Taxation

All Sri Lankan businesses, except for BOI companies (enterprises that qualify for BOI incentives under Sec. 17 of theBOI Act and enterprises that qualify for special concessions under the Inland Revenue Law, are liable to tax.

Tax Treaties

Double Tax Relief Agreements signed between Sri Lanka and other countries provide for reduced tax rates on dividends, interest and royalties. Recently completed agreements include special provisions to ensure that foreign investors receive the benefits arising from the various tax incentives. The countries having tax treaties with Sri Lanka are: Australia, Bangladesh, Belgium, Canada, Czechoslovakia, Denmark, Finland, France, Germany, India, Indonesia, Italy, Japan, Korea-South, Kuwait, Malaysia, Mauritius, Nepal, Netherlands, Norway, Oman, Pakistan, Poland, Romania, Saudi Arabia Singapore, Sweden, Switzerland, Thailand, United Kingdom, UAE, United States and Yugoslavia.

Corporate Income Tax

Resident and Non-Resident companies are liable to a corporate income tax of 35 per cent. These rates are in line with those in other fast developing Asian economies.

Non-resident companies (companies whose head offices are located overseas, or are controlled from abroad) pay an additional tax of one-third of remittances abroad or one-ninth of taxable profits - whichever is less. Remittances exclude dividends for this purpose.

BOI companies that meet specific criteria i.e. size of total investment, type of investment and location of investment, qualify for tax holidays ranging from 5-20 years. In addition, a concessionary rate of income tax of 15% up to a maximum period of 20 years is also extended to these companies.


Dividends

Dividends declared out of tax-exempt profits during the tax holiday period and one year thereafter, is tax free. A withholding tax of 15% on dividends applies to all companies other than quoted public companies. This can be credited against the individual income tax of the shareholders. Quoted public companies have to deduct the 15% withholding tax on dividends paid to non-resident shareholders.

Resident companies pay an Advance Company Tax (A.C.T.) of 27% of gross dividend. The A.C.T. can be offset against the tax liability of the company to a level of 50% of the income tax payable. Any excess can be carried forward to the following year.


Personal Income Tax

Resident individuals pay personal income tax on a sliding rate scale up to a maximum of 35% of their income. The first Rs.144, 000 per annum is exempt from income tax.

Non-citizens of Sri Lanka who are employed in qualifying BOI companies pay a concessionary tax of 15% of their Sri Lankan source income. This benefit, with the exception of BOI approved "flagship" projects, is restricted to the expatriate's first five years of employment.



Imposition of Value Added Tax:

2. (1) Subject to the provisions of this Act, a tax, to be known as the Value Added Tax (hereinafter referred to as "the tax) shall be changed-

(a) at the time of supply, on every taxable supply of goods or services, made in a taxable period, by a registered person in the course of the carrying on, or carrying out of a taxable activity by such person in Sri Lanka;

(b) on the importation of goods into Sri Lanka by any person and on the value of such goods or services supplied or the goods imported, as the case may be, at the following rates :-

• Ten per centum (of which the Tax Fraction is 1/11) on the value of goods and services referred to in the Second Schedule, which are chargeable with the tax other than zero rated supplies;
• twenty per centum (of which the Tax Fraction is 1/6) on the value of all other taxable goods and services which are chargeable with the tax other than zero rated supplies.

Free Trade Zones (under continuous surveillance by Customs)

VAT is not due on the imports of goods to a free trade zone for the purpose of storage/processing. VAT is payable on imported goods taken out of a free trade zone and used within Sri Lanka or on goods used within the free trade zone. VAT is not payable on goods of Sri Lankan origin, which have been in a free trade zone and are being removed in an unaltered state, for home use. Where goods manufactured in a zone are removed into Sri Lanka for use in the owner's business, as opposed to being sold or disposed of, VAT is due only on the value of any imported elements of the goods.
Supplies of goods and services to, from and within a free zone are taxable in the normal way.

Zero Rating and Exemption Lists of Items

Zero Rated Goods - Goods exported to a customer outside Sri Lanka is normally zero-rated provided that the appropriate conditions are met. Input taxes can be claimed.

Services

Services are zero-rated under the following conditions:
a) International transportation (including transhipment) of goods and passengers
b) Moveable or immovable property outside Sri Lanka
c) Repair of foreign ships or aircraft, refurbishment of marine cargo containers or any other goods imported for the purpose of re-export
d) A copyright, patent, license, trademark or similar intellectual property right to the extent that such rights are for use outside Sri Lanka.


Exemptions

An Exemption Schedule to the Goods and Services Act No. 34 of 1996 is available at the Department of Inland Revenue.

Source: The Board of Investment, Sri Lanka