Budget 2021 key tax changes and relief

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COLOMBO  – Sri Lanka will give a Rs 100,000 a month tax relief for personal income tax payers who invest in government securities, shares of listed companies, and housing loan and medical insurance will also be deductible, Prime Minister and Finance Minister Mahinda Rajapaksa said.

“To encourage private savings, I propose to treat medical insurance, interest on housing loans, investments in Government Securities and shares of listed companies incurred up to Rs.100,000 per month as deductible expenditures in the calculation of personal income tax,” PM Rajapaksa told Parliament presenting a budget for 2021. Sri Lanka will also introduce a special Goods and Services tax for, alcohol, tobacco, gaming, telecommunications replacing several different taxes, he said.

Other tax changes and relief proposed are as follows:

  • “For the benefit of the country, I request from all entrepreneurs to utilize the funds hidden locally or internationally in order to evade laws relating to taxes and foreign exchange. It is expected to make legal provisions to provide a tax pardon to entrepreneurs thus utilizing funds for any investment facilitated by this budget under the payment of taxes amounting to 1%.
  • In order to promote investments in the housing market through the Sri Lanka Real Estate Investment Trust (SLREIT) regulated by the Securities and Exchange Commission, I propose to exempt such investments from capital gains tax and dividends free from income tax, and to reduce the stamp duty up to 0.75%.
  • So as to promote the listing of local companies with the Colombo Stock Exchange, I propose to provide a 50% tax concession for the years 2021/2022 for such companies that are listed before 31 December 2021 and to maintain a corporate tax rate of 14 percent for the subsequent three years.
  • I propose to simplify the Taxes on Capital Gains, where such taxes will be calculated based on the sale price of a property or the assessed value of a property whichever is higher.
  • I propose to exempt the tax on dividends of foreign companies for three years if such dividends are reinvested on expansion of their businesses or in the money or stock market or in Sri Lanka International sovereign bonds.
  • On instances when the commercial banks in Sri Lanka purchase Sri Lanka International sovereign bonds subject to a minimum of US$ 100 million, I propose to suspend the risk weighted provisioning under Central Bank Regulations for three years and to free the profits on capital and interest income of these investments from taxes.
  • “In order to encourage the recycling and re-use of material from construction, I also propose a ten year tax holiday for investments in selected recycling sites.
  • Investments exceeding US$ 10 million with potential to change the landscape of the economy, in the areas of export industries, dairy, fabric, tourism, agricultural products, processing and information technology will be provided with concessions up to a maximum of 10 years under the Strategic Development Law.
  • In order to encourage savings, I propose to release the interest income of the welfare societies and institutions from income taxes which was imposed by the previous government.
  • In order to promote the Colombo and Hambanthota ports as commodity trading hubs in international trading, and to encourage investments in bonded warehouses and warehouses related to offshore business I propose to exempt such investments from all taxes.
  • In order to encourage the exports of multi-national companies which are import based for requirements of the domestic market, it is proposed to reduce the tax imposed on their dividends by 25% in 2021 and 50% in 2023 under the condition that they increase their exports by 30% and 50% in the respective years.
  • In order to maintain a similar amount as the import expenditure in foreign exchange in domestic banks, the interest income of such deposits will be exempted from taxes.
  • To develop the latent industries such as mineral sand, phosphate, fertilizer and graphite as high value export industries, I propose to reduce the expenditure on research and development expenses of local entrepreneurs involved with the Institute of Nanotechnology from taxes.
  • I propose to provide separate docks, dockyard access facilities and long-term credit facilities to promote boat and shipbuilding activities which have high development prospects due to the rising demand in the fisheries, tourism and shipping sectors and the high production potential of local manufacturers. It is also proposed to grant a tax break of 7 years for local boat and shipbuilding
  • We believe that the Colombo Port City will become a prime choice for investors and business community due to the business and investor friendly legal framework and proposed advanced infrastructure. It is expected to provide concessions on required taxes and specific goods trade, banking and foreign exchange with the objective of converting the Port City Economic Zone as one of the hubs for investment promotions in the country.
  • It is proposed to establish a shop in all Grama Niladhari divisions where the network of shops has been adequately expanded targeting 25,000 female entrepreneurs chosen from Samurdhi families. Under this network of shops functioning under government sponsorship and bank credit facilities, priority will be given to sell local products. Related expenditure of the local entrepreneurs who contribute to establish these shops will be considered as deductible expenditures in the calculation of personal income tax.

Import Duty

  • I propose to exempt import tax on the import of machinery with modern technologies.
  • I further propose to implement a treasury guarantee scheme for leasing companies to obtain the leasing payments for purchase of equipment required by small and medium-term entrepreneurs.
  • It is required to increase foreign earnings by diversification of exports through value addition to local resources. Trade and production processes should be aligned so as to minimizing the reliance on foreign imports in order to reduce the trade deficit.
  • In reducing the trade deficit, and increasing our external resources, supply of goods and services must be maintained at an elevated level with income earnings from tourism, foreign employment, ports and airport services should also be enhanced.
  • Under this macro-economic vision, we must embark on a development path which broad bases rural development targeting poverty eradication, having created more avenues for livelihood and employment with better access to health, education and social welfare.
  • I propose to maintain the VAT unchanged at 8%, for businesses 7 with a turnover of more than Rs 25 million per month engaged in the import and manufacture of goods or provision of services, except in the case of banking, financial and insurance sectors.
  • I propose to improve the efficiency of tax collection through the introduction of an online – managed single Special Goods and Service Tax in place of the various goods and service taxes and levies, imposed under multiple laws and institutions on alcohol, cigarettes, Telecommunication, betting and gaming and vehicles, which accounts for 50% of the income from taxes and levies.
  • In ensuring that the production economy is geared to fulfil the above objectives, the following proposals will be implemented to remove import taxes on the raw materials not available in the country, machineries and equipment with modern technology, to boost exports, and also to encourage domestic industries to produce value added goods
  • In order to make import and export procedures more efficient the officials of required regulatory bodies, will be assigned to the Department of Import and Exports to provide the required services.
  • In order to maintain a similar amount as the import expenditure in foreign exchange in domestic banks, the interest income of such deposits will be exempted from taxes.
  • I propose to reduce the import taxes levied on vehicle spare parts required for new production sectors to incentivize entrepreneurs in automobile industries engaged in vehicle repairing and vehicle assembly.
  • Certain raw materials such as cement, premix, iron rods, bitumen that cannot be produced domestically will be imported in bulk without import duties, to be used to for the construction of mega housing schemes, highways and also to ensure the smooth and continuous availability of such materials for small and medium construction activities at a competitive price.
  •  Budget 2021 – Full Speech

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