through deployment of technology

Under the Strategic Development Projects Act No 14 of 2008 (as amended), exemptions not exceeding 25 years may be granted for a Strategic Development Project (SDP) either in full or part from one or more of the enactments such as

The approval process for a SDP entails publication of a gazette notice identifying the project; obtaining the approval of the Cabinet of Ministers for same, publication of an Order in the gazette specifying the exemptions granted and then placing it before parliament for approval by Resolution of Parliament.

For the Investment Incentives available for Strategic Development projects see the Investment Incentives Section.

Tax Concessions

A "Tax Concession" is an exemption from the provisions of the Inland Revenue Act for a specific period with regard to payment of tax on income and profits derived from the approved activity of the enterprise.

This exemption can be either a total exemption, for example, Tax Holiday, or it may be a concessionary exemption with a reduced rate of applicable corporate income tax rate; please refer to Inland Revenue Department Website.

Taxes and Levies Applicable to BOI Enterprises

Value Added Tax (VAT)

VAT is imposed on all goods & services supplied in or imported into Sri Lanka, other than certain exempt items. The following VAT rates are applicable in 2011:

  1. Exempt
  2. Zero Rate: 0%
  3. Standard Rate: 12%

Economic Service Charge (ESC)

If the liable turnover exceeds Rs. 25 Million per quarter ESC will be charged on the turnover at the following rates:

  1. BOI Enterprises that are liable for income tax: 0.1%

    • Apparel exporters
    • BOI trading houses
    • Manufacturers of textiles to apparel exporters
  2. Enterprises that are exempt and those subject to a concessionary rate of Income Tax and Others: 0.25%

    • Includes enterprises with operating losses which may not be liable for income tax
    • Wholesale or retail trade other than manufactured or produced by the seller (except distributors or dealers in motor vehicles or liquor)
    • Primary conversion of any tea, rubber or coconut plantation including desiccated coconut, coconut oil or fiber, copra and sheet rubber, but excluding any conversion which produces any alcoholic beverage
  3. Commercial Operations – Advertising Agents: 0.25%

  4. Others (including dealers in motor vehicles, liquor, tobacco and petroleum) and Turnover of Businesses which are defined under the gazette notification: 0.1%

Port & Airport Development Levy (PAL)

PAL is levied on the cost, insurance and freight (CIF) value of all items originating outside and imported into Sri Lanka. At present the levy is 5%.

Nation Building Tax (NBT)

Imposed on manufacturers, importers and service providers that generate turnover per quarter of more than Rs. 500,000/-. As of January 1, 2011, the NBT is 2%.

Dividends

Dividends are subject to a withholding tax of 10% of the gross dividend.

Registration Information

  • Income Tax: Department of Inland Revenue Sri Lanka
  • VAT: Department of Inland Revenue Sri Lanka
  • Tax Identification Number : Department of Inland Revenue Sri Lanka
  • Import/Export: Department of Inland Revenue Sri Lanka, Sri Lanka Customs, Board of Investment of Sri Lanka (BOI)