budget highlights 2022

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2022

Budget Highlights

BUDGET HIGHLIGHTS 2022

FOR CLIENTS OF B.R DE SILVA & CO.

This publication brings to the attention of our clients, the highlights of the government policies, as stated in the Budget Speech presented in the Parliament on 12th November 2021.

The contents of this document focus and states only, what we believe our business clients would be mostly interested in.

We have included highlights of the main government policies with regard to Social Development and Economic objectives and how the government proposes to achieve the said objectives.

This synopsis has been prepared for general information purpose only and is not intended to be relied upon as accounting, tax or other professional advice. Although we endeavor 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 future. It also does not intend to address circumstances of any individual or entity. These proposals are yet to be enacted and therefore no course of action should be initiated based solely on the information contained in this booklet without obtaining appropriate professional advice from us.

If you need my clarification, please contact us.

Thank You,

B.R. DE SILVA & CO.

Chartered Accountants


Index Page No

1. Tax Proposals 01 - 01

1.1. One-Off Taxes 01 - 01

1.2. Other Tax proposals 02 - 03

2. Non-Tax Proposals 04 - 04

3. Tax Administration 05 - 06

4. Expected Legal Reforms 07 - 08

5. Summary of the Budget 08 - 11


1Page |

1. Tax Proposals

1.1. One-Off Taxes

Surcharge Tax Chargeability

Individuals or companies who have earned a taxable income over Rs. 2,000 Mn for the year of assessment 2020/2021.

Rate 25% on Taxable Income

Effective Date The effective date not specified in the budget proposals

Expected Revenue

Rs. 100 Bn

VAT on financial services Chargeability

Supply of financial services by financial institutions

Rate Increased from 15% to 18%

Effective Date January 1, 2022 to December 31, 2022. to be paid every month

Expected Revenue

Rs. 14 Bn


2Page |

1.2. Other Tax proposals

Social Security Contribution Chargeability The liable turnover over Rs. 120

million per annum Rate 2.5%

Effective Date April 1, 2022.

Expected Revenue

Rs. 140 Bn

Special GST Chargeability Institutions on,

i. Alcoholii. Cigarettes

iii. Telecommunicationiv. Betting and gamingv. Vehicles.

Rate The rate of the tax not specified in the budget proposals

Effective Date January 2022

Expected Revenue

Rs. 50 Bn


3Page |

Other Tax proposals (Contd…)

Excise Duty (Special Provisions) of Cigarettes Chargeability Excise Duty on Cigarettes

Rate A cigarette will be Increased by Rs. 5

Effective Date With immediate effect

Expected Revenue

Rs. 8 Bn

Excise Duty on Liquor under Excise Ordinance Chargeability Excise Duty on Liquor Rate As per the gazette

Effective Date With immediate effect

Expected Revenue

Rs. 25 Bn


4Page |

2. Non-Tax Proposals

1. Imposing a fee in respect of vehicles which undergo motor traffic accidents and allowing to reimburse the fee from the insurance.

2. Levying a fee for vehicles modernization, modification or upgrading.

3. Legalizing all unauthorized roadworthy motor vehicles and motorcycles by paying a penalty during a period of amnesty.

4. After charging necessary taxes and a fine, all vehicles stationed at Sri Lanka Customs for non-payment of tax or other reasons will be released.

5. Issuing a licence for conducting leisure related activities for special premises which are developed as special zones.

6. Issue licences issued in relation to telecommunication including for fixed telephone operators, mobile operators, internet service providers and satellite broadcasting operators by Telecommunication Regulatory Commission of Sri Lanka through an auction.


5Page |

3. Tax Administration

1. Strengthening the Large Taxpayers' Unit (LTU) and Upper Corporate Unit (UCU) established at the Inland Revenue Department to further enhance the revenue generated from large taxpayers.

2. Addressing deficiencies within the digitized platforms of revenue agencies: RAMIS at Inland Revenue Department and Single Window at Sri Lanka Customs.

3. Implementation of the digital revenue platform of Excise Department

4. Simplifying the liquor license issuing process.

5. Allowing the submission of digital invoices and documents as valid documents in tax filing wherever possible through the above digital platforms with the proper verification system in place.

6. Technical Rectifications

Relevant Amendments will be made to Value Added Tax Act, No. 14 of 2002 and other relevant acts to rectify certain ambiguities (including differences in translations).


6Page |

Tax Administration (Contd…)

7. The tax exemption granted on import or supply of goods listed under item (xxxi )of paragraph (a) of Part II to the First Schedule to the Act would be amended as follows.

“medical equipment, machinery, apparatus, accessories and parts thereof and hospital furniture, drugs and chemical donated to a Government hospital or the Ministry of Health for the provision of health services to address any pandemic or public health emergency approved by the Ministry of Finance on the recommendation of the secretary to the Ministry of the Minister assigned with the subject of health with effect from January 1 2022.”


7Page |

4. Expected Legal Reforms

1. New Acts/ Amendments to existing Acts expected to be introduced: -

✓ Act on Rights of the Differently-abled.✓ Green Agricultural Development Act - to protect

the traditional knowledge of farmers andsafeguard their right to own lands

✓ A Special Finance Bill - to ensure the safety oflocal and foreign exporters, to ensure the safetyof transactions of foreign current accounts andto simplify the conditions that are imposed bythe Central Bank on exports with regard toforeign currency conversions and transfers.

✓ Amendment to the Finance Act - to simplify thecomplex processes related to new businessregistration process adopted by the Board ofInvestment, Department of Foreign Exchangeand Export Development Board and toconsolidate fees levied by various institutions.

✓ New Finance Act - to introduce necessary legalprovisions to establish free ports.

✓ Amendment to Trade Union Ordinance – toremove limitations in obtaining membership inseveral government professional associationsrelevant to his service and to remove limitationspreventing integration, consolidation andcentralization of several professionalassociations of different services.


8Page |

Expected Legal Reforms (Contd…)

4. New Areas considered under legal reform;

✓ Application of technological processes to taxadministration to discourage Tax evasionpractices.

✓ New Laws on the usage of lands owned byplantation companies (including public andprivate owned land) to ensure the maximumutilization of buildings and other assets

✓ Amendment of Laws and Regulations thatimpede the inflow of foreign exchange earnedby young free-lancers through development andupgrading of new software through ITknowledge and artificial intelligence and newinnovations.

✓ Amendments to the Tax Law in relation to theuse of digital identification numbers and otherlegal requirements

✓ Banks encouraged to convert their branches intosmart banking units using digitalization. TheCentral Bank to introduce the required laws,regulatory framework including on capitalrequirements, licensing etc.


9Page |

SUMMARY OF THE BUDGET (2021-2022)

Item 2021 Revised

Estimate (Rs. Bn)

2022 Budget (Rs. Bn)

Total Revenue & Grants 1,561 2,284 Total Expenditure 3,387 3,912

Recurrent Interest 1,055 1,115 Salaries & Wages 887 1,015

Budget Deficit (1,826) (1,628) Budget Deficit Percentage 11.01% 8.8% Total Tax Revenue 1,325 1,987 Revenue / GDP % 9.5 % 12.3%

Source: Budget Proposal 2021/2022

Other Factors Rate Inflation 7.6% Unemployment Rate 5.1% GDP Annual Growth Rate 4.3% Corporate Tax Rate 14%, 18%, 24%, 40% Personnel Income Tax Rate Maximum 18%

Source: CBSL Website

The budget 2022 was presented by the Hon. Minister of Finance on the 12.11.2021. A summary of the appendix given as part of the budget proposals indicate budgeted expenses are Rs. 3,912 Bn with budget revenue at Rs. 2.284 Bn. The deficit is 1,628 Bn.

The projected budget deficit for 2021 is 11.1% and is expected to reduce to around 8.8% in 2022. As per Central Bank statistics the budgeted deficit for the previous three years was 11.1% (2020) 9.6% (2019) and 5.3 % (2018).


10Page |

From the expenditure side, biggest recurrent expenditure is interest at 1,055 Bn in 2021. Followed by salaries and wages of 887 Bn.

The salaries include pension costs and is expected to increase to 1,015 Bn in 2022. This is mainly due to the government is making 53,000 graduates permanent with a budget expenditure allocation of Rs. 27.6 Mn. The retirement age of public sector Servants being increased to 65 years, however, may reduce the burden of pension cost short term.

Even though the government has consciously tried to implement measures to control expenditure, the expenditure continues to rise.

While inflation is around 7.6% with the prices going up. Government has placed price controls on petrol, diesel and kerosene. This may indicate that actual inflation may be higher and could be a challenge to the economy.

There are 6 key revenue proposals in the 2022 budget which are expected to generate additional tax revenue.

The total tax revenue is 1987 Bn in 2022 with 308 bn to be generated from the 6 key revenue proposals this year. Namely;

Proposal Rs. Mn.

Surcharge Tax 100,000 Social Security Contribution 140,000 Value Added Tax 14,000 Special Goods & Services Tax 50,000 Proposal relating to Motor Vehicle 4,000

308,000


11Page |

There are some merits to these proposals.

The one-off tax of special GST will help boost the tax revenue. Social Security Contribution and VAT will raise 140 Bn and 14 Bn respectively. While the surcharge tax of 25% on taxable income for the Y/A 2020/21 is expected to raise Rs. 100 Bn. However, the tax surcharge is only on taxable income and exclude the persons and companies which are exempt from tax. The question arises whether this policy is fair.

A good tax policy should be fairly efficient and taxes should be easy to collect. A good tax policy of a country has a strong impact on its economy. It encourages market price and profit to increase allowing the government to raise more tax revenue in future. The total revenue as a percentage of GDP is only 9.5%. In a country such as Sri Lanka the revenue on a percentage of GDP should be much higher.

The government of Sri Lanka has promised consistency in the tax policy. Currently corporate tax rates remain at 14%, 18%, 24%, 40% while individual tax rate is a maximum of 18%.

However, with the current economic challenges, high inflation and total revenue as a percentage of GDP being 9.5%, the question arises whether this current tax policy will be sustainable in the long term.

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budget highlights 2022

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