IntroductionSetting up in Sri Lanka
Tax Incentives in Sri Lanka - 2013
A new incentive regime has been introduced particularly with the budget 2012 & 2013 to promote private investments, both domestic and foreign into desired sectors of the economy. These tax incentives mainly include exemption on Corporate Income Tax, Customs Duty, Value Added Tax, and Ports & Airports Development Levy. Details of these incentives applicable for different categories of investments are described below for easy reference. (Amendments as per 2013 Budget proposal have been included subject to enactment of relevant legislations).
- Tax incentives with no minimum investment threshold
- Small & Medium Scale Enterprises (based on the Investment Value)
- Small Scale - New Enterprises
- Medium Scale - New Enterprises
- Large Scale - New Enterprises (based on the Investment Value)
- Strategic Import Replacement New Enterprises (based on the Investment Value& Product)
- Expansion of Existing Enterprises
- Customs Duty, VAT & PAL Exemption on Imports
- Reduced Corporate Income Tax Rates
- Taxation of BOI registered enterprises after the expiry of tax holiday
- Permissible Deductions
- Exemption for Tax on Dividends
- Land Transfer Tax Exemption
- Strategic Development Projects
- Commencement of Corporate Income Tax Holiday
- Taxation of BOI registered enterprises after the expiry of tax holiday
The details of the applicable investment threshold and the incentives granted for the enterprises under each category are described as follows.
Note :
Under the Inland Revenue Law, these incentives are offered to an “undertaking” as defined in the Inland Revenue Act. However, for the purpose of BOI, the word “undertaking” is replaced by the word “enterprise” since the BOI Law requires an investor to incorporate an enterprise before entering into an agreement with the BOI.
1) Tax incentives with no minimum investment threshold
| Sector of Investment | Tax Exemptions |
|
|
2) Small & Medium Scale Enterprises
New enterprises engaged in any of the following activities, provided that the sum invested in fixed assets is made between 31st March 2011 to 01st April 2015 and commences commercial operations on or after 01st April 2011 will be eligible to tax holidays as follows;
a) Small Scale – New Enterprises* (investments between Rs. 25-50 Mn)
| Activity | Qualifying Criteria Amount of Investment * (Rs. Mn) | Tax Exemptions (No. of years) |
|
|
|
* Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets.
* For BOI approved projects, Custom duty will be exempted on imports of; Project related capital goods (plant, machinery and equipment) and, Inputs (raw materials) of export oriented projects.
b) Medium Scale - New Enterprises*(investments Rs. 50 Mn and above)
| Activity ** | Qualifying Criteria Amount of Investment* (Rs. Mn) | Tax Exemptions (No. of years) |
|
≥50 and <100 |
4 5 6 |
* Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets.
**Products shall be with a minimum of 35% value addition if more than 50% of the production is to be sold in the domestic market.
* For BOI approved projects, Custom duty will be exempted on imports of; Project related capital goods (plant, machinery and equipment) and, Inputs (raw materials) of export oriented projects.
3) Large Scale – New Enterprises*
Any new enterprise engaged in “specified activities” with an investment of over Rs 300 Mn (large scale projects) and made investment on fixed assets by such company on or after1st April 2011 will be eligible for the following tax holiday periods.
| Activity | Qualifying Criteria | Tax Exemptions (No. of years) | |
| Min. Export Req. (% of Output) | Amount of Investment* (Rs. Mn) | ||
|
None 90% (60% forApparel& Ceramic) None 70% of turnover should be in convertible foreign currency as applicable. |
>300 and ≤500 >500 & ≤700 >700 & ≤1,000 >1,000 & ≤1,500 >1,500 & ≤2,500 >2,500 |
6 7 8 9 10 12 |
* Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets
* For BOI approved projects, Custom duty will be exempted on imports of; Project related capital goods (plant, machinery and equipment) and, Inputs (raw materials) of export oriented projects. In addition please refer category No 6 below for exemptions during the project implementation period.
4) Strategic Import Replacement - New Enterprises
Any new enterprise established on or after 01.04.2012 and engaged in the manufacture of any of the products referred to in the table below will be eligible for the following tax incentives.
| Sector | Minimum Investment * (USD. Mn.) | Tax Incentives |
|
|
5 years Tax holiday followed by a concessionary tax rate of 12% thereafter |
Note:
For exemptions on importation of plant, machinery or equipment, please refer category No. 6 below (i.e. Customs Duty, VAT, and PAL – Exemptions on imports of capital goods)
* Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets
5) Expansion of Existing Enterprises
a) Expansions by Small, Medium and Large Scale Enterprises
Existing enterprises falling within small, medium and large scale categories described above which have made investment on fixed assets on or after 01st April 2011 but before 01st April 2015 in the expansion of any enterprise will be eligible for following tax incentives.
| Category | Qualifying Criteria | Tax Incentives | |
| Min. Export Req. (% of Output) | Amount of Investment * (Rs. Mn) | ||
Any Existing enterprise; |
As applicable to the original enterprise | 50 | A qualifying payment relief of the investment made,
subject to ;
|
* Amount of Investment means the cost of any land, plant, machinery, equipment and other fixed assets
b) Expansions by Strategic Import Replacement Enterprises
A special incentive scheme has been introduced for existing enterprises falling within the investment criteria stipulated for Strategic Import Replacement Enterprises described under category 4 above, which have made investment on fixed assets on or after 01st April 2012 in the expansion of any such enterprise. Theenterprise will be eligible for following tax incentives, depending on the sector and the relevant investment requirement.
| Category | Qualifying Criteria | Tax Incentives | |
| Min. Export Req. (% of Output) | Amount of Investment * (Rs. Mn) | ||
Being an investment which would have qualified such enterprise under
strategic import replacement category
engaged in the manufacturing of any product referred herein. |
Fabric |
5 |
A qualifying payment relief of the investment made,
subject to ;
|
6) Customs Duty, VAT, and PAL – Exemptions on imports of capital goods (Only for new Large Scale and Strategic Import Replacement Enterprises)
To reduce the upfront cost incurred on account of importation of project related plant, machinery or equipment, the applicable Customs Duty, VATand PAL will be deferred/exempted during the project implementation period as applicable and the said deferment will be treated as an exemption on the fulfillment of the conditions as specified in the agreement entered into with the Board of Investment of Sri Lanka.
| Duty Type | Relevant Act/Gazette | Eligible Enterprises | Remarks |
| Customs Duty | Customs Ordinance | For large scale enterprises and Strategic Import Replacement enterprises | Payment of Customs Duty on importation of plant, machinery or equipment on or after 01.01.2012, will be exempted during the project implementation period. |
| VAT | VAT Act No.14 of 2002 | For large scale enterprises and Strategic Import Replacement enterprises | Payment of VAT on importation of plant, machinery or equipment on or after 01.01.2012, will be deferred during the project implementation period and treated as an exemption, subject to fulfillment of conditions as specified in the agreement with BOI. |
| PAL | PAL Act No. 18 of 2011 | For large scale enterprises and Strategic Import Replacement enterprises For large scale enterprises engaged in construction activities |
|
7) Reduced Corporate Income Tax Rates
The enterprises falling within small, medium, large scale, strategic import replacement and strategic development project categories who are engaged in the following business activities shall enjoy reduced tax rates (as stipulated in the table below) after the expiry of full or partial tax holiday period as applicable.
| Sector | Reduced Rate After Tax Holiday |
| Agriculture (including Organic tea in bulk), Animal Husbandry or Fishing Poultry Farming |
12% 10% |
| Manufacturing | Export Oriented : 12% Other : Taxable income ≤ Rs 5Mn : 12% Taxable income >Rs 5 Mn : 28% |
| Information Technology | 10% |
| Tourism | 12% |
| Education | 10% |
| Petroleum Exploration | 12% |
| Storage Facilities | 12% |
| Supply of Labour | 12% |
| Creative work including work of an artist | 12% |
| Construction Work | 12% |
| Goods or Services provided to foreign Ships paid in foreign currency | 12% |
| Sale of Products manufactured in Sri Lanka for payment in foreign currency (through Foreign Exchange Earning Account) | 12% |
| Sale of goods manufactured in Sri Lanka by an export oriented BOI registered enterprise to any BOI registered enterprise (enjoying tax holiday under section 16C, 17A or 16D and SDP) for import replacement purposes, during the project implementation period. | 12% |
| Renewable Energy / Mini Hydro | 12% |
8) Permissible Deductions
Any enterprise involves in acquisition of any plant, machinery or equipment for the given purposes will enjoy following deductions when ascertaining profits and income.
| Sector | Deduction Rate |
| Depreciation allowances The cost of acquisition of any plant, machinery or equipment acquired on or after April 1, 2013 :
|
Deduction at 50% per year Deduction at 100% per year Deduction at 50% per year |
9) Exemption for Tax on Dividends
Any dividend paid to a shareholder of a small, medium or large scale company, are exempted from Dividend Tax during the tax holiday period. However, a resident construction project will be eligible for additional one year exemption from the Dividend Tax.
10) Other Exemptions
10.a) Royalty, franchising fee or any payment for designing
Royalty, franchising fee or any payment for designing made to any foreign collaborator by a BOI registered company during the period of tax holiday under section 17A (Large Scale) or Section 16D (Strategic Import Replacement)of Inland Revenue Act will be exempted from , where the foreign direct investment raised outside Sri Lanka exceeds US$ 50Mn, if such services are:
- - essential in carrying out activities in Sri Lanka; and
- - not obtainable in Sri Lanka;
as determined by the BOI on request made for that purpose.
10.b) Emoluments for Experts
The income from emoluments arising in Sri Lanka of any individual who is an expert within the meaning of paragraph (dd) of subsection (1) of section 8 of the Inland Revenue Act, and who is not a citizen of Sri Lanka and brought to Sri Lanka by a BOI registered company, during the period of tax holiday under section 17A (Large Scale)or section 16D (Strategic Import Replacement) of the Inland Revenue Act , where the total investment made is out of foreign direct investments exceeding US$ 50Mn, if such services are essential to carry out the activities of the company, as determined by the BOI on request made for this purposes. Provided that the number of experts in an undertaking to whom this provision is applicable shall not exceed five. (Section 8 of the Inland Revenue Act will be amended).
11) Land Transfer Tax Exemption for BOI Companies
Awaiting for amendments to the Finance Act on “Foreign ownership for Land” and “100% Land Transfer Tax”.
12) Strategic Development Projects
Tax exemptions are considered under the provisions of the Strategic Development Projects Act No 14 of 2008 and its amendments for special projects which are in the national interest, likely to bring economic and social benefit to the country and to change the landscape of the country.
Strategic Investment Projects Act covers full or partial exemptions from following taxes based on the nature of the investment on a case by case basis.
- Inland Revenue Act No.10 of 2006
- Value Added Tax Act No.14 of 2002
- Finance Act No.5 of 2005
- Excise (Special Provision) No.13 of 1989
- Economic Service Charge Act No.13 of 2006
- Customs Ordinance Chapter 2, 3, 5
- Nation Building Tax Act No.9 of 2009
- Ports and AirportsDevelopment Levy Act No.18 of 2011
- Cess on importation of raw materials, during the project implementation period, in cases where the required raw materials are not available in Sri Lanka for the required quantity
A special process has to be followed to declare a project as a Strategic Development Project by the Parliament.
13) Commencement of Corporate Income Tax Holiday
The Corporate Tax exemption period shall be reckoned, from the commencement of the year of assessment in which the enterprise commences to make profits or any year of assessment not later than two years from the commencement of commercial operation, whichever is earlier.
14) Taxation of BOI registered enterprises after the expiry of tax holiday
Taxation of BOI registered enterprises after the expiry of tax holiday Where the BOI enters into an agreement with any enterprise, which provides for income tax concessions, and :
- the taxation under such agreement after the expiry of the tax exemption period provided thereunder is more burdensome, than the taxation under the Inland Revenue Act, then provisions of the Inland Revenue Act will apply; and
- the income tax concessions provided under BOI agreement will not be extended through supplementary agreements. (The Inland Revenue Act will be amended to provide such provisions)