Summary Of Income Tax Proposals Announced In The National Budget 2021

Salient Features –Sri Lanka Income Tax Proposals

The web notice dated 13th January 2021 was issued by the Department of Inland Revenue (“DIR”). A summary of income tax proposals made in the National Budget – 2021 as mentioned in the said notice is set out below:

Such proposals will be implemented after formal amendment to the Inland Revenue Act No.24 of 2017 (“IRA”).

1. Exemptions

No. Exemptions Eligibility Criteria Effective Date and/ or Exemption Period
1. Remittance Tax of 14% payable on remittance of retained and invested profit

by non - resident companies carrying on businesses in Sri Lanka through Permanent Establishments (“PE”)
  • Profit and income earned on or after 01st April 2021; and
  • retained the same in Sri Lanka, for a minimum period of 03 years, by investing it in Sri Lanka to;
    - Expand its business;
    - Acquire shares or any securities from Colombo Stock Exchange (“CSE”); or
    - Acquire treasury bills, treasury bonds or Sri Lanka International sovereign bonds issued on behalf of the Government of Sri Lanka (“GoSL”).
Effective from 01st April 2021

Remittance of such profits after 03 years from 01st April 2021
2. Income Tax on gains and profits by a person from Agro Farming
  • Gains and profits derived from the sale of produce of an undertaking for Agro Farming; and
  • Produce should not be subject to any process of production or manufacture.

  • The term “Agro farming” is defined to mean the tillage of the soil and cultivation of land with plants of any description, rearing of fish or animal husbandry, including poultry farms, veterinary and artificial insemination services.

    This exemption has already been administrated as informed by the Notice dated 08th April 2020 (PN/IT/2020-03(Revised), issued by DIR. But, the proposal provides for definition of the term, Agro Farming and time limit for exemption.
05 Years of Assessment (Y/A) commencing on 01st April 2019
3. Income Tax on gains by a person from the realization of land Lands sold, exchanged or transferred to a Sri Lanka Real Estate Investment Trust (“SLREIT”) listed in CSE and licensed by the Security Exchange Commission. w.e.f. 01st April 2021
4. Income Tax on
  • dividends or gains on the realization of units; or
  • amounts derived as gains from the realizations of capital asset of a business or investment).
Any SLREIT unit holder Not specified.

5. Income Tax on interest income from deposits of multinational companies
  • Interest accruing from a deposit opened by utilizing foreign sources;
  • Maintained the same in foreign currency in any domestic bank; and
  • Maintained it to cover its import expenditure for that Y/A.
w.e.f. 01st April 2021

6. Income Tax on gains from the realization of Sri Lanka International Sovereign Bonds

by a commercial bank or authorized dealer
  • Sri Lanka International Sovereign Bonds issued by or on behalf of the GoSL; and
  • Such gain is received/ derived by a commercial bank or authorized dealer who has made an aggregate investment of not less than USD 100 Mn. in such bonds on or after 01st April 2021.
w.e.f.01st April 2021

7. Income Tax on gains and profits by a person from a new undertaking, commenced on or after 01st April 2021
  • any gains from the realization of capital assets and liabilities of the business as calculated under Chapter IV of the IRA)
  • any undertaking formed by splitting up or re-construction of an existing undertaking.
An undertaking which sells construction materials recycled in a selected separate site established in Sri Lanka to recycle the materials, which were already used in the construction industry.

If recycled materials are used by the same person for construction services, this exemption can be claimed by deeming such materials as have been sold to the construction service business at market price.
10 years*

8. Same as Item No. 7 Any business;
  • by an individual;
  • after he successfully completes vocational education from any institution which is standardized under the Technical and Vocational Education and Training (TVET) concept and regulated by the Tertiary and Vocational Education Commission.
05 years*

9. Same as Item No. 7 An undertaking;
  • by a resident person;
  • in manufacturing of boats or ships in Sri Lanka; and
  • Gains/ profits derived from supplying such boats or ships.
07 years*

10. Same as Item No. 7 Any “renewable energy project”;
  • established with a capacity to generate not less than 100 Mega Watts solar or wind power; and
  • supplies such power to national grid.
07 years*

11. Same as Item No. 7 Any undertaking by any resident person who constructs and installs communication towers and related appliances using local labour and local raw materials in Sri Lanka or provides required technical services for such construction or installation. 05 years*

12. Same as Item No. 7 Any undertaking;
  • for letting bonded warehouses or warehouses related to the offshore business in Colombo or Hambanthota ports; and
  • Investment on such warehouse has been made on or after 01st April 2021
Not specified

* Tax exemption period is proposed to commence from;

  • the Y/A in which the undertaking commences to make profits from transactions entered into in that Y/A; or
  • from the commencement of the Y/A immediately succeeding the Y/A in which the undertaking completes a period of 02 years from the date on which the undertaking commences to carry on commercial operations,

whichever occurs earlier.

2. Changes in Tax Rates in Sri Lanka

No. Type of Income Eligibility Criteria Tax Rate Applicable Period
1. Income of a listed company, excluding gains from the realization of investment assets Any company which lists its shares in the CSE, prior to 31st December 2021 Reduced by 50% For the Y/A 2021/2022 (i.e., Y/A commencing on 01st April 2021)
14% For 03 Y/As commencing on 01st April 2022
(i.e., from Y/A 2022/2023 to Y/A 2024/2025)
2. Gains and profits from dividend by multinational companies Such multinational companies achieve increase in exports, excluding Specified Undertaking (defined in the IRA) by;

  • 30% in the Y/A 2021/2022 compared to the previous Y/A; or
  • 50% in the Y/A 2022/2023 and maintains such status in the subsequent Y/A, compared to the Y/As 2020/2021.
Reduced by 25% For the Y/A 2021/2022
Reduced by 50% For 02 Y/As immediately succeeding Y/A 2021/2022

(i.e., from Y/A 2022/2023 to Y/A 2023/2024)

3. Other Changes

No. Area Description
1. Capital Allowance for the Local liquid milk industry To be granted within 02 years, for milking machines with latest technology used to manufacture local milk related products.
2. Debt claims by banks and financial institutions Instructions on specific provisions on debt claims by such institutions to be issued, in order to ensure better and transparent management.
3. Research and Development expenses Temporary concession on such expenses, which is 100% additional deduction for actual expenses incurrent in a relevant year, to be extended for another 02 years (i.e., Y/A 2021/2022 and Y/A 2022/2023).
Qualifying Payments
4. Expenditure incurred by a financial institution by way of cost of acquisition/ merger of any other financial institution

w.e.f. 01st April 2021
  • Cost is ascertained by considering all the facts on a case-by-case basis and as confirmed by the Central Bank of Sri Lanka.
  • Claim is permitted over a period of 3 Y/As, commencing from the Y/A in which expense is incurred, in equal instalments (i.e., 1/3 of the cost per Y/A).
  • Any unclaimed amount during said 03 years (due to total assessable income not exceeding the deduction) can be deducted during any Y/A immediately succeeding the said 03-year period.
5. Capital Gains Tax (“CGT”) – IInvestment Assets Consideration received in relation to computation of CGT will be calculated on the amount received, receivable or the assessed value at the time of realization, whichever is higher.

“Assessed Value” - the value at the time of realization, certified by a professionally qualified valuer in a valuation report.

4. Tax Administrative Measures

No. Area Description
1. CGT
  • A single return to be submitted for all capital gain transactions within a calendar month and payments due to be paid within 30 days, after the relevant calendar month.
  • Presently, submission of CGT return and payment of CGT are due within 01 month after the date of realization.
2. Submission of Tax returns
  • All companies to submit tax returns only by electronic means, w.e.f. 01st April 2021.
  • At present, returns can be filed in writing or electronic means.
3. Tax Identification Number (“TIN”) Mandatory use of TIN in all tax related documents.
4. Administrative Review
  • Decision of the Commissioner General of Inland Revenue (“CGIR”) of the review on assessment or other decisions and the reasons for the decision to be served on the taxpayer within a period of 06 months, from the date of acknowledgement of the request for review.
  • At present, there is no timeline.
5. Administrative Review An appeal to the Tax Appeals Commission by a taxpayer aggrieved by a decision on administrative review to be made, within;
  • 30 days from the date of receipt of the decision of the CGIR; or Presently, no timeline.
  • within next 30 days from the date after lapse of 07 months from the request for administrative review was made.
    The timeline at present is 90 days.
6. Punitive provisions Punitive provisions will be introduced, against auditors, tax practitioners, tax advisors or approved accountants, other than full time employees of the tax payers, who;
  • intentionally disregard or fail to take reasonable care in discharging the professional duty; or
  • fraudulently prepare and certify those documents and information; or
  • deliberately misinterpret any provisions of any Act administered by the CGIR, regulation, rule or order made thereunder.
7. Tax Amnesty
  • No assessment to be made;
  • No penalty to be imposed; or
  • No action to be initiated,
under the penal provisions of any Act administered by the CGIR, on or after 01st January 2021,

Eligible Persons
A person who;
  • earned money from any source and has not declared or not paid the due taxes to the CGIR as per the relevant enactments; and
  • utilizes such money hidden in Sri Lanka or outside Sri Lanka as investments on any undertaking in Sri Lanka during the year 2021; but
  • subject to the payment of 1% of final tax to the CGIR on the gross investment amount.

  • Such persons are required to make a declaration to the CGIR in a prescribed form with their investment plan.
  • 1% of tax to be paid immediately, as instructed by the CGIR.
  • A Separate guideline is proposed to be issued.

5. Tax Relief Measures for Post COVID - 19 Economic Recovery

Following relief measures are proposed in relation to Small and Medium Enterprises (“SME”)*;

No. Type of Relief Eligibility Criteria
1. Writing off of income tax arrears payable If the arrears;
  • has arisen due to any assessment made up to the Y/A 2018/2019; and
  • is outstanding as at 24th June 2020, in the records of the CGIR.

  • Provided that the CGIR is satisfied that there is no fraud or willful neglect involved in the disclosure of income or any deduction or relief by such person in return of income submitted for the relevant Y/A.
2. Non issuance of amended/ additional income tax in Sri Lanka assessment for Y/A 2019/2020 CGIR to be satisfied that there is no fraud or willful neglect involved in disclosure of income, any deduction or relief; and
SME has paid the tax declared in the return.
3. Grant of a grace period to settle taxes Any tax in default/ arrears which is outstanding and payable as at 24th June 2020.

*As per the IRA, “Small and Medium Enterprise” means a person who satisfies the following conditions:-

  • The person who conducts business solely in Sri Lanka other than an individual who is engaged in providing professional services individually or in partnership being an individual who is professionally qualified;
  • The person does not have an associate that is an entity; and
  • The person’s annual gross turnover is less than LKR 500 Mn.