budget 2014

Contents1. Overview of Fiscal

Performance

2. Income Tax

3. Value Added Tax

4. Nation Building Tax &TelecommunicationLevy

5. Import and Export PointTaxes

6. Tax Administration

7. Socio EconomicDevelopment Initiatives

1.1Our thoughts on Budget 2014

| Overview of Fiscal Performance

1.1 Government revenue has grown at a faster pace than governmentexpenditure from 2010-2012

Key fiscal performance indicators

Percentage (%) 2010 2011 2012 2013Estimated

2014Budgeted

Revenue and Grants/GDP 14.9 14.5 14.1 13.8 14.8

Tax/GDP 12.9 12.4 12.0 12.1 12.8

Expenditure/GDP 22.8 21.4 20.5 19.7 20

Current Expenditure/GDP 16.7 15.4 14.9 14.1 13.4

Public Investment/GDP 6.4 6.2 5.9 5.8 6.7

Budget Deficit /GDP 8.0 6.9 6.4 5.8 5.2

Source: Department of Fiscal Policy

Total government revenue from 2010 – 2012 has increased from Rs. 834 Bnto Rs. 1,068 Bn at a compound annual growth rate “CAGR” of 13.1% perannum. However, the total revenue as a percent of Gross DomesticProduction “GDP” has declined during the same period from 14.9% to 14.1%indicating that GDP growth has increased at a faster pace compared to thegrowth in revenue.

Total government expenditure growth from 2010 - 2012 has been slowercompared to the growth in government revenue with governmentexpenditure increasing at a CAGR of 10.3%. Current expenditure as apercent of total expenditure has remained stable over the period,approximately at 73% of total expenditure. One of the key movements seenin recurring government expenditure is, expenditure on other goods andservices has increased at a CAGR of 26.1% from 2010 – 2012. Furthermore,expenditure on subsidies and transfer payments has increased at a CAGR of -9.4% and interest expenditure have increased at a CAGR of 7.6%.

1.2 Budget deficit as a percentage of GDP is showing a declining trend

The overall budget deficit has increased during the period from Rs. 446 Bnto Rs. 489 Bn. However, the rate of increase has been less compared to theincrease in GDP. As a result, the budget deficit as a percentage of GDP hasgradually decreased from 2010 – 2012 from 8.0% to 6.4%. A notableobservation is that according to the Department of Fiscal Policy, the budget

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deficit is increasingly being financed from domestic borrowings. In 2010domestic borrowings were 56.3% of total financing requirement, whereas in2012 total domestic borrowings accounted for 63.0% of financing used tobridge the budget deficit.

1.3 Growth in GDP has outpaced growth in total debt

Historical movement of Debt

Source: Central Bank of Sri Lanka

Total debt has increased between 2008 – 2012 from Rs. 3.6 trillion to Rs.6.0 trillion. However, total debt as a percentage of GDP has declined from81.4% to 79.1% during the same period. It is evident from the abovemovement that GDP growth has increased at a faster pace compared to thegrowth in total debt.

1.4 Trade deficit as a percentage of GDP has increased from 2008 -2012

As a % of GDP 2008 2009 2010 2011 2012

Exports 20.4% 17.0% 17.6% 18.0% 16.8%Imports 35.5% 24.5% 27.5% 34.6% 32.9%

Trade balance -15.1% -7.5% -9.8% -16.6% -16.1%Source: Central Bank of Sri Lanka

Sri Lanka’s exports have increased in absolute terms over the years.However, the pace of increase has been slower compared to the overall

20%30%40%50%60%70%80%90%100%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2008 2009 2010 2011 2012(provisional)

Rs. Bn.

Domestic Foreign Total debt as % of GDP


economic growth rate as evident through the decline in exports as apercentage of GDP from 20.4% in 2008 to 16.8% in 2012 as depicted in theabove table.

A similar pattern is seen in the growth of imports. The total values of importshave increased during the last five years. However, the growth in GDP hasoutpaced the growth in imports during the same period resulting in a declinein imports as a percentage of GDP from 35.5% in 2008 to 32.9% in 2012.

An important observation from the above table is the trade deficit as apercentage of GDP has increased from 15.1% in 2008 to 16.1% in 2012. Thisimplies that the growth in imports have outpaced the growth in exports from2008 – 2012.

1.5 Fiscal Performance in 2013

According to the Department of Fiscal Policy, total government revenue isprojected to be Rs. 1,203 Bn for 2013, which is an increase of 12.7% vis avis 2012. However, total government expenditure is expected to reach Rs.1,712 Bn in 2013 by increasing at a slower pace of 10% from 2012.

It is important to note that government revenue and expenditure areexpected to decrease as a percentage of GDP during 2013 with GDP growthcontinuing to outpace the growth in fiscal revenue and expenditure.Nevertheless, the budget deficit as a percentage of GDP is expected todecline to 5.8% of GDP in 2013.


1.6 Summary of Fiscal PerformanceRs Bn

2010 2011 2012 2013Estimated

2014Budgeted

Total Revenue and Grants 834 950 1,068 1,203 1,470

Total Revenue 817 935 1,051 1,183 1,437Tax Revenue 725 813 908 1,052 1,275Income Tax 136 157 173 240 283Taxes on Goods andServices 435 468 520 578 689

Taxes on External Trade 154 187 217 234 303Non Tax Revenue 93 122 143 131 163Grants 17 15 16 20 32Total Expenditure 1,280 1,400 1,557 1,712 1,986Recurrent 937 1,007 1,131 1,225 1,328Salaries and Wages 301 320 348 391 411Other Goods and Services 353 114 140 132 192Interest 196 357 408 445 441Subsidies and Transfers 88 217 235 256 285Public Investment 357 408 444 504 669Education and Health 33 37 46 56 74Infrastructure 324 370 398 448 594Other (13) (14) (18) (16) (11)RevenueSurplus(+)/Deficit(-) (120) (72) (80) (42) 109

Budget Deficit (446) (450) (489) (509) (516)Total Financing 446 450 489 509 516Total Foreign Financing 195 194 181 150 236Foreign Borrowings-Gross 270 178 365 247 332Foreign Commercial 112 110 130 - 98Debt Repayments (75) (88) (184) (97) (96)Total Domestic Financing 251 256 308 359 281Non-Bank Borrowings 204 39 71 105 129Foreign Investments 49 25 106 53 51Bank Borrowings (2) 192 132 201 100

Source: Department of Fiscal Policy


| Income Tax

In the Budget speech delivered in Parliament today the Hon. Minister ofFinance made the following proposals in relation to the taxation ofcorporates and individuals.

2.1 Corporate income tax

§ Qualified export profits

Under sections 51 and 52 of the Inland Revenue Act the concessionary rateof tax of 12% granted for qualified export profits which was to expire on 31stMarch 2014 and 2015 has been extended. Relief is granted under sections51and 52 for profit and income from an undertaking engaged in the exportof nontraditional goods, performance of any ship repair, ship breaking repairand refurbishment of marine cargo and containers, the provision ofcomputer software, computer programs or such other services as specifiedby the Minister by gazette.

§ Profits from certain services to exporters

Services which could be essentially treated as services provided tomanufacturers of goods for export or the export of services or servicesprovided to foreign principals directly and payment received in foreigncurrency will be taxed at the concessionary rate of 12%. Currently onlyservices provided to garment exporters are taxed at the reduced rate of 12%under this section.

§ Services under section 13 (ddd)

Currently services provided by a person or partnership in or outside SriLanka to a person outside Sri Lanka are exempt from income tax if theincome from such services is remitted to Sri Lanka. No change has beenproposed to this concession but it was proposed that such services must beutilized outside Sri Lanka. Currently the law does not make any reference tothe utilization of such services outside or in Sri Lanka.

§ Small and medium industry tax rate

Currently undertakings engaged in the manufacture of goods or theprovision of services and whose turnover is less than Rs. 500 million per

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annum is liable to income tax at the rate of 10% on their profits and income.It has been proposed to increase the rate to 12%. There is no changeproposed to current law with regard to group companies and as such groupcompanies will not be entitled to the reduced rate.

§ Companies listing in the CSE

Currently a concession is available for companies listing in the CSE whichmaintain a minimum public float of 20% to pay income tax at 50% of thecorporate income tax rate for any company that obtains a listing on orbefore 31st March 2014 for a period of three including the year of listing. Ithas been proposed to extend the listing period by a further three year periodif the Company is paying income tax at the rate of 28%. Thus, in respect ofthose companies paying tax at rates below 28% will not be entitled to theproposed concession.

§ Concessions to acquire financial institutions

The cost of acquisition or merger of financial services companies by the maincompany will be allowed as deduction over a period of three years. It is notknown whether the deduction will be available as a deduction against incomeunder section 25 as a normal expense incurred in the production of incomeand also available as a qualifying payment relief under section 34.

2.2 Incentives for professional services

§ Income tax rates

The Hon. Minister has proposed the following incentives for professionals inemployment and those providing professional services.

- Up to Rs. 25 million – maximum rate 12%- Rs. 25 million to Rs. 35 million – maximum rate 14%- Above Rs. 35 million – maximum rate 16%

For this purpose a professional in employment has been defined to mean amedical doctor, engineer, architect, lawyer, pilot, navigation office, softwareengineer, accountant and a researcher or senior academic.

§ Construction of residential apartments

A professional who sets up a consortium with a bank and a constructioncontractor for the construction of residential apartments for his own use isentitled to the following concessions.


- Qualifying payment relief of Rs. 50,000/= per month on therepayment of the loan.

- Stamp duty on the transfer of the land reduced by 25%

Such bank will also qualify for a rebate of 50% on the applicable tax rate oninterest earned from a loan granted for such project.

§ Concessions for creation of corporate entities for hub service

The following concessions will be granted to professionals who establishcorporate entities that will provide international services for providing highend BPO services in accounting, law, finance and procurement.

- 50% rebate on corporate income tax for a period of five year.- Concessions of 10% of applicable taxes on the import of a motor

vehicle if more than US$ 100,000 is remitted to Sri Lanka in anyconsecutive period of three years.

2.3 Other corporate tax concessions

§ International and regional office

In order to promote the relocation of regional operating headquarters orregional offices of international establishment the following concessionswere proposed.

- Income tax holiday for a specific period- Deduction of expenses connected with incorporation- Relief from VAT and NBT for receipts in foreign currency

§ Acquisition of international brand names and IP rights

The following concessions will be available to any establishment whichacquires any internationally recognized intellectual property and earnsincome in foreign currency by way of royalty.

- total cost of acquisition will be allowed as a deduction- Income earned in foreign currency will be exempted for a specific

period.

§ Shipping industry

A deduction of 10% of income tax payable by a ship operator or any agent ofa foreign ship will be allowed in consideration of skills development of


trainees engaged in the shipping industry based on the number of individualstrained.

2.4 Exemptions

§ Institutional exemptions

Exemptions form income tax on profits and income except dividend andinterest is granted to the following institutions.

- National Enterprise Authority- Sri Lanka Institute of Marketing- The Institute of Physics

§ Source exemptions

Marginal relief - It has been proposed to grant an exemption from income taxto an employee of Rs 48,000 per annum to an if he is not engaged in anytrade business, profession or vocation other than for income fromemployment or any source from which tax has been deducted at source.

Payments for software - Computer Software payments made by Sri LankanAirlines and Mihin Lanka on special requirements of such airline tononresident persons will be exempt from income tax.

Dividends - Dividends paid by a company out of dividends received on aninvestment made outside Sri Lanka if such distribution is made within onemonth of receipt such dividend will be exempt tax.

2.5 Employment income

An individual employed by more than one employer or serving in differentplaces and receiving the benefit of using a private motor vehicle or receivingan allowance from more than one employer then the excess of the aggregateof such benefits or allowance over Rs. 50,000 per month will be taxable.

It has also been proposed to increase the limit to RS. 50,000 for theapplication of the 10% tax rate for public sector employees employed in morethan one place of employment.

It has also been proposed to change the definition of an executive from aperson receiving a monthly emolument of Rs. 25,000 per month to Rs.75,000 per month.


2.6 Restriction on the qualifying payment reliefs and tax holidays

It has been proposed to restrict the qualifying payment relief granted undersection 34 for the expansion of an existing undertaking up until 31st March2014. It appears that any unclaimed qualifying payment relief as at 31st

March 2014 will be permitted to be carried forward as at present.

Although, there are no specific details it has been proposed to remove someof the existing tax holidays granted under sections 16 and 17 of the InlandRevenue Act for new undertakings including the triple deduction of researchand development expenses and the depreciation rates.

It has also been proposed to restrict the income tax exemption grantedunder section 22 of the Inland Revenue Act for research and developmentcompanies until 31st March 2014.

All amendments to the Inland Revenue Act will be effective from 1st April2014.

2.7 Corporate tax rates amended

It was also proposed to abolish with effect from 1st April 2014 theconcessionary tax rate of 10% that is applicable to SME undertakings whoseprofits are below Rs. 5 million per annum since the concessionary tax ratesto the SME sector is reduced to 12% based on a turnover threshold. Hence,the rate of tax of such companies earning less than Rs. 5 million per annumand turnover exceeding Rs. 300 million per annum will be taxable at thenormal rates unless marginal relief based on profits is provided.

2.8 Insurance industry

The one off transaction relating to the segregation of composite insurancebusiness under the Insurance Industry Act will be treated as a continuation ofthe business and the same position with regard to the life insurance andgeneral insurance businesses will be maintained with regard to the following.

- Carried forward losses of the existing business- Set Off of unabsorbed VAT- Set off of ESC- Transfer of the asset and the continuation of the claimability of the

depreciation allowance.

However tax proposals have not addressed issues pertaining to setting off ofnotional tax credits and stamp duties.


| Value Added Tax

3.1 Wholesale and retail trade

The imposition of VAT on wholesale and retail trade which was introduced asa ground breaking change to the VAT law in the previous budget has nowbeen extended to such businesses having a turnover exceeding Rs. 250million per quarter. This is a reduction of the threshold from Rs. 500 millionto Rs. 250 million per quarter thereby expanding the VAT net to mediumscale wholesale and retail traders as well.

The threshold of Rs. 250 million is to be ascertained by considering theturnover of all companies within a group including subsidiaries and associatecompanies engaged in wholesale and retail trade. Therefore groupcompanies would have ensure that the turnover of all companies within thegroup, engaged in wholesale and retail trade, are aggregated in ascertainingthe liability to VAT of each company within the group.

In a move to further tax this sector, the eligibility to claim exemption ongoods, specifically exempt under the VAT law, sold by a wholesaler andretailer would be restricted to a maximum of 25% of the total sales. Thismeans that even if the majority of the items sold by a wholesaler or retailerare specifically exempt from VAT such exemption would not be allowed in fullon the sale of such items but would be limited to only 25% of the total salesof that entity.

Whilst it has been proposed that the input VAT attributable to the suppliesfrom the above adjustment would be allowed this may not have a directimpact since such exempt items would not have input tax at the point ofpurchase. Therefore the price of such goods (over and above the 25%exemption limit) would now increase by 12%. However common inputs suchas common overheads on which input is paid could now be claimed up to 75%of the turnover based on the above adjustment.

3.2 Removal of exemptions

§ Goods on which the Special Commodity Levy (SCL) is levied at importpoint are exempt from VAT at both import point and at the point of sale.It has been proposed that this exemption on such products be limitedonly to import point in the case of traders whose quarterly turnoverexceeds Rs. 250 million from such imported goods.

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SCL is generally imposed at import point on several essential items andthe removal of this exemption at the point of sale would result in theprice of such goods increasing by 12%. This is due to the fact that therewould be no input VAT that can be claimed as SCL is paid at import pointinstead of VAT. It is unlikely that the SCL paid at import point would beallowed as a claim against the VAT.

§ The following items which were specifically exempt from VAT at thepoint of import and sale (of such imported goods) have been proposed tobe made liable to VAT at both points with effect from January 1, 2014.Whilst this would result in the supply of such goods being liable to VATthis would mean that such suppliers would now have to register for VATand the input VAT incurred by such suppliers would be claimable. Thedate from which the input invoices can be claimed is not specified and itis assumed that inputs from January 1, 2014 would be allowed in full.

- Paddy, rice, rice flour- Wheat, wheat flour, bread- Cardamom, cinnamon, cloves, nutmeg, mace, pepper- Desiccated coconuts, fresh coconuts- Rubber, latex- Tea including green leaf- Eggs- Liquid milk or powdered milk- Agricultural tractors or road tractors for semi- trailers under HS

Code Nos: 8701.10.10, 8701.10.90, 8701.20.10, 8701.90.108701.90.20

- Machinery and equipment for the tea and rubber industry under HSCode Nos: 8438.80.40, 8429.10

- Machinery for modernization of factories by the factory owner- Plant and machinery by an undertaking qualified for a tax holiday

under section 24C of the Inland Revenue Act No 10 of 2006- Pharmaceutical preparations falling under HS Code Nos:

3003.90.11, 3003.90.12, 3003.90.13, 3003.90.15, 3003.90.19,3004.90.11, 3004.90.12, 3004.90.13, 3004.90.15, or3004.90.19

The input VAT paid on any goods used in an exempt supply would beclaimable as input at the point such supplies subsequently become liableto VAT provided such goods are used in making taxable supplies (subjectto certain conditions).


3.3 Exemptions

The following supplies would be made exempt from VAT with effect fromJanuary 1, 2014.

§ Import or supply of copper cables exclusively for the telecom industryand imported or purchased by any operator of telecommunicationservices. The exemption for importation would depend on the non-availability of such cables locally.

§ The local supply of gully bowsers, semi- trailers for road tractors, anymachinery or equipment used for garbage disposal activities carried outby any local authority, for the purposes of provision of such services tothe public as approved by the Secretary to the relevant Ministry.

§ Import or supply of the following goods

- Ties and bows under HS Code Nos: 62.15.10, 62.15.20, 62.15.90- Designer pens under HS Code No: 96.08.30- Frozen Bait , Fish Hooks/rods/reels, Fishing tackle under HS Code

Nos: 0511.91.90, 9507.10, 9507.20,9507.30 and 9507.90- Marine Propulsion Engines under HS Code Nos: 8407.21, 8407.29

3.4 Zero rated supplies

§ It is proposed that the transportation of goods and passengers betweenInternational Airports situated within Sri Lanka would be defined to beinternational transportation which in effect would result in the zerorating of such services under the VAT law. Whether such servicesbetween such airports would be limited to transportation via air is notclear.

§ It is also proposed that aviation services and related activates be zerorated. It is presumed that this would cover all aviation services bothdomestic and international.

3.5 Administration

The contribution to the VAT refund Fund by the Customs is to be reduced to6% from 10% of VAT collected at import point due to the reduction in VATrefund claims as a result of the SVAT scheme.


| Nation Building Tax & Telecommunication Levy

The Honourable Minister of Finance announced the following proposals inrespect of Nation Building Tax (NBT) and Telecommunication Levy

4.1 Removal of exemptions

§ Banks and Financial institutions – The business of providing banking andfinancial services which were hitherto exempt from NBT has been madeliable to NBT.

The Banking and Finance sector was excluded from NBT from theinception of the NBT law. The imposition of NBT @ 2% would mean that aturnover based tax is imposed on this sector after a lapse of 15 years.

Since a Bank or financial institution has several types of activities, onwhich activities the NBT will be imposed, is not clear. According to thepresent law, leasing of movable property is exempt from NBT. It is notclear whether the exemption will continue.

§ Goods subject to Special Commodity Levy – Exemption of NBT for localsupply of goods which are subject to Special Commodity Levy at point ofimport is removed. Hence, all such goods sold locally either on wholesaleor retail basis will now be liable to NBT. However, the exemption from NBTat point of import will continue and such goods will be subject to theSpecial Commodity Levy. The goods subject to the Special CommodityLevy are,

- Sprats, Watana, Chickpeas, Green gram, Canned fish, Sugar, Maldivesfish, Dried fish, Orange, Coriander / Cumin / Turmeric (neithercrushed nor ground or crushed or ground), Fennel, Black gram flour,Ground nuts, Mustard seed, Palm oil - crude and refined, Salt,Yoghurt, Butter and Margarine.

§ Sale of tractors – Exemption from NBT will apply only for locallymanufactured tractors. The import of tractors falling under the HS Codenumbers, 8701.10.10, 8701.10.90, 8701.20.10, 8701.90.10,8701.90.20 will be liable to NBT.

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§ Pharmaceutical products – Certain specified pharmaceutical productsfalling under the following HS Codes were made liable to NBT at point ofimport.

3003.90.11, 3003.90.12, 3003.90.13, 3003.90.15, 3003.90.19,3004.90.11, 3004.90.12, 3004.90.13, 3004.90.15, 3004.90.19

4.2 Exemptions from NBT

The following were exempted from NBT:

§ Retail trade of goods at duty free shops for payment in foreign currency§ Sale of locally manufactured coconut oil by the manufacturer – period of

exemption is 3 years§ Distribution of LP Gas§ Services provided in any Airport for payments in foreign currency§ Aviation services and related activities – related activities could include,

aviation fuel supplies, ground handling, air cargo and catering facilities(See Note on VAT)

4.3 Telecommunication levy

§ Present rate of 20% will be revised to 25%§ Rate of 10% on services provided through Internet/Broadband to facilitate

IT and BPO sectors remains unchanged§ Effective date for NBT amendments and the Telecommunication Levy –

January 1, 2014


| Import and Export Point Taxes

It was proposed that all the following changes will be in force with immediateeffect.

5.1 Customs import duty

A four band tariff structure presently in place is further consolidated alignedwith simplicity to facilitate production and trade as follows;

Classification Customs Duty (%) No of Tariff Lines

Essential inputs, notmanufactured locally

0 3,376

Raw materials & semiraw materials

7.5 184

Intermediate goods 15.0 1,605

End user products 25.0 1,412

Customs Duty has been removed for followings HS Codes:

Sector HS CodeIT Supportive Printers 8443.31.10, 8443.31.90, 8443.32.10,

8443.32.20, 8443.32.90, 8443.39.10,8443.39.90, 8443.99.10

Optical Fiber Cables 8544.70Energy Saving Materials 3919.90.10

Customs duty has been revised to 7.5% for following HS Codes:

Item HS CodePerfumes 3303.00.10Pens 9608.30Ties, Bow & Cravats 6215.10, 6215.20, 6215.90Tea Machinery 8438.80.40Tractors 8701.20.10, 8701.20.20, 8701.30.10,

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8701.30.20, 8701.90.30, 8701.90.40Steel 7207.11.10, 7207.20.90Cement 2523.21, 2523.29.10,

2523.29.20,2523.29.30,2523.30, 2523.90Ayurvedic Industry 2712.10, 2712.20, 3301.25, 3301.90.93,

3301.90.96, 3301.90.99Fisheries Industry –Frozen Bait

0511.91.90

Gold** 7108.11, 7108.12, 7108.13, 7108.20** 100% surcharge has been removed

Customs duty has been revised to 15% for following HS Codes:

Item HS CodeAyurvedic Industry 2914.29.10

Confectionery IndustryFlavors 2103.90.10(New NSD), 2103.90.90(New NSD)Cocoa Beans 1801.00.10, 1801.00.20

Motor VehiclesDiesel Hybrid Vehicles(New NSD)

8703.31.71, 8703.31.79, 8703.31.81,8703.31.89, 8703.31.91, 8703.31.92,8703.31.93, 8703.31.94, 8703.32.51,8703.32.52, 8703.32.53, 8703.32.61,8703.32.69, 8703.32.72, 8703.32.81,8703.32.89, 8703.32.91, 8703.32.92,8703.32.94, 8703.32.95, 8703.32.96,8703.32.97, 8703.32.98, 8703.32.99,8703.33.51, 8703.33.59, 8703.33.61,8703.33.69, 8703.33.72, 8703.33.81,8703.33.89

Customs duty has been revised to 25% for following HS Codes:

Item HS CodeBoat ManufacturingIndustry

8902.00, 8903.10.90, 8903.91, 8903. 92,8903.99.90, 8904.00.10

Wheel Barrows & Parts 8716.80.20 (New NSD), 8716.90.10(New NSD)Gauze 5803.00, 3005.10, 3005.90


5.2 Import CESS

CESS will be removed / revised on following HS Codes:

Item HS Heading/HS CodeTung oil 15.15.90.10Paper board 48.11.51.10Unbleached Fabric 52.09.11, 52.10.11, 52.11.11, 52.12.21,

58.02.11Aluminum Wires 76.05.11Designer Pens 96.08.30Ties and bows 62.15.10 ,62.15.20 ,62.15.90

Cess rate have been revised on following items to promote local valueaddition:

Item Cess Rate HS Heading/HS CodeCheese, Curd andsimilar products

30% orRs.300kg

04.04, 04.06, 04.08, 04.10

Cut flowers, Foliage 30% orRs.110kg

06.03, 06.04

Vegetables (Cabbages,Lettuce, Carrots,Cucumbers,Leguminousvegetables, Tomatoes,and similar vegetables (fresh, Chilled orcooked)

30% orRs.110kg

35% orRs.110kg

20% orRs. 25kg

35% orRs.125kg

07.04,07.05, 07.06,07.07,07.08,07.09,07.10, 07.11, 0712.31,0712.32,0712.33,0712.39,0712.90.10,

20.01,

20.02,

20.04,20.05

Mushrooms and truffles 35% orRs.

20.03


125kgManioc, Sweet potatoesand similar yams

30% orRs.110kg

07.14

Nuts and Fruits(Pineapples ,Avocados,Guavas, Mangoes,Mangos teens, Citrusfruit ( except freshMandarins and apples) ,Melons, Papaws, pears,Apricots, Cherries,Peaches and othersimilar fruits and nuts(fresh, dried orprepared)

30% orRs.110kg

30% orRs.120kg

30% orRs.120kg(Dates25% orRs. 25kg)

30% orRs.120kg

30% orRs.120kg

35% orRs.125kg

08.01,08.02

08.03

08.04

08.05( except 0805.20.10)(Dried Orange 20% or Rs. 120kg)

08.06, 08.07, 08.08, 08.09, 08.10,08.11, 08.12, 08.14

2006.00.10, 20.06.00.90, 20.07.91,20.07.99, 20.08

Fruit juice 35% orRs.110kg

20.09

coffee, pepper, vanillaand cinnamon

15% 09.01, 09.04, 09.05, 09.06

Artificial Flowers 35% orRs.1000kg

67.02

Mosquito coil 25% 38.08.50.10Wheat or Meslin flour Rs. 25kg 1101.00.10Margarine or vegetablefats and poultry fat

5% orRs. 15kg

15.01, 15.09, 15.10


Rs. 75kg 15.17Sausages and similarproducts

30% orRs.110kg

16.01, 16.02, 16.03

Sauces andpreparations

30% orRs.125kg

21.03

Sugar confectionary 35% orRs.100kg

17.04(Packages of 1kg or less – 35% or Rs.100kg or 35% of 65% of MRP)

Chocolate and otherpreparations containingcocoa

10%

35% orRs.100kg

18.02, 18.03, 18.04

18.06(Blocks, Slabs & Bars – 35% or 100kgor 35% of 65% of MRP)

Pasta and similarproducts

30% orRs. 80kg

19.02

Cereals and similarproducts

15%

30% orRs. 80kg

11.04

19.04

Soups and broths andsimilar preparations

30% orRs.125kg

21.04

Ice cream and otheredible ice

30% orRs.125kg

21.05

Waters includingnatural or artificialmineral waters

35% orRs. 110Ltr

22.01, 22.02

paints and varnish Rs. 80kg 32.08,32.09Beer made from malt,un denatured ethylalcohol and similarbeverages

40%

50%

22.03

22.08

Vinegar 35% orRs.100Ltr

22.09

Candles 30% orRs. 75kg

34.06


Battery 5% 85.06.10Josh Sticks Rs.

1,000kg33.07.41

Portland cement inpacking of 50 kg andbelow

10% 2523.29.20

Gauze Rs.100kg

3005.10, 3005.90 , 58.03.00

Soap and Face Wash 25% orRs.150kg

3401.11, 3401.19, 3401.20 ,3401.30(Retail packages 25% or Rs. 150kg or25% of 65% of MRP)(Soap noodles 8%)

Laminated Sheets 15% orRs.150kg

39.20(Of other polyester 20% or Rs. 150kg)

Sanitary napkins 30% orRs.300kg

96.19.00

Steel Products Rs. 15kgRs. 30kg25%20%8%

72.0472.14.20.9073.06.30 , 73.06.61.9073.06.69.90 ,73.06.90.90, 73.2373.14.20 , 73.14.31, 73.14.41,73.14.42, 73.14.49

Aluminum bars andtubes

5%10%

76.04, 76.0876.10(Day lighting Devices 5%)

Padlocks, hinges Rs. 50kg 83.01, 83.05 ,83.06

83.02.10Aluminum – Rs. 50kgOther – Rs. 30kg

Furniture 30% &20%

94.03

Brooms and Brushers 20% orRs. 75Unit

96.03

Rubber Machines andrubber products

4084.20.10.10.

Unbleached Fabric Rs. 75kg 52.09.11, 52.10.11, 52.11.11,52.12.21, 58.02.11


5.3 Export Cess

To promote local value addition CESS has been introduced for followingitems:

Item HS Heading/HS CodePepper 09.04.11.10 - Rs. 10kgCinnamon (Organic) 09.06.11.10 – Rs. 6kgClove (Organic) 09.07.10.10 – Rs. 6kgNutmeg and Cardamoms(Organic)

09.08.11.10 – Rs. 10kg

5.4 Excise (Special Provisions)

New National Sub Headings and new Excise (SP) Duty Rates on such itemswill be introduced to the following HS Codes:

HS Code New national sub headings

8703.31 8703.31.71,8703.31.81, 8703.31.91,8703.31.93,8703.31.79, 8703.31.89, 8703.31.928703.31.94

8703.32 8703.32.51, 8703.32.53, 8703.32.618703.32.52, 8703.32.59, 8703.32.698703.32.72, 8703.32.81, 8703.32.91,8703.32.94, 8703.32.96, 8703.32.988703.32.79, 8703.32.89, 8703.32.92,8703.32.95, 8703.32.97, 8703.32.99

8703.33 8703.33.51, 8703.33.61,8703.33.72, 8703.33.818703.33.59, 8703.33.69,8703.33.79, 8703.33.89

8704.21 8704.21.51, 8704.21.52,8704.31 8704.31.41, 8704.31.42

The Excise (SP) Duty on following HS Codes will be revised.


Item HS Code

Petrol 2710.12.20 (Rs. 27 per ltr)Diesel 2710.19.40 (Rs. 3 per ltr)Lorries & Trucks 8704.21.51, 8704.31.41 (14%)

8704.21.52, 8704.31.42(14% or Rs. 109,000per unit)

Trishaws 8703.21 & 8703.31

The description of the following HS codes will be revised.

8704.21.51, 8704.21.52, 8704.21.61, 8704.21.62, 8704.21.63,8704.21.64, 8704.31.41, 8704.31.42, 8704.31.51, 8704.31.52,8704.31.53, 8704.31.54

5.5 Special Commodity Levy

The special commodity levy will be revised on import of the following items:

Item HS Code

Sprats 0305.59.20Watana – whole/ split 0713.10.10, 0713.10.20Chickpeas – whole/ split 0713.20.10, 0713.20.20Green gram 0713.31.10Canned fish 1604.11, 1604.12, 1604.13, 1604.14, 1604.15,

1604.16, 1604.17, 1604.19, 1604.20Sugar 1701.12, 1701.13, 1701.14, 1701.91.10,

1701.91.90, 1701.99.10, 1701.99.20,1701.99.30, 1701.99.90

Maldive Fish 0305.59.10Dried Fish 0305.59.90Orange 0805.10.10Coriander – neithercrushed nor ground orcrushed or ground

0909.21, 0909.22

Cumin - neithercrushed nor ground orcrushed or ground

0909.31, 0909.32

Fennel 0909.61.20Turmeric - neither 0910.30.10, 0910.30.90


crushed nor ground orcrushed or groundBlack gram flour 1106.10.10Ground nuts 1202.42Mustard seed 1207.50Palm oil - crude andrefined

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, 1513.21,1513.29

Salt 2501.00Yoghurt 0403.10Butter 0405.10Margarine 1517.10.10, 1517.10.90

5.6 Port & Airport Development Levy

The PAL will be revised as follows:

Aviation Fuel under HS Code No 2710.19.20 FreeImports of pharmaceutical products under HSCode No’s, Nos3003.90.11, 3003.90.12,3003.90.13, 3003.90.15, 3003.90.19,3004.90.11, 3004.90.12, 3004.90.13,3004.90.15, or 3004.90.19, 3004.10,3004.20, and 3004.90.90

15%

5.7 Tariff reductions under the Free Trade Agreements

Under South Asia Free Trade Agreement (SAFTA) and India-Sri Lanka FreeTrade Agreement (ISFTA), items 208 and 10 are removed respectively underfrom the negative list of Sri Lanka.

Indo-Sri Lanka Free Trade Agreement (ISFTA)Customs Duty on the following tariff lines in the negative list of Sri Lanka willbe zero rated.


Item HS Code

Pectic substances, pectinates and pectates 1302.00Agar-agar 1302.31Mucilages and thickeners, whether or notmodified, derived from locust beans, locustbean seeds or guar seeds

1302.32

Pet food for retail sale 2309.10Yarn used to clean between the teeth(dental floss)

3306.20

Trade advertising material, commercialcatalogues and the like

4911.10

Corrugated sheets 6811.81Other sheets, panels & tiles 6811.82hard rubber or plastics - Combs, hair-slidesand the like

9615.11

Other - Combs, hair-slides and the like 9615.15

South Asia Free Trade Agreement (SAFTA)

Category Item NoLeast DevelopedCountries (LDCs)

0104.10, 0104.20, 0201.10, 0201.20,0201.30, 0202.10, 0202.20, 0202.30,0205.00, 0206.10, 0206.21, 0206.29,0207.27, 0209.00, 0307.99, 0711.20,0802.11, 0802.12, 0802.21, 0802.31,0802.40, 0802.50, 0802.60, 0809.10,0809.20, 0809.30, 0812.10, 0813.10,0813.20, 0909.10, 0909.40, 0910.20,1001.10, 1109.00, 1212.21, 1302.11,1302.12, 1302.13, 1302.20, 1302.31,1302.32, 1302.39, 1404.20, 1501.00,1505.00, 1522.00, 1603.00, 1604.11,1604.12, 1604.19, 1604.30, 1702.20,1702.40, 1702.50, 1702.60, 2309.10,2710.91, 2711.11, 2711.14, 2711.19,2711.21, 2711.29, 2713.11, 2713.12,2713.20, 2713.90, 2714.10, 2714.90,2715.00, 4007.00, 4805.11, 4805.12,4805.19, 4808.30, 4808.90, 4823.20,6811.81, 7309.00, 7318.12, 7318.13,


7318.14, 7318.16, 7318.21, 7318.23,7419.99, 7604.10, 7604.21, 8201.10,8201.20, 8201.30, 8201.40, 8201.50,8201.60, 8201.90, 8211.91, 8211.93,8211.94, 8308.10, 8308.20, 8308.90,8413.92, 8418.29, 8418.61, 8418.69,8421.22, 8424.10, 8432.10, 8432.80,8432.90, 8433.40, 8433.52,8433.59,8438.80, 8480.71, 8480.79,8516.10, 8516.21, 8527.99, 8528.71,8528.73, 8538.90, 8546.90, 8547.10,9017.20, 9612.10, 9612.20

All other membercountries

0804.20, 0810.40, 0903.00, 1008.30,1214.10, 1901.10, 2005.91, 2523.21,2523.29, 2709.00, 3907.50, 4002.99,4105.10, 4106.21, 4106.31, 4106.32,4106.40, 4106.91, 4201.00, 4202.11,4202.12, 4202.19, 4202.21, 4202.22,4202.29, 4202.31, 4202.32, 4202.39,4202.91, 4202.92, 4202.99, 4203.10,4203.21, 4203.29, 4203.30, 4203.40,4205.00, 6402.12, 6402.19, 6403.12,6403.19, 6404.11, 6811.82, 6913.10,6913.90, 7015.10, 7114.11, 7114.19,7114.20, 7215.10, 7215.50, 7215.90,7303.00, 7313.00, 7318.24, 7615.11,8212.20, 8215.10, 8215.20, 8215.99,8414.59, 8418.21, 8421.19, 8423.90,8424.81, 8433.51, 8504.22, 8516.79,8517.69, 8527.13, 8527.21, 8527.29,8536.70, 8536.90, 9004.10, 9004.90,9608.91, 9615.11, 9615.19, 9615.90,9616.10, 9616.20


5.8 Other

In order to maintain a rational tariff structure, the list of items given below isplaced on the negative list of BOI concessions. The BOI could permitcompanies to import these items on duty free basis only if such items are notavailable from local suppliers, with the concurrence of the Director General,Department of Trade and Investment Policy.

Item No. Commodity

1 Cement2 Steel reinforcement3 Plywood sheets4 Aluminum cladding material with framework5 Plywood doors6 PVC doors7 Staircase, handrails, nosing and fittings8 Ceramic/porcelain wall tile, floor tiles, marble floor tiles, granite and

quartz tiles9 Column corner guards for car park area

10 Paints11 Aluminum and zinc/aluminum roller shutters12 Manhole covers and grating13 Bell and bell switches14 Electrical wires and cables15 Telephone cables16 Main distribution frames, distribution/junction boxes etc17 PVC floor gullies18 WC’s wash basin, bidets, vicinity basins, bath tubs, urinals and other

sanitary fittings and fixtures19 Power coated louvers and drills20 Cast iron drainage fittings21 Timber doors22 Hinges for doors and windows23 Floor hinges and spring hinges24 Casement stays and casement fasteners for windows25 Door locks, door closers, door handles, door stoppers (allowed if

they come as composite units)26 Panel bolts27 Toilet partitions28 Wall finishing material


| Tax Administration

6.1 Introduction of the Revenue Administration Management InformationSystem (RAMIS)

It is proposed to introduce a new system i.e. RAMIS to automate the processof IRD and eventually link the IRD with the following departments;

§ Sri Lanka Customs§ Department of Registrar of Companies§ Department of Motor Traffic§ Land Commissioner General’s Department§ Ministry of Finance and Planning

A unique personal identification number will be used to coordinate alltransactions and to facilitate online tax payments.

6.2 Tax clearance to be filed with the Registrar of Companies as part ofthe Annual Return

The Inland Revenue Act currently imposes a duty on the Registrar ofCompanies to obtain a certificate issued by the Commissioner-General ofInland Revenue as an integral part of the annual return filed under theCompanies Act in certain instances. In order to give power to the Registrarof Companies to effectively enforce this duty it is proposed to make thecorresponding changes to the Companies Act. Therefore, the Companies Actwill be amended to make it necessary to obtain a tax clearance certificatefrom the Commissioner General of Inland Revenue as part of the annualreturn under the Companies Act.

Further, a tax clearance certificate will be required before effecting theliquidation or any change such as amalgamation, merger or re-structuring.

6.3 Restrictions on secrecy provision

The official secrecy provision in section 209 of the Inland Revenue Act willbe amended to enable the dissemination of specific information toGovernment Institutions such as the Department of Customs and theDepartment of Sri Lanka Police.

6


6.4 Preferential claim for tax in default at liquidation - expanded

Currently the Companies Act provides a preferential claim at liquidation forincome tax charged or chargeable for one complete year prior tocommencement of liquidation. This year is selected by the CommissionerGeneral of Inland Revenue. This preferential claim which is currently for 1year is to be expanded to 5 years. This expansion may be extended to thepreferential claim given for rates and taxes in addition to income tax.

6.5 Default Tax Recovery Act

Relevant provisions in the Inland Revenue Act relating to the recovery oftaxes will be introduced to the Default tax Recovery Act, in order tostrengthen the recovery process.

6.6 Economic Service Charge Act- changes to time bar provision

As the ESC Return is filed on an annual basis with effect from April 1, 2011the prevailing time bar provision in the ESC Act is to be amended on similarlines of the time bar provision in the Inland Revenue Act.

6.7 Rules and regulations to be introduced to upgrade the standard andquality of services of approved accountants and authorizedrepresentatives

6.8 List of inactive VAT registrations to be published in the IRD Web-site

6.9 Technical ratifications

It is proposed to make necessary adjustments to the respective provisions ofthe Inland Revenue Act, Value Added Tax Act, Nation Building Tax Act,Economic Service Charge Act, Finance (Amendment) Acts, Default Tax(Special Provisions) Act, Telecommunication Levy Act, Ports and AirportsDevelopment Levy Act and Tax Appeal Commission Act to rectify certainambiguities and unintended effects (including differences in translation).


| Socio Economic and Development Initiatives

Initiatives to enhance economic and social development

Building on the far reaching socio-economic policies undertaken in previousyears, His Excellency the President has made a number of proposalsincluding infrastructure, urban and rural development, promoting researchand development, self employment, enhancing local industries, providingwelfare and state sector restructuring initiatives. A synopsis of theseproposals is presented in this section, together with stated proposedallocations as follows.

Infra-structure development

Area Purpose AmountEstablishment ofnational communitywater supplydepartment and relateddevelopment work

To regulate and developwater supply schemes,to ensure water qualitystandard and propermaintenance of relatedprojects.

LKR 300Mn.

Agrarian livelihood andirrigation

Development ofselected irrigationschemes.Modernisation ofagrarian servicecentres.Rehabilitation of tanksand restore abandonedpaddy lands.

LKR 14,000Mn.

LKR 300Mn.

LKR 2,300Mn.

Fisheries Development of fisheryharbors and anchoragefacilities.

LKR 1,000Mn.

Divi Neguma- GamaNeguma

Development ofthousand bridges andupgrading roadfacilities to connectvillages.Provision of small buses

LKR 4,500Mn.

LKR 300Mn.

7


Area Purpose Amountfor remote villages.

Greater Colombo floodprotection program

To develop drainagesystem and rehabilitatecanal system andimprove Colombo andsurrounding residentialareas.

LKR 1,500Mn.

Township development Upgrading andmodernizing housingschemes.Low income housingdevelopment program.

LKR 800Mn.

LKR 500Mn.

Research and Development

Area Purpose AmountFood technology Research and

laboratory facilities inuniversities inprovinces.

LKR 500Mn.

Agrarian and irrigation Development of high-quality seed andplanting material.

LKR 300Mn.

Sri Lanka as a regionalmedical hub

To build a state-of- the-art post graduateinstitute of medicine.

LKR 600Mn.

National Science Centre Establishment of anational centre.

LKR 600Mn.

Industries

Area Purpose AmountLivestock and poultryindustry

Strengthening ofveterinary servicesAllowance forveterinary surgeons.

LKR 200Mn.

LKR 50Mn.

IT industry Expansion of Nenasalacentres and newfacilities.

LKR 1,000Mn.


Welfare

Area Purpose AmountHealth services Rural water purification

project for northcentral province.

LKR 900Mn.

Healthcare Investment in non-communicable diseasesframework viz. cancer,stroke and kidney.Modernisation of twonational childrenhospitals.Development ofColombo, Ragama andKalubowila hospitals.

LKR 2,000Mn.

LKR 1,000Mn.

LKR 12,000Mn.

Partnership with WorldFood Program

Set up of a revolvingfund to streamlineproduction andmarketing facilities inmajor grain producingdistricts.

LKR 1,500Mn.

Farmer pension schemeand crop insurancescheme

Capital contribution inorder to providewelfare to farmersabove 63 years.

LKR 1,000Mn.

Social services Modernisation ofvocational schools forthe needy.

LKR 100Mn.

Child abuse andviolence against women

Preventive measures ofviolence.

LKR 700Mn.

Arts and culture Set up two performingarts and culturalcentres.Modernisation of threeselected theatres.Five holiday bungalowsfor artists.

LKR 1,500Mn.

LKR 3,000Mn.

LKR 100Mn.Education andsanitation

Upgrade sanitation andother facilities in ruralschoolsModernisation of

LKR 1,000Mn.

LKR 750Mn.


Area Purpose Amountteacher trainingcolleges.To improve andupgrade Pirivenaeducation facilitiesSkills development andyouth affairs.

LKR 450Mn.

LKR 1,200Mn.

Youth development For youth developmentprograms.Encourage participationat the 2014 UN Youthconference programs.

LKR 150Mn.

LKR 250Mn.

Other Sectors

Area Purpose AmountConvert long-termloans of selected stateenterprises to equity:CEB, NWS&DB, Airport& Aviation Services,SLPA

To strengthen financialposition and enableannual dividend to theTreasury.

Not mentioned.

Sri Lankan and MihinAirlines: Government totake-over the sharesheld by state banks

On-going capitalizationto strengthen the twoairlines.

USD 200Mn.

Sri Lanka TransportBoard

Bridge revenueshortfall.Strengthen bus fleet.

LKR 500Mn.

LKR 1,000Mn.Local government To provide capital

equipment andsupplement workingcapital for communityinfra-structurefacilities.

LKR 3,400Mn.

Wildlife protection andconservation

Develop wildlifeconservation andprotection schemes andprovide for capitalequipment for wildlifedepartment.

LKR 1,200Mn.


Area Purpose AmountLegal and judicialreforms

Modernisation program. LKR 500Mn.

Police service Housing schemesExpansion of facilitiesat the Police Academy.

LKR 1,500Mn.LKR 500Mn.

Peoples’representatives

Implement small andspecial developmentprojects under SpecialTask Force.

LKR 4,000Mn.

2017 Asian YouthGames

Preparation of Youthfor the 2017 AsianGames.

LKR 500Mn.

Subsidies and Incentives

Sector Subsidy/Incentive DetailsAgrarian, Livelihoodand Irrigation

Fertilizer Subsidy. Fertilizer at LKR350/per 50/kg bagduring Yala and MahaSeasons.Fertilizer at LKR 1,250per 50/kg bag forother crops.

Agrarian, Livelihoodand Irrigation

Motor Cycles subsidy forfield officers

LKR 2,300Mn.

SmallholderPlantations

Land ImprovementSubsidy -water and soilconservation.

LKR 200Mn.

Backyard Economies-Divi Neguma- GamaNeguma Participants

Incentivise theparticipants of the familyoriented micro-enterprise. Developmentscheme.

LKR 10,000 for eachof the 5 best backyardeconomies/ homegardens in each GramaNiladari division.

Divi Neguma- GamaNeguma – District levelSupervisors

Incentives to coordinaterural -centric work andto promote betterexpendituremanagement andsupervision at districtlevel.

Allowance of LKR15,000 to DistrictSecretaries, LKR 5,000to DivisionalSecretaries and LKR3,000 to PlanningDirectors and ChiefAccountants.


Sector Subsidy/Incentive DetailsSmall Businesses andSelf Employed.

Self employmentincentives.

Divi Negumaentitlement cards atLKR 500 each:- Exemption from

multiple taxpayments to localauthorities.

- Reduced annuallease rental of LKR1,000 for less thanhalf an acre stateland leases.

Small Entrepreneurs Long term leaseincentive.

For leases already over10 years to be giventhe option to convertto a 50 year long termlease.

Health Services Incentive payments forhospital staff.

LKR 100Mn.

Skills education Incentives for lecturersand students invocational education

LKR 300Mn.

Regional medical hub Research allowances fordoctors and medicalinterns.

LKR 1,400Mn.

Low cost financing schemes

Sector Purpose FinancingManufacturing and SMEIndustries

Modernization offactories with energyefficient technology.

Euro 90Mn creditfacility at an interestrate not exceeding 8%.

High performingplantations

Replant an agreedextent and ensuresocial development ofplantation workers andto increase the volumeof value added teaexports.

Credit scheme with a 8year tenure at 6%interest.Banking Institutions toestablish LKR 500Mnloan scheme in 2014.

Dairy Industry- SME Promote dairy farms,collection centers and

A special loan schemeat an interest rate of


Sector Purpose Financingequipment,development of animalfeed etc.

8%.

Backyard Economies-Divi Neguma- GamaNeguma

Develop greenhousefarms poultry,livestock, fish farms,handloom, and smallindustries.

Banks and FinancialInstitutions to grant atleast 500 workingcapital loans of LKR25,000 at 6% interestwithout collateral.

Women MicroEnterprises

Working capitalfinancing.

Women MicroEnterprise CreditGuarantee Scheme toprovide loans upto LKR250,000 withoutcollateral.Regional DevelopmentBanks and SME BankingUnits of CommercialBanks to provide theloan facility.

Small Businesses andSelf Employed

50% of investmentsavings of Divi Negumaand Samurdhibeneficiaries and smalltime traders to begiven small loans at lowinterest rates by bankson the basis of groupsecurity by borrowers.

budget 2014

Economy & Finance