Setting 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
  • Enterprise for fishing
    Any enterprise for fishing carried on in Sri Lanka. (including cleaning, sizing, sorting, grading, chilling, dehydrating, packaging, cutting or canning of fish)
  • Enterprise for Producing of agricultural seeds or planting materials
    Any enterprise for producing of agricultural seeds or planting materials or primary processing of such seeds or material.
  • Cultivation of renewable energy crops
    Any enterprise for cultivating of renewable energy crops in agriculture lands.
  • Organic fertilizer and pesticides
    Private Sector investments for manufacturing, distribution or sale of organic fertilizer and pesticides.
  • Exempted from Income Tax for each year of assessment within the period of five years commencing from 1st April 2011.


  • Exempted from Income Tax for each year of assessment within the period of five years commencing from 1st April 2011.


  • The profit and income of an enterprise will be exempted (Sec 16 E to the IR Act will be introduced).


  • The profit and income of an enterprise will be exempted.

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)
  • Agriculture
    Agriculture, Animal Husbandry and Fishing (including processing)
  • Services
    Creative work including work of an artist Information Technology
  • ≥25 and <50


  • ≥25 and <50
  • 4


  • 4

* 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)
  • Manufactureof any article
    (including processing) other than liquor or tobacco products
  • Agriculture
    Agriculture, Animal Husbandry or Fishing (including processing)
  • Services
    Information Technology, Software Development, Business/Knowledge Process Outsourcing, Health Care, Education, Beauty care, Cold room and storage facilities, Tourism, Sports and fitness centers, Creative work including work of an artist, Mini Hydro Power Projects

≥50 and <100
≥100 and <200
≥200

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)
  • Agriculture or Forestry
    Cultivation of food crops or industrial crops, Horticulture, Forestry, Animal Husbandry (Dairy, poultry, Swine, Goat etc.)
  • Manufacturing
    • Manufacture,Production or processing of non-traditional goods for export, including deemed exports;
    • Manufacturing for domestic and/or export market Boats, Pharmaceuticals, Tyres and Tubes, Motor Spare Parts, Furniture, Ceramics, Glassware or other mineral based products, Rubber based products, Cosmetic products, Edible productsmanufactured out of locally cultivated agricultural products, Construction materials, Electrical/Electronic items
  • Services
    • Provided to a person or partnership outside Sri Lanka





    • Tourism or Tourism Related Projects,
    • Providing Hotel Services, Guest Houses or Similar Services,
    • Infrastructure Projects including Construction of Commercial Buildings,
    • Development of any warehousing or storage facility,
    • Power Generation using Renewable Resources
    • Establishment of Industrial Estates, Special Economic Zones or Knowledge Cities,
    • Urban Housing or Town Centre Development,
    • Provision of Any Sanitation Facility or Waste Management Systems,
    • Development of Water Services,
    • Development of internal water waysor related transport (goods or passengers)
    • Construction of Hospitals and provision of Health Care Services,
    • Repair of aircrafts or maritime vessels or ship breaking
    • Sporting Services (eg. Motor Racing or Golf Course)
    • Information Technology
    • Software development
    • Business/Knowledge Process Outsourcing
    • Any Project in Light or Heavy Engineering Industry,
    • Artificial insemination for cattle (Dairy development)
    • Educational services

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
  • Fabric
  • Pharmaceutical
  • Milk Powder
  • Cement
  • 5
  • 10
  • 30
  • 50

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;

­ Should qualify for exemptions under small/medium or large scale category

­ Investment to be made in fixed assets between 01.04.2011 to 01.04.2015

As applicable to the original enterprise 50 A qualifying payment relief of the investment made, subject to ;
  • not exceeding 25% of such investment in that year of assessment and balance 75% be apportioned in equal amount over 3 year period immediately succeeding that year of assessment
  • If investment is made in more than one year of assessment, the year of assessment on or after 01.04.2011, in which, the aggregate of the minimum investment of Rs 50 Mn is reached, shall be deemed to be the year of assessment to qualify for this deduction.

* 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.

­ Investment to be made in fixed assets on or after 01.04.2012

Fabric

Pharmaceutical

Milk Powder

Cement

5

10

30

50

A qualifying payment relief of the investment made, subject to ;
  • Concessionary tax rate (12%) for 5 years
    Reckoned from the commencement of assessment year in which the minimum investment criteria is fulfilled; coupled with,
  • Qualifying payment relief of the investment madesubject to ;
    • not exceeding 25% of such investment in that year of assessment and balance 75% be apportioned in equal amount over 3 year period immediately succeeding that year of assessment
    • if investment is made in more than one year of assessment, the year of assessment on or after 01.04.2012, in which, the aggregate of the minimum investment is reached shall be deemed to be theyear of assessment to qualify for this deduction.


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
  • Payment of PAL on importation of plant, machinery or equipment by any enterprise qualified for tax holiday under large scale or strategic import replacement category on or after 09.05.2012, will be deferred during the project implementation period subject to furnishing of Bank Guarantee on the amount of the tax due on the articles imported and will be treated as an exemption, subject to fulfillment of conditions as specified in the agreement with BOI.
  • Payment of PAL on importation of project related articles on or after 09.05.2012 (not being plant, machinery or equipment other than the articles in the negative list published by the secretary to the Treasury), by any enterprise qualified for a tax holiday under large scale category engaged in construction activities which has entered into agreement with BOI, for the use by such enterprise for construction purposes of the project, will be exempted during the project implementation period.

    However, this provision is subject to the condition that such articles are not obtainable in Sri Lanka and recommended by the DG/ BOI on the request made to in that regard by such enterprise.


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 :
  • for technology upgrading purposes or introducing any new technology
  • for energy efficiency purposes, which provides more than 30% of the total requirement of the power generation out of alternative energy resources
  • for any export industry
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)