2013 budget analysis - paving the way for development

2013 Budget

Analysis

Paving the way for development

November 2012

KPMG Sri Lanka

8 November 2012

For the clients of KPMG Sri Lanka only

Fiscal Proposals 2013 Paving the way for Development

The 8th budget of the Government was presented by His Excellency the President as the Hon. Minister of Finance, in Parliament, this evening. A development oriented

budget that focussed on three key objectives, being a middle class economy, self sustainability with a focus on food and environmental security and an economy driven

by technology.

Appended hereto is a snapshot of the key fiscal and tax proposals which may be of interest to you.

We may mention that these have been compiled on a high level review of the proposals in the limited interim time available to us. May we also emphasise that these

proposals need to be enacted by Parliamentary procedure for legal enforcement.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to

provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in

the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation

Tel : +94 11 542 6426 Fax : +94 11 244 5872 +94 11 244 6058 +94 11 254 1249 +94 11 230 7345 Internet : www.lk.kpmg.com

KPMG (Charted Accountants) 32A, Sir Mohamed Macan Makar Mawatha, P.O. Box :186, Colombo 00300, Sri Lanka.

KPMG, a Sri Lankan Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International cooperative (KPMG International), a Swiss entity.

M.R. Mihular FCA Ms. M.P.Perera FCA Mr P.Y.S.Perera FCA C.P.Jayatilake FCA T.J.S. Rajakarier FCA W.W.J.C. Perera FCA Ms. S. Joseph FCA Ms. S.M.B. Jayasekara ACA W.K.D.C. Abeyrathne ACA S.T.D.L. Perera FCA G.A.U. Karunaratne ACA R,M,D,B Rajapakse ACA Principals S.R.I. Perera ACMA, LLB, Attorney-at-law, H.S. Goonewardene ACA

CHARTERED ACCOUNTANTS

2 2012 KPMG, a Sri Lankan Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Contents

Page

Focus of Fiscal Proposals 3

Focus of Tax Proposals 4

Detail Analysis of Tax Proposals

Income Tax 6

Value Added Tax 13

Stamp duty 15

Direct and Indirect Taxes 16

Exchange Control 19

Real Property Transaction 21

Tax Appeals Commission 22

Industry Specific Changes 24


Focus of Fiscal Proposals

A poverty free upper middle income economy

To reach a per capita income of USD 4000 by 2016

Engage in a framework and incentive structure to promote household economic activities, SMEs and private sector to expand investment in production .

Diversify domestic production and develop livelihood opportunities in areas of food production, livestock and cottage industries.

Rollout development projects in rural areas focusing on schools and hospitals and facilitate knowledge sharing programmes to eradicate malnutrition.

Invitation extended to private business community to participate in special poverty reduction programmes.

A country with food, water and environmental security

Rapid expansion in food production focusing on being a self sufficient agricultural economy .

Focus on export development in items such as tea, rubber, coconut, spices and import substitution in industries such as sugar, dairy & livestock and fisheries.

Island wide development of irrigation systems to facilitate cultivation and for usage by people, with prime focus on providing quality drinking water.

Encourage exploration of hydro potentials, solar and other renewable energy sources

Implement an environment conservation initiative targeting to preserve natural resources, rain forests, reservoirs , ocean resources wildlife.

Approaching a path to a technology revolution, through quality education and skills development.

Aim to promote knowledge services industry to a billion dollar industry with 150,000 direct employment in the next 3 years.

Incentives extended to private organizations engaged in research and development.

Establish 20 vocational technical university colleges to cater to the skill demands of international markets.

Align skills education and university education to ensure prompt employment and overall to focus on human resource development.

Incentives provided to reduce cost of broadband facilities and focus on providing enhanced training programmes to improve the quality certification in the IT and BPO industry.

Liberalization of exchange control

Investment into unit trusts via foreign direct investment

Opening up of Foreign Currency Earners Accounts by persons who provide goods and services for foreign currency.

Liberalizing foreign borrowing regulations


Focus of Tax Proposals

Incentives provided to domestic industries

Incentives provided mainly to undertakings in agriculture, dairy & livestock and export industries.

Increased import levies to protect domestic industry and to provide confidence in local goods and services.

Incentives for research and development in order to enhance research in agriculture, health and IT sector.

Encouragement for use of renewable energy.

Concessionary rate of income tax for undertakings operating mini hydro power projects or other alternative energy source.

100% allowance for depreciation for equipment acquired for energy efficiency purposes.

Investment in sustainable energy sources added as qualifying sector for loan advances from Investment Fund Accounts.

Incentives provides to SMEs. Exemption from VAT and NBT (including wholesale or retail) if annual turnover/supplies less than Rs 12 Mn

Annual turnover for application of concessionary tax rate increased to Rs 500 Mn.

Exoneration from non compliance of tax laws provided monies re-invested in business.

Income Tax holidays

Generation of revenue via indirect tax

VAT has been extended to businesses of wholesale and retail making supplies of more than Rs 500 Mn per quarter.

As in the previous years, this years budget proposals too indicate that a significant portion of state revenue would be generated via indirect taxes.

Simplification and clarity Amendments to be incorporated to further simplify the SVAT scheme.

On WHT on interest income from corporate debt security

Taxation of BOI registered enterprises after the expiry of tax holiday

Ambiguities in the Tax Appeals Commission Act

Rulings/clarifications on tax issues to be issued within 6 months.

Detailed Analysis of Tax Proposals

Income Tax

Value Added Tax

Customs Duty

Stamp Duty

Direct and Indirect Taxes

Exchange Control Regulations

Real Property Transaction


Income Tax Determination of Business Profits - Deductions

Depreciation Allowance Proposed

It is proposed to accelerate the capital allowance deduction on plant, machinery & equipment as follows:

50% allowance would be extended to plant, machinery & equipment acquired for technology upgrading purposes or for the purpose of introducing new technology.

100% allowance for plant, machinery & equipment acquired for energy efficient purposes which provides more than 30% of the total requirement of the power generation from alternate energy resources.

100% allowance for expenses incurred on establishment of Broker Back Office system to be compliant with the CSE requirements in relation to the risk management systems.

KPMG Comments

Currently depreciation allowance is granted at 33-1/3% and 50% respectively. The said proposal seeks to grant an incentive to adopt new technology and the use of alternate energy resources.

Deductibility of research & development expenditure

Proposed

Proposal seeks to grant a triple deduction for expenses carried out via any private institution.

KPMG Comments

At present a double deduction is afforded for research and development carried out via any private institution and a triple deduction if such is carried out through a Government agency.

Deductibility of special levies Proposed

Proposal seeks to grant deduction for special levies paid by Public Corporations and Government owned business undertakings to the Government.

KPMG Comments

At present the said levies are not specifically precluded from deduction the amendment may be to clarify the matter.


Income Tax Exemptions Source Specific Exemption

Interest income on bonds to a non-resident

Proposed

It has been proposed to exempt interest income earned by non residents on investment in bonds.

KPMG Comments

Currently the said exemption is granted for foreign loans .The said scope expansion seeks to encourage foreign investment.

Interest exemption on corporate debt securities

Proposed

Interest income and Withholding Tax on corporate debt securities listed in Stock Exchange on or after 1.1.2013 will be exempt from income tax.

KPMG Comments

The proposal seeks to encourage listing of debt securities in stock exchange.

Interest income on municipal bonds

Proposed

Interest income on municipal bonds issued with the approval of the General Treasury will be exempt from income tax.

KPMG Comments

The proposal seeks to increase the borrowing capacity of the Municipal Authorities.

Interest income on bonds and debentures

Proposed

Withholding tax on interest income earned from investment in bonds and debentures listed in the Colombo Stock Exchange will be exempt.

KPMG Comments

Withholding tax on interest income from bonds and debentures is removed to encourage companies to raise capital via debt instruments.


Income Tax Exemptions Source Specific Exemption

Offshore Business Proposed

Effective from 1st April 2012 it has been proposed to exempt off-shore businesses which entails the procurement of goods from one country to another country ( other than through Sri Lanka).

KPMG Comments

Presently this provision is contained in the English version of the tax law. However, there is inconsistency with the Sinhala version. This proposal seeks to clarify the matter.

Listing of shares with effect 1.4.2013

Proposed The tax payable by any company listing its shares on or after 1.4.2013, with more than 20% of its shares issued to the general public , will be reduced by 50% for the year of assessment in which such shares are listed and two Years of Assessments immediately succeeding that Year of Assessment.

KPMG Comments The said proposal seeks to encourage companies to list in the Stock Exchange and issue shares to public.

Royalty income, franchise fee and designing fee

Proposed Royalty, franchise fee or any payment for designing, made to a foreign collaborator, by a BOI registered company which enjoys a tax holiday under Section 17A or Section 16D of the Inland Revenue Act is exempt from income tax.

The said exemption will be granted provided the following conditions are met:

- Foreign investment in the said BOI company exceeds USD 50 Mn.

- Services availed are essential to carry out activities in Sri Lanka

- Services are not obtainable in Sri Lanka.

KPMG Comments

Proposal intimates that the said exemption would be granted provided the BOI is satisfied that the company meets the above criteria.


Income Tax Personal Tax - Exemptions

Undertaking exempt under Section 16D or 17A of the Inland Revenue Act

Proposed The income from emoluments arising in Sri Lanka to any non-citizen individual who is an expert and brought to Sri Lanka by a BOI registered company enjoying a tax holiday, will be exempt on the meeting of the following conditions.

The total investment should be out of foreign direct investment exceeding US$ 50 Mn. The number of experts should not exceed five Services are essential to carry out the activities of the company.

KPMG Comments Similar incentives were granted in the past to BOI companies.

Offshore income to a resident Proposed The profits and income derived from any source outside Sri Lanka by an individual who is a resident and citizen of Sri Lanka, will be exempt from income tax, if such income is remitted to Sri Lanka through a bank in Sri Lanka.

KPMG Comments

Presently, exemption is for profits and income earned in foreign currency by any resident company, any resident individual, or any partnership in Sri Lanka from services rendered in or outside Sri Lanka to any person or partnership outside Sri Lanka and rendered in the course of carrying on any trade, business, profession or vocation, if such profit and income is remitted to Sri Lanka through a bank.

Offshore income to a permanent resident

Proposed The present foreign income exemption applicable to a citizen of Sri Lanka who also holds citizenship of another country will be extended to an individual who is a citizen of Sri Lanka and has a permanent residency status in another country.

KPMG Comments

At present, Section 15 exempts such income only for a dual citizen (i.e. of Sri Lanka and another country).


Income Tax Personal Tax - Concessionary Rates

Employment income accruing to pilots

Proposed The maximum rate of income tax applicable to pilots on the profits from employment referred to at Section 40 A and the qualified employees referred to at Section 40 B, will be reduced to 16%.

KPMG Comments Currently, income is liable to tax at 20%.

Employment income accruing to IT related service professionals

Proposed The IT professionals are liable to income tax at a maximum income tax rate of 16%.

KPMG Comments Presently, the maximum rate of income tax applicable is 24%.

Compensation for loss of office Proposed The maximum rate of income tax applicable to compensation for loss of employment in terms of a scheme, which is not uniformly applicable to all employees will be reduced to 16%.

KPMG Comments Presently, the rate of income tax applicable is 20%.

Tax concessions to SME Sector

Proposed Any individual who returns from foreign employment and invests savings to commence new businesses will be exempt from all taxes payable on turnover and on profits from such business for a period of 5 years.

KPMG Comments

This proposal is to entice workers returning to employ their funds in the SME sector.


Income Tax Administrative Provisions

Residency rule Proposed

The present requirement for a person to become a non-resident is absenteeism from Sri Lanka for an unbroken period of 365 days. This is to be reduced to 183 days.

KPMG Comments

This proposal makes it easier for an individual to become non-resident giving him/her greater flexibility of movement between countries and reduce exposure for tax.

WHT on corporate debt securities

Proposed

Withholding tax on corporate debt securities that carry a floating interest rate will be at the point the interest is paid. In all other instances, withholding would be at the time of issuance.

KPMG Comments

This proposal will enable the companies to issue corporate debt securities that carry floating rate since presently such was not possible due to withholding provisions.

Time bar for assessments Proposed

The time bar period is to be reduced to 18 months effective from the Year of Assessment commencing from 1st April 2013.

KPMG Comments

Presently, time bar provision is two years from the filing of the tax return.

Request for rulings Proposed

Any request for an administrative ruling on interpretations to be dealt with, within six months.

KPMG Comments

This is to expedite the process, as currently tax payers have experienced long delays in obtaining feedback in the absence of a requirement to provide a ruling in a timely manner.


Income Tax Administrative Provisions

Revenue Administration Proposed All large tax files to be brought under one consolidated unit.

Revenue Administration management Information System to be implemented at the Department of Inland Revenue by 2014.

KPMG Comments

The proposals are to intensify tax audits and information gathering by the Department of Inland Revenue.

Specific provisions for administrative enforcement of transfer pricing

Proposed It has been proposed to introduce specific provisions for the determination of arms length price of domestic inter company transactions and provisions relating to advance pricing arrangement.

KPMG Comments

Provisions have already been introduced with regard to arms length pricing methodologies which are consistent with international principles. Hence it is interesting to know what changes would be made for the domestic context.


Value Added Tax Imposition and Exemptions

Chargeability - Wholesale and retail businesses

Proposed

Any person or partnership carrying on a business of wholesale or retail trade will be liable to register for VAT, provided turnover (including exempt turnover/supplies) per quarter is not less than Rs. 500 million.

Chargeability to VAT will be limited to liable turnover

KPMG Comments

Currently the business of wholesale and retail trade is specifically excluded from chargeability for VAT.

Restriction/ Extension on value added services

Proposed

VAT exemption which results in the improvement of quality, character or value of any fabric or garment will be:

restricted to services provided to non-exporters

extended to services related to yarn

KPMG Comments Presently there is no restriction to whom the services should be provided and includes services only in relation to fabric or garment.

Threshold for chargeability

Proposed

Liable turnover less than Rs. 12 million per annum will be exempted from VAT.

KPMG Comments

The current threshold for chargeability is Rs. 650,000 per quarter or Rs. 2,500,000 per annum. However, as an incentive to SMEs, this concession has been granted.


Value Added Tax Administrative Provisions

VAT Suspension Scheme Proposed

Changes to the SVAT Scheme will be incorporated into the VAT Act with appropriate guidelines.

The guidelines issued will be regularised through Gazette notification.

SVAT registration for the identified persons will be made mandatory and penal provisions will be introduced for non compliance with the statutory requirement of SVAT scheme.

Tax audits on SVAT system, which was introduced last year will be expanded.

KPMG Comments

This would provide legislative enforceability of the SVAT scheme. Since SVAT registration was not mandatory until now enforcement of same was an issue to the authorities.

Payment of VAT and filing of returns

Proposed

Payment of VAT 20th day from the end of the relevant taxable period.

Filing of returns 30th day from the end of the relevant taxable period.

KPMG Comments

Presently both payment and filing of VAT returns are due on the 20th day from the end of the taxable period.


Stamp Duty

Exemptions Proposed

Instrument of transfer of stocks transferred by any person to a margin trading account and vice versa will be exempted.

KPMG Comments

Presently the transfer of shares is liable to Stamp Duty unless Share Transaction Levy is paid on the transaction.

instrument Proposed Prevailing

Affidavit Rs. 250 Rs. 100

Policy of Insurance Rs. 1 of every Rs. 1,000 or part thereof the aggregate of the premia payable on the policy

Rs. 0.50 of every Rs. 1,000 or part thereof

Notary warrant Rs. 2,000 Rs. 1,000

Periodic license to carry on trade, business, profession or vocation.

Rs. 2,000 or 10% of license fee whichever is less Rs. 1,000 or 10% of license fee whichever is less

License for sale of liquor Rs. 20,000 Rs. 10,000

Demand for usage of a credit card Rs. 15 for every Rs. 1,000 or part thereof Rs. 10 for every Rs. 1,000 or part thereof

Stamp duty has been revised on the following instruments as specified below:


Direct and Indirect Tax Small and Medium Term Enterprises

Concessionary rate of Income Tax

Proposed Currently, any manufacturing and service undertaking with an annual turnover threshold not exceeding Rs.300 Mn. is considered a SME and entitled to a concessionary tax rate of 10%. It is proposed to increase this turnover threshold to Rs. 500 Mn.

KPMG Comments This proposal is very likely to incentivise companies to grow their business to formidable entities. Currently, companies with a turnover in excess of Rs. 300 Mn. is liable to tax at 28%.

Exemption from VAT & NBT Proposed

Any person or partnership with an annual liable turnover not exceeding Rs.12 Mn. from all businesses carried on will not be liable to VAT or NBT.

KPMG Comments

The proposal is likely to reduce the tax compliance obligation on small scale entities.

Exoneration on non payment of tax and tax incentive on reinvestment

Proposed

Income tax and other indirect taxes due from a person carrying on a business which derives a turnover of less than Rs.300 Mn. a year will be exonerated on the condition that past earnings prior to 1st April 2011 are invested into the business prior to 31 March 2014 and tax laws are complied with thereafter. Profits derived from such business will qualify for a 5 year income tax holiday.

KPMG Comments

The proposal seeks to entice businesses operating outside the tax net to voluntarily operate within same.

Incentives to individuals returning from overseas

Proposed

There is also a proposal to grant incentives to a person returning to Sri Lanka and investing foreign currency earnings into a new business venture. This is discussed in slide 10.


Direct and Indirect Tax Interpretations and Proposed Amendments

Contradictions between Inland Revenue Act and provisions of BOI Agreements

Proposed It is proposed that where provisions of BOI agreements are comparatively disadvantageous compared to the Inland Revenue Act, the provisions of the Inland Revenue Act would apply.

KPMG Comments This proposal seeks to eliminate the unfair situation faced by BOI companies where agreements prescribed rates of tax which existed at the time of granting incentives, which are now comparatively higher than the prevalent rates.

Cess to be covered under SDP law

Proposed Amendments due to be introduced to the SDP law to cover Cess, so as to provide for an exemption from cess on raw materials not available in Sri Lanka for the required quantity imported during project implementation period.

KPMG Comments The SDP law provides for exemption from 10 laws and Cess would be 11th law which can be exempted under same.

Hub Services Proposed It is proposed that amendments to the Finance Act No.12 of 2012 would be made to provide for the following:

(1) Regulations on the basis in which the guideline and approval would be granted

(2) Determine scope of the exemption

(3) To declare the relevant areas to be brought within this law.

KPMG Comments

Amendments were introduced last year to promote Sri Lanka as a hub service destination where exemptions were provided under Customs, Exchange Control and Import & Export Control laws for specified activities. This amendment seeks to introduce administrative guidelines necessary for the implementation of same.

Telecommunication Levy Proposed

Telecommunication levy in respect of services provided through internet / broad band to facilitate IT / BPO sector, to be reduced to 10%.

KPMG Comments

Currently, telecommunication levy on these services are imposed at 20%.


Direct and Indirect Tax Institutional Exemption

Institutional

Exemptions

Proposed

Proposal seeks to exempt the profits and income other than dividends and interest of the following institutions:

College of General Practitioners of Sri Lanka established under Act No. 26 of 1974.

Sri Lanka Social Security Board established under Sri Lanka Social Security Board Act No.17 of 1996.

Public Corporations who provide free services via funds voted by Parliament from the Consolidated Fund or loan arranged through the Government.

Sri Lanka Savings Bank which is merged with National Development Trust Fund

Lankaputhra Development Bank

Income Tax

Proposed Profits and income of the following would be exempted

Central Bank of Sri Lanka (Including Financial VAT), and

Services by any public corporation provided free of charge on behalf of the Government, out of funds voted by Parliament from the consolidated Fund, or out of any loans arranged through the Government.

Value Added Tax (Including Financial VAT)

Nation Building Tax

Economic Service Charge



Unit trust Proposed

It has been proposed to permit , Sri Lankans working and living abroad and small time investors to directly invest foreign currency in Unit Trusts without channelling investment through Securities Investment Account (SIA).

KPMG Comments Previously investment was mandated to be channelled through SIA. However, the proposal seeks to popularize Unit trusts among Sri Lankans residing abroad and small time investors where they can directly invest in Unit Trusts.

Sri Lankan firms to borrow from foreign sources

Proposed It has been proposed to allow corporate entities to borrow up to US$ 10 million per annum over the next 3 years without prior permission of the Exchange Control Department.

KPMG Comments Previously borrowing in foreign currency was restricted to specified industries . The proposal seeks to relax regulations further.

Commercial Banks to borrow from foreign sources.

Proposed It has been proposed to permit licensed Commercial Banks to borrow up to US$ 50 million each year for 3 years without prior permission of the Exchange Control Department.

KPMG Comments The intention is to improve the mobility of the funding requirement from global financial markets.

Permission to accept foreign currency

Proposed

It has been proposed to permit the service providers who are engaged in the supply of goods and services to tourist and foreign businesses to accept foreign currency provided such earnings are deposited in the banking system within 7 working days of the transaction.

KPMG Comments The proposal is a further relaxation of regulation which permits goods and service providers to hold Foreign Exchange Earners account.



Foreign Exchange Earners account

Proposed

It has been proposed to permit all residents to maintain Foreign Exchange Earners Accounts in currencies of their choice in licensed commercial banks to deposit foreign exchange earnings from services provided to non residents.

KPMG Comments

The said proposal is a further relaxation of the prevailing guideline in force, to allow all residents to open the account . The current regulation prescribes eligible persons, permitted credits and debits and permitted currencies.

Transfer of foreign savings of resident Sri Lankans and expatriates

Proposed

It has been proposed to permit transfer of foreign savings of resident Sri Lankans as well as expatriates into investments in instruments up to US$ 5 million without the approval of the Exchange Control Department.

KPMG Comments

Currently the investment in instruments outside Sri Lanka requires special approval from Exchange Control Department . The proposal seems to relax such restrictions provided the investment is made via foreign savings.


Real Property Transactions

Prohibition on sale of State land

Proposed

It is proposed to prohibit the sale of State land to foreigners.

KPMG Comments

In the recent past the government has been only leasing land to foreign investors . This proposal is likely to provide enforcement requiring same

Leasing of land to a foreign person .

Proposed Foreigner leasing state land are to be charged a 100% tax on the lease value as determined by the Government Chief Valuer for the entire lease period. The tax is payable upfront unless the prescribed investment requirement by way of foreign remittance is exceeded.

KPMG Comments

Previously the payment of the 100% tax was limited only to the purchase of land.

Concessions applicable to foreign investors on land leases.

Proposed It is proposed to give concessions on leasing of lands to foreign investors who form an equity partnership with local investors holding at least 30% of capital.

KPMG Comments

No details were intimated on concessions to be provided.

Concessions applicable to a local investor when leasing government land.

Proposed

It is proposed to give a 25% discount on the lease rental determined by the Government Valuer for the entire term, to all local investors who lease state land.

KPMG Comments

The intention seems to provide relief to local investors seeking to carry out investment projects.


Tax Appeals Commission Act

Extension of time bar on concluding appeals

Proposed

To extend the time bar on appeal s transferred from the Board of Review to the Tax Appeals Commission

KPMG Comments

There was a technical error in the extension via the previous amendment and this is to rectify same.

Expanding the scope of tax laws for hearing

Propose To make provisions to include Inland Revenue Act No. 28 of 1979, No. 38 of 2000 and Finance Act No. 11 of 2004 to the list of specified Acts in order to commence hearings on appeals made under such statutes.

KPMG Comments

Currently the Commission is not empowered to hear appeals under the above statutes as such statutes have been omitted from the schedules in the Tax Appeals Commission Act.

Provisions enabling the referring of determinations from the Tax Appeals Commission to the Court of Appeal

Proposed

It has been proposed to make provisions in the Tax Appeals Commission Act, to enable the referring of determinations of the Commission to the Court of Appeal

Currently, the provisions of the VAT, ESC, Stamp Duty and NBT Act on the submission of appeal to the Court of Appeal, have been repealed under the Tax Appeals Commission Act. The proposal seeks to rectify this omission.


Tax Appeals Commission Act

Introduction of a time frame to appeal to the Tax Appeals Commission

Proposed

The time frame to make an appeal to the tax appeals commission is to be amended to be one month from the date of the transmission of reasons for the determination, by the CGIR

KPMG Comments There is an error in the current statute which sought to introduce this provision.

Deposit/ bank guarantee made to the Commission

Proposed Provisions are to be introduced to refund any deposit or enable the commission to remit same to the CGIR.

KPMG Comments

There is no provision relating to monies paid to the Commission.

Industry Impact

Agriculture and Forestry

Financial services

Automobile

Sports

Alcoholic Beverages and Tobacco

Exports

FMCG

Power and Energy

Education

Betting & Gaming

Poultry, Fishery and Dairy

Capital Markets & Unit Trust

Industrial


Industry Impact Agriculture and Forestry

Income Tax

Income Tax exemption

The profits and income of an undertaking which cultivates renewable energy crops in agricultural land will be exempt from tax for a period of 10 years.

Value Added Tax

It is proposed to exempt the the;

The supply of locally manufactured products out of coconut waste (coco peat, coir fiber, grow pellets, grow bags, twist fiber, coconut husk).

Cess

It is proposed to increase / impose cess on the following;

It is proposed to reduce / remove cess on the following

Item H.S. Code No

Cut flowers, flower buds and foliage

06.03 , 06.04

Fresh, preserved, dried vegetables and fruits/ other vegetables and fruit products

07.02, 07.04, 07.05, 07.06, 07.07, 07.08, 07.09, 07.10, 07.11, 07.12, 07.14, 08.01 ( except 0801.31.10 and 0801.31.90), 08.02, 08.03, 08.04 (except 0804.10), 0805.10.20, 0805.40, 0805.50, 0805.90, 0806.20, 08.07, 0808.30, 0808.40, 08.09, 08.10, 08.11, 08.12, 08.13, 08.14, 20.01, 20.02, 20.03, 20.04, 20.05, 20.06, 2007.91, 2007.99, 20.08 (except 2008.30.10 and 2008.50.10), 20.09 (except 2009.11.10).

Item H.S. Code No

Groats and meal of maize 1103.13

Natural honey 04.09


Industry Impact Agriculture and Forestry

t is proposed to increase cess on the exports of the following

Special Commodity Levy

It is proposed to revise Special Commodity Levy on the following;

Item H.S. Code No

Chilies Crushed or ground 0904.22.10

Black gram 0713.31.90

Grapes 0806.10

Coriander crushed or ground 0909.22

Turmeric - crushed 0910.30.90

Ground Nut shelled 1202.42

Mustard seeds 1207.50

Seeds of cumin 0909.30

Palm oil crude and refined 1507.10, 1507.90, 1511.10, 1511.90.10, 1511.90.20, 1511.90.90, 1512.11, 1512.19, 1513.11.11, 1513,11,19, 1513.11.21, 1513.11.29, 1513.19.10, 1513.19.90

Item H.S. Code No

Cinnamon 0906.11

Cloves 0907.10.


Industry Impact Financial Services Banking Sector

Income Tax

interest Income to Development Banks

Investment income derived by DFCC Bank and NDB on to their long term funding projects which have been funded by a foreign borrowing to be exempt from Income Tax.

Investment Fund Account The list of qualifying sectors for lending through the Investment Fund Account to be expanded to include:

Investment in sustainable energy sources

Investment in women entrepreneurship venture capital projects where the investment should not be in excess of Rs. 10 Mn.

Funds lying in the Investment Fund Account, not invested as per the guidelines set out by the Central Bank of Sri Lanka/ Department of Inland Revenue, by 30.06.2013 will be to be transferred to the Government Consolidated Fund .

Introduction of New Levy

It is proposed to introduce a special levy of 1% on profits of a banking institutions and the levy is to be transferred to the National Insurance Trust Fund in order to establish an insurance scheme for farmers.

Other proposals

Banks have been requested to defer the recovery of related agricultural loans till after the Maha harvest

Interest charged on such loans to be waived


Industry Impact Automobile

Value Added Tax

Import or supply of following items will be exempt from tax:

Excise Duty Special Provisions Duty on the following items will be revised:

Finance Act Definition of semi-luxury dual purpose motor vehicle is proposed to exclude any single cab or light truck less than g.v.w 3,500 kg used for transport of goods. Such vehicles will not be liable to semi-luxury dual purpose motor vehicle levy payable with effect from 1.1.2013.

* The budget speech has also intimated that duties on all vehicles imported under concessional schemes will be increased by 10 20 percent.

items H.S. Code No.

Bowsers 8704.23.10, 8704.23.20, 8704.32.10, 8704.32.20

Bulldozers, graders, levelers, excavators 84.29

Fire fighting vehicles 8705.30.10

Road tractors for semi trailers 8701.20.10

items H.S. Code No.

Go Carts (to be exempt) 8703.21.62

Trishaws 8703.21.51, 8703.21.54, 8703.21.55, 8703.31.50, 8703.31.60

Motor cars (less than 1,000 cc) 8703.21.69, 8703.21.79, 8703.21.92,8703.21.93

Trucks g.v.w. is between 5 & 20 tonnes 8704.22.30, 8704.22.40, 8704.32.30, 8704.32.40

Trucks g.v.w. is exceeding 20 tonnes 8704.23.30, 8704.23.40

Single Cabs 8704.21.81, 8704.21.82,8704.31.71, 8704.31.72

Specially designed racing vehicles (to be exempt)


Industry Impact Sports

Income Tax

Advertising costs incurred on or after 1st August 2012 on specific sponsorship of international sports events approved by the Minister of Sports are to be fully deductible.

Value Added Tax

The supply of hotel accommodation to a sportsman, an organizer or sponsor of any sport event, who comes to Sri Lanka to participate in any sport event or activity connected with sport, is to be exempt from VAT.

Nation Building Tax

Import of goods for any international sports event approved by the Minister of Finance will be exempt from NBT.

Excise (Special Provisions) Act

Go carts and specially designed racing vehicles are to be exempt from Excise Duty.


Industry Impact Alcoholic beverages and tobacco

Excise duty Excise duty rates applicable to liquor and ethyl alcohol have been revised via gazettes1778/40 and 1778/42 effective 6 October 2012.

Excise duty rates applicable to cigarettes have been revised via gazette 1778/41 effective 6 October 2012.

Description Revised Prevailing

Cigars, cheroots and cigarillos, containing tobacco Rs. 7,000 per kg net weight Rs. 5,500 per kg net weight

Cigarettes, each not exceeding 60 mm in length Rs. 4,612 per 1000 cigarettes Rs. 4,037 per 1000 cigarettes

Cigarettes ,each exceeding 60 mm but not exceeding 67 mm in length Rs. 9,258 per 1000 cigarettes Rs. 8,112 per 1000 cigarettes



Cigarettes ,each exceeding 84 mm in length Rs. 18,500 per 1000 cigarettes Rs. 17,100 per 1000 cigarettes

Description Revised Prevailing

Liquor other than toddy or liquor made from any cereal (Wine) Rs. 898 per Proof Litre Rs. 838 per Proof Litre

Molasses, Palmyra, Coconut and Processed Arrack Rs. 1,043 per Proof Litre Rs. 983 per Proof Litre

Country made foreign spirits Rs. 1,183 per Proof Litre Rs. 1,123 per Proof Litre

Rs. 100 per Bulk Litre Rs. 100 per Bulk Litre Rs. 90 per Bulk Litre

Malt liquor ( Absolute strength less than 5%) Rs. 116 per Bulk Litre Rs. 106 per Bulk Litre

Spirits to be used in the specified purpose as prescribed by gazette

- Up to 10,000 litres per month

- 10,001 to 20,000 litres per month

- above 20,000 litres per month

Rs. 370 per bulk litre







Industry Impact Exports

Income Tax

Deemed Exports

The following is proposed to be considered as deemed exports and the profits and income therefrom be taxed at the concessionary rate of 12%:

Supply of locally manufactured goods or provision of services to foreign ships for payment in foreign currency

Sale of any product manufactured in Sri Lanka for payment in foreign currency through a Foreign Exchange Earning Account authorised by the Central Bank of Sri Lanka

Sale of locally manufactured goods by an export oriented BOI enterprise upto the quantity approved by the BOI as being for import replacement to :

(a) A BOI company enjoying a tax holiday under section 16C, 16D or 17A of the Inland Revenue Act or the Strategic Development Projects Act which is permitted to import project related materials on duty free basis under the BOI agreement during the project implementation period or

(b) Any person eligible to import specific goods on duty free basis under any Government Authority Non traditional goods The definition of non traditional goods "is proposed to be extended to include organic tea in bulk. Profits from export or indirect export of organic tea in bulk will be taxed at the concessionary rate of 12%. Determination of profits

The capital allowance rate on plant , machinery or equipment acquired on or after 1.04.2013 for any export industry , is proposed to be increased to 50% (Prevailing 33 1/3%)

It is proposed to allow the actual expenses incurred on product safety testing in Handlooms and similar domestic resource based value added products.

Export oriented manufacturers

It has been proposed to grant permission to the export oriented manufacturers of ceramic or garment products , to increase domestic sales upto 40% of total sales subject to the following;

VAT and NBT will be levied in lieu of all indirect taxes

Income tax will be charged at the concessionary rate of 12%

The enterprise will be considered as an exporter under the SVAT scheme.

Current chargeability to VAT of Rs. 25/- per piece on supplies for the local market will cease.


Industry Impact Exports

Rebates

Where Cess and Special Commodity Levy has been paid on imports used for export, such should be repaid in the form of a rebate under the said laws.

CESS It is proposed to increase the Cess on export of following items :

Port and Airport Development Levy

It is proposed to reduce the levy from 5% to 2.5% on import of consumables for the textile and apparel industry under following HS codes, with a view to enhancing the competitiveness of domestic apparel products in the global markets

0 Industry Item HS Code

Agriculture

Cinnamon Cloves

0906.11 0907.10

Mineral

Natural sands (waste, Other, Other), Quartz, Other, Clay, Phosphate, Stones (emery, corundum), Stones (Gravel, Pebbles, etc), Mica (Cured, Waste), Steatite( Not crushed, Crushed), Other minerals, Ilmanite, Rutile Titanium, Zirconium, Niobium, tantalum, vanadium

2505.10.10, 2505.10.90, 2505.90, 2506.10.10, 25.07, 2510.10.10, 2513.20, 2517.49, 2525.10, 2525.30, 2526.10, 2526.20, 25.30, 2614.00.10, 2614.00.20, 2614.00.90, 2615.10 2615.9

HS Code Description

84.48.51, 84.52.30, 84.52.90, 84.51.90, 34.02, 34.02.11, 34.02.12, 34.02.03, 4.02.19

Snikers,needles and other articles used in forming stitches, Sewing machine needles, Other parts of sewing machines, Ironing parts, Organic surface active agents, Anionic, Cationic, Non ionic, Other


Industry Impact FMCG

Cess

It is proposed to increase / Impose cess on imports on the following;

Item H.S. Code No

Edible oils 15.08, 15.09, 15.10, 1512.21, 1512.29, 1513.21, 1513.29, 15.14, 15.15, 15.16.20

Margarine 1517.10

Sausages and preserved meat products 16.01, 1602.32, 1602.50, 1609.90, 16.03

Honey and jaggery 17.02

Confectionaries 17.04, 18.06

Bakery products 19.05

Food preparations 21.03, 21.04, 21.05

Mineral water 22.01, 22.02

Vinegar 22.09

Salt 25.01

Soap 34.01 (except 3401.20)

Handles for toothbrushes 3926.90.60

Soap wrappers 48.11 (excep4811.10)


Industry Impact Renewable Energy and Waste Management

Income Tax

Exemption on profits and income from cultivation of renewable energy crops in agricultural lands.

Cessionary rate at 12% proposed for profits and income from operating any mini hydro power project or alternative energy source

100% depreciation to be allowed on energy efficient plant machinery or equipment acquired after 1st April 2013 , if more than 30% of the total requirement of the power generation is out of alternative energy resources.

Value Added Tax

Import or supply of raw material for the manufacture of energy saving bulbs (HS Code 8543.9) to be exempt from VAT

Nation Building Tax It is proposed to exempt following from NBT;

Solar panel modules, accessories or solar home systems for the generation of solar power energy (HS Code Nos. 8501.31.10, 8541.40, 8513.10.10, 9405.10.10, 9405.10.20, 9405.20.10, 9405.20.20, 9405.40.30, 9405.40.40, 9032.89.10 and 8539.31.20)

Coal (HS Code Nos. 2701.11, 2701.12 and 2701.19)

Ports and Airport Development Levy

Import of items specified under NBT to be exempt for PAL as well.

Customs Duty

Rates have been reduced to 5% on day lighting devices which capture sunlight transfer & diffuse light in a building interior (HS Code Nos. 7610.90.10 and 9405.50.20)

Waterless urinals (HS Code 3922.90.10) proposed to be removed

Cess

Proposed impose of cess on Lubricants (HS Code 2710.19.890)

Cess on Import of waterless urinals ( proposed to be reduced/removed

Other proposals and incentives

Allocation of Rs.250mn to rehabilitate existing water schemes

Improve sanitary facilities through the Deyata Kirula 2013


Industry Impact Education

Income Tax

Exemption on any private school which is;

- assisted by the Government

- not established under the Companies Act

- registered with the Ministry of Education and

- mandated to follow the government curricula set and circular issued by the Ministry of Education

Currently institutions, including charitable institution providing educational services are taxed at the rate of 10%.

Every school falling under the ambit of charitable institutions used to enjoy an exemption on its profits from business up to 31 March 2011.


Education sector allocated with Rs. 306 billion i.e. 4.1% of National Income.

Budgetary allocation of Rs.4000mn for university education expansion the bulk of which is on account of salaries of university staff.

Comprehensive transformation of certain universities.

Allocation of Rs.900mn for recruitment and training of teachers within respective localities

Set up technical colleges attached to vocational technical university colleges

Agricultural training schools to be equipped with modern technology and research facilities.

Develop rural schools and provide students with food, uniforms and shoes.


Industry Impact Betting and Gaming

Income Tax

No person is permitted to carry out the business of betting and gaming without registering with the Inland Revenue Department for tax purpose.

Betting & Gaming Levy

Bookmakers:

Gaming - Gaming including rudjino Rs 100 million per year

In lieu of all indirect taxes apart from the taxes mentioned above a 5% all inclusive levy will be imposed on gross collection as betting and gaming on a monthly basis.

Bookmakers Proposed Rs.

Prevailing Rs.

Betting business through agents 2,000,000 per year 1,000,000 per year

where live telecast facilities are used 500,000 per year 300,000 per year

where live telecast facilities are not used 25,000 per year 50,000 per year


Industry Impact Poultry, Fisheries and Dairy

Income Tax

Poultry - The tax rate applicable on profits and income from poultry farming will be reduced to 10%

Cess

Cess has been increased or imposed on import of following dairy products.

Customs Duty

It is proposed to increase the customs duty applicable on import of milk powder to enhance the local livestock industry, under following HS codes. Special Commodity Levy

To encourage local industry, the levies applicable on canned fish and Maldive fish imported under following HS Codes will be revised


Budgetary provision of Rs.2,000Mn for the development of four fisheries harbours.

Item HS Code

Dairy Products 04.03, 04.04, 04.05, 04.06

Birds Eggs 04.08

Edible Products of animal origin 04.10

Milk Powder category HS Codes

In powder, granules or other solid forms, of a fat content, by weight, not exceeding 1.5% 0402.10

Not containing added sugar or other sweetening matter 0402.21

Other 0402.21

HS Codes

Canned Fish 1604.11, 1604.12, 1604.13, 1604.14, 1604.15, 1604.16, 1604.17, 1604.19, 1604.20

Maldive Fish 0305.59.10


Industry Impact Capital Markets & Unit Trust

Income Tax

Companies that Lists - The tax payable by any company listing its shares on or after 1.4.2013, with more than 20% of its shares issued to the general public , will be reduced by 50% for the year of assessment in which such shares are listed and two years of assessments immediately succeeding that year of assessment.

Share Brokers - Expenses incurred on establishment of Broker Back Office system to be compliant with the CSE requirements in relation to the risk management systems will be allowed in full.

Interest Exemption - Interest income on corporate debt securities listed in Stock Exchange on or after 1.1.2013 will be exempt from income tax

Unit Trust - The present tax rate of 28% will be reduced to 10% on unit trust management companies

Value Added Tax

The supply of services to a unit trust by a unit trust management company is proposed to be exempt from VAT.


Industry Impact Industrial

Nation Building Tax

Exemption on import of gems subject to special service fee at rates specified under customs ordinance and on subsequent sale of processed gem. Local sale of unprocessed gems remain taxable.

Customs Duty Following rates have been proposed to encourage local value added industries.

Cess Cess to be increased/imposed on import of Steel (HS Code 7214.20.90 and 7306.61.90), Aluminium wire (HS Code 7605.11) and

prefabricated building (HS Code 94.06)

Item HS Code Proposed

Glass beads 7018.20 Free

Maize Starch 1108.12 15%

Molded or pressed articles of paper pulp 4823.70 5%

Polyester resin 3907.91.00 Free

Pneumatic tyres of rubber

4011.20.10 15% or Rs.70/- per Kg

4011.20.90 15% or Rs.70/- per Kg

4011.10 30% or Rs.140/- per Kg

Wet cleansing Tissues

5601.21.10 30%

5601.21.90 Free

5601.22.10 30%

5601.22.90 Free

5601.29.10 30%

5601.29.90 Free

Structure and parts of structure Iron or steal 7308.90.90 30%

Coated papers printing or graphic purposes 4810.22 5%

4810.29 5%


Effective Dates of Proposed Amendments

Effective Date Type of tax

1st April 2013 Income Tax

Economic Service Charge

1st January 2013 Value Added Tax

Finance Act

Telecommunication Levy Act

Betting & Gaming levy Act

Nation Building Tax

Airport Departure Tax

Stamp Duty

Immediate effect Cess

Ports & Airports Levy

Excise (Special ) Duty

Customs Duty

Special Commodity Levy

All statutory provisions relating to the following taxes are effective from the dates mentioned below unless specified otherwise;


Key Contacts Ms Premila Perera Partner Head of Tax KPMG in Sri Lanka Tel: + 94 11 2343106 E-Mail: [email protected] Ms Shamila Jayasekara Partner Tax & Regulatory KPMG in Sri Lanka Tel: + 94 11 5426503 E-Mail: [email protected] Mr Suresh Perera Principal Tax & Regulatory KPMG in Sri Lanka Tel: + 94 11 5426502 E-Mail: [email protected] Office Contact Address: No. 32A, Sir Mohamed Macan Markar Mawatha, Colombo 3, Sri Lanka Tel: + 94 11 5426426 Fax: + 94 11 2445872, + 94 11 2446058 E-Mail: [email protected] Web: www.kpmg.com/lk

Notes

The information contain herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will be continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

2012 KPMG, a Sri Lankan Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Slide Number 2ContentsFocus of Fiscal Proposals Focus of Tax ProposalsDetailed Analysis of Tax ProposalsIncome Tax Determination of Business Profits - DeductionsIncome Tax ExemptionsSource Specific Exemption Income Tax ExemptionsSource Specific Exemption Income TaxPersonal Tax - ExemptionsIncome Tax Personal Tax - Concessionary Rates Income TaxAdministrative ProvisionsIncome TaxAdministrative ProvisionsValue Added TaxImposition and ExemptionsValue Added TaxAdministrative ProvisionsStamp DutyDirect and Indirect TaxSmall and Medium Term EnterprisesDirect and Indirect TaxInterpretations and Proposed Amendments Direct and Indirect TaxInstitutional ExemptionExchange Control RegulationsExchange Control RegulationsReal Property TransactionsTax Appeals Commission ActTax Appeals Commission ActIndustry ImpactIndustry ImpactAgriculture and ForestryIndustry ImpactAgriculture and ForestryIndustry ImpactFinancial Services Banking SectorIndustry ImpactAutomobileIndustry ImpactSportsIndustry ImpactAlcoholic beverages and tobaccoIndustry ImpactExportsIndustry ImpactExportsIndustry ImpactFMCGIndustry ImpactRenewable Energy and Waste ManagementIndustry ImpactEducationIndustry ImpactBetting and GamingIndustry ImpactPoultry, Fisheries and DairyIndustry ImpactCapital Markets & Unit TrustIndustry ImpactIndustrialEffective Dates of Proposed AmendmentsNotesSlide Number 43

2013 budget analysis - paving the way for development

Documents