Summary of key tax changes - IR Amendment Act ,No 10 of 2021(05.07.2021)

1. EXEMPTIONS
   • FOREIGN CURRENCY INVESTMENTS IN SRI LANKA
     • Income derived by any non-resident person (other than a Sri Lankan permanent establishment) as interest, discount or realization of any gain, on any sovereign bond denominated in local or foreign currency. (From 01.04.2018)
     • Income derived by any person as interest or discount paid or allowed, on any sovereign bond denominated in foreign currency, including Sri Lanka Development Bonds. (from 01.04.2018)
     • Gains from the realization of Sri Lanka international sovereign bonds, derived by a commercial banks who made aggregate investment not less than USD 100 million. (from 01.04.2021)

• INVESTMENTS AND SAVINGS
  • Interest
    • From any foreign currency account approved by the Central Bank of Sri Lanka (from 01.01.2020)
    • Interest accruing to any person from a term deposit account titled as Special Deposit Account opened and maintained either in local or foreign currency in a licensed commercial bank or with authorized dealer. (from 08.04.2020)
    • Interest income of welfare societies. (from 01.04.2021)
  • Dividends 
    • Dividend paid to any non-resident person
    • Dividend distributed by commercial hub enterprises
    • Dividend paid by a resident company (B) to a member (C) to the extent that dividend payment is attributable to, or derived from gains and profits from dividends received (net gain after the deduction of expenses, losses or tax) by that resident company.

2. AGRICULTURE

• AGRO FARMING
  • Gains and Profits from the sale of Agro Farming produces( Exemption available for Five Years period from 2019/2020 to 2023/2024)
  • Deemed sales is considered for exemption (if agricultural produces from farming activities are used for processing or manufacturing activities by the same person)-( Exemption available for Five Years period from 2019/2020 to 2023/2024)
•  "Agro Farming" means
  • Cultivation of land with plants, cultivation in green house, bee-keeping, rearing of fish or animal husbandry, poultry farms, shrimp farming, hatchery, veterinary or artificial insemination services.
  • Primary processing activities of cleaning, sizing, sorting, grading, cutting or chilling of any produce produced out of the farming activities (same person), in preparation of such produces for the market but excludes the agro or food processing.

• AGRO PROCESSING
  • Gains and profits from Agro processing w.e.f. 01.01.2020(Applicable rate is 14%)
  • Deemed sales considered for exemption (if used for processing or for manufacturing (Applicable rate is 14%
    
•  “Agro processing” means
  • the processing of any locally produced agricultural, fishing, or animal product and includes an undertaking for the dehydrating, milling, packaging, canning for the purpose of changing the form, contour or physical appearance of such product in preparation for the market but excludes an undertaking of deep-sea fishing or manufacturing.

• Value Addition to Agro Farming Produces
  • If agricultural produces from farming activities are used for processing or manufacturing activities by the same person, attributable quantum of the relevant tax liability will be reduced by 25% - (from 01.04.2021)
  • “Manufacture” means a change in a non-living physical object, article or thing-
    • resulting in transformation of such object, article or thing into a new and distinct object, article or thing having a different name, character or use; or
    • bringing into existence of a new and distinct object, article or thing with a different chemical composition or integral structure

3. FOREIGN SOURCES & SERVICES
   • Exemption (from 01.01.2020)
   • Gains and Profits from foreign sources (Sec.74 of IRA) (Foreign Currency should be remitted to Sri Lanka through a bank)
   • Any service rendered in or outside Sri Lanka to any person to be utilized outside Sri Lanka (Foreign Currency should be remitted to Sri Lanka through a bank)
   • Any amounts derived from the provision of laboratory services or standards certification services by a non resident person

4. INFORMATION TECHNOLOGY & ENABLED SERVICES

• Exemption (from 01.01.2020)
  • Information technology and enabled services as may be prescribed.Refer the Gazette No:2334-6

5. GOLD, GEMS OR JEWELLERY

• Exemption
  • Gains and profits from the business of export of gold, gems or jewellery including cut and polish gems for export (FC should be remitted through a bank to Sri Lanka).(From 01.04.2021)
• Concessionary rates
  • Gains and profits from the consideration received in respect of gems and jewellery (From01.04.2021) (Individuals & Companies 14%)
  • Sale for Foreign currency, of any gem or jewellery, being a sale made in Sri Lanka by any person authorized by the CBSL to accept payment in foreign currency – From 01.04.2018) (Companies 14%)

6. INVESTMENT IN REAL ESTATES

• Income
  • business or capital gains of the seller

Business or capital gains from the disposal of land or building, if such land or building disposed to a Sri Lanka Real Estate Investment Trust (SLREIT). (Exemptions from 01.04.2021)

• business or capital gains, Dividends to unit holder

Dividends, capital or business gains from units or amounts deriving as capital or business gains from the realisation of capital assets of a SLREIT to a unitholder of any SLREIT(Exemptions from 01.04.2021)

7. VOCATIONAL EDUCATION

• Gains and profits from conducting vocational educational programmes, standardized under TVET concept by any vocational educational institution regulated by Tertiary and Vocational Education Commission (Exemption from 01.04.2021)

Condition:

student intake should be doubled compared to the previous year for same programmes or first year student intake (doubled in first year) is required to maintain for balance 4 years period.

Eg. Student intake for the Y/A 2020/2021 – 30

         2021/2022 – 60

If maintain such number of students for the Y/A 2022/2023 to 2025/2026

• Exemption W.E.F. 01.04.2021

New businesses commenced by an Individuals who have completed the vocational education from an institute standardized under TVET concept

• Exemption applies for

Business gains and profits (other than gains from the disposal of capital assets or liabilities)

**two years of project implementation period granted

• Exemption Period

5 Years

8. RENEWABLE ENERGY

• Renewable energy project established with a capacity to produce not less than one hundred mega watts of solar or wind power and supplied such power to the national grid –Business gains and profits from such undertaking (other than gains from the disposal of capital assets or liabilities)

**Two years of project implementation period granted (Exempt for 7 year)

• Supply of electricity to national grid, generated by using renewable energy resources by any person (Companies – 14%, Individuals = 14%)
• Expenditure incurred on solar panels (from 01.04.2021) fixed on premises and connected to the national grid, maximum deduction for year is Rs. 600,000 (including repayment of loan)

9. LISTING OF SHARES IN COLOMBO STOCK EXCHANGE

• A company list its shares during the calendar year 2021, for Year of Assessment 2021/2022 (on aggregate tax excluding capital gain tax)- Tax rate reduced by 50%
• A company list its shares during the period from 01.01.2021 to 31.12.2021, for year of assessment 2022/2023 to 2024/2025 (14%)

10. TO ENCOURAGE THE EXPORTS OF MULTINATIONAL COMPANIES

• Income
  • On the relevant tax liability of dividend income derived by a multinational company (from 01.04.2021)
    • if export increased by minimum of 30% in 2021/2022 compared to the year 2020/2021( Reduction of tax by 25%= (10.5)
    • if export increased by minimum of 50% in 2022/2023 compared to the 2020/2021( Reduction of tax by 50% = 7%)
    • if export increased by minimum of 50% in 2023/2024 compared to the 2020/2021 or same status in (ii) above is maintained for 2023/2024 (Reduction of tax by 50% = 7%)

11. CONCESSIONS TO SME’S

• write off any income tax arrears (after the deduction of any refund) payable by any small and medium enterprise as interpreted in section 195 (defined in relation to the year of assessment 2019/2020) of the IR Act, if such arrears arise due to any assessment made (other than assessments made for tax payments as per the returns, but any penalty will be written off subject to the payment of tax on return) up to the year of assessment 2018/2019 which is outstanding as at June 26, 2020, in the record of the Commissioner General.

• It will not issue an amended or additional income tax assessment (unless an application has been made to amend the self-assessment) for the year of assessment ending on march 31, 2020 (2019/2020) where the Commissioner-General satisfies that there is no fraud or willful neglect is involved in disclosure of income or any deduction or relief by the small medium enterprise who paid the tax declared in the return.
• Removed the restriction for SME to deduct its brought forward reduced rate losses from its businesses when the company earn business profits taxable at a higher rate of income tax.
• Expanded the definition of SME

       Associated companies are treated as SME, if the aggregate turnover of such group of persons do not exceed the turnover threshold of Rs.500 Million

12. EXEMPTIONS FOR OTHER SECTORS

• Exemption W.E.F. 01.04.2021
  • New undertaking which is involved in the sale of construction materials recycled in a selected separate site established in Sri Lanka to recycle the materials which were already used in the construction industry, Exemption applies for Business gains and profits (other than gains from the disposal of capital assets or liabilities)

**two years of project implementation period granted (Exemption Period 10 Years)

• Construction and installation of communication towers and related appliances using local labour and local raw materials or provision of required technical services for such construction or installation. , Exemption applies for Business gains and profits (other than gains from the disposal of capital assets or liabilities)

**two years of project implementation period granted (Exemption Period 5 Years)

• New business commenced to manufacture boats or ships in Sri Lanka and gains and profits from sale of such boats or ships Exemption applies for Business gains and profits (other than gains from the disposal of capital assets or liabilities)

**two years of project implementation period granted (Exemption Period 7 Years)

13. INCOME TAX CONCESSION TO NON-RESIDENT ENTITIES

Remittance tax (at the rate of 14% on remitted profit) is not required to be paid by a SLPE who earned profits and income and retained such total profit for minimum of three years period by investing in Sri Lanka to expand its business or to acquire shares or any securities from Colombo stock exchange or to acquire any treasury bill, treasury bond or Sri Lanka international sovereign bonds. The exemption is applicable on such invested retained profit is remitted whenever after that three years (concession granted from 01.04.2021).

14. RELIEFS FOR RESIDENT INDIVIDUALS

• Personal relief (provided for non-resident Sri Lanka citizens as well) increased to Rs. 3 million (from 01.01.2020)
• Rent relief 25% as provided in IRA 
• Expenditure relief (from 01.01.2020) maximum amount of deduction is restricted to Rs. 1,200,000 for Y/A
  • Health expenditure including contributions to medical insurance
  • Education expenditure (including vocational education) incurred locally for such individual or on behalf of his children
  • Interest paid on housing loans
  • Contribution made to local pension schemes
  • Expenditure incurred for the purchase of equity or securities (TB issued under TB ordinance, stocks or securities under reg. Stock ordinance, corp. Debt sec. Traded on CSE)
• Expenditure incurred on solar panels (from 01.04.2021) fixed on premises and connected to the national grid, maximum deduction for year is rs. 600,000 (including repayment of loan)

15. NORMAL TAX RATES – INDIVIDUALS

16. CONCESSIONARY TAX RATES – INDIVIDUALS

17. SPECIAL TAX RATES – INDIVIDUALS

18. TAX RATES -PARTNERSHIP

19. TAX RATES – ENTITIES

20. SPECIAL TAX RATES TO COMPANIES

21. REDUCED TAX RATES TO COMPANIES

22. AMENDMENTS FOR DEDUCTION RULES

• Food and beverages (other than liquor) will be considered as an allowable expenditure subject to Sec. 10 and 11.

17. Repair expenditure will be allowed as a deduction whether the expenditure is in capital nature or not. Improvement expenditure restricted to 5% on buildings and related assets (class 4) and 20% for others.

• Additional 100% deduction on research and development expenditure (deductible under Sec.15 of the IRA) has been allowed for year of assessment 2021/2022 and 2022/2023.
• Expiration period extended for another 3 Years, to claim enhanced capital allowances under Sixth Schedule to the IRA
• Capital allowances on milking machines, granted within 2 years

23. MARKETING AND COMMUNICATION EXPENDITURE

• Expenditure incurred by any person including capital nature expenditure for,
  • market research (should be carried out by the same person or local institution)
  • development or production of marketing, advertising and communication campaign (should be carried out in Sri Lanka)
  • advertising on mainstream media or social media including television, radio, print or as outdoor advertising
  • product launches or campaign activation (should be carried out by the same person or local institution)
  • development and printing of point of-sale material (should be carried out by the same person or local institution).

18. Additional 100% deduction provided subject to an upper cap of Rs.500 million incurred on goods or services having minimum of 65% of local value addition during the three years from 2021/2022 to 2023/2024 ( payments to associates, certain internal expenditure cannot be considered for additional deduction).

24. AMENDMENTS FOR DEDUCTION RULES

• Financial cost deduction limit is re-arranged

A   

_____ * c

B

Where:

‘A’ = Financial cost of the year; and

‘B’ = Value of financial instruments on which the financial cost incurred during the year; and

‘C’ = 4 x Total of the issued share capital and reserves of the company at the end of the year

• Financial cost can be deducted for the Y/A 2021/2022 without a limit (if there is any B/F balance, it should be C/F)

25. QUALIFYING PAYMENTS

• Payments made to consolidated fund by any public corporation (with effect from 01.04.2019)
• Contribution made by a resident individual in money or otherwise to establish a shop for a female individual who is from a samurdhi beneficiary family as instructed and confirmed by the Department of Samurdhi Development.
• Expenditure incurred by any financial institution by way of cost of acquisition or merger of any other financial institution where such cost is ascertained by considering all the facts on case-by-case basis and as confirmed by the central bank of Sri Lanka. Total deductible expenditure shall be apportioned in equal amounts over a period of 3 years and be deductible from the assessable income up to the total qualifying payment.
• Expenditure incurred in the production of a film at a cost (including promotional expenditure of such film) not less than Rs. 5mn or in the construction and equipping of a new cinema at a cost not exceeding Rs. 25mn or in the upgrading of a cinema at a cost not exceeding Rs. 10 million. The deduction will be restricted to 1/3 of the taxable income of the year and can be carried forward to next year

26. OTHER IMPORTANT AMENDMENTS

• If a return or part of a return was prepared for a payment by any person, including by an approved accountant, such person shall certify separately specifying the extent to which he was involved in the preparation of such return and specify the documents examined by him and the information relied upon by him. Such certification shall be submitted along with the return and the said certification shall be deemed to be part and parcel of the said return.
• Taxpayer can appeal to the TAC within 30 days from the date of receipt of decision of the CGIR or within next 30 days from the date lapsed the 7 months since the request for Administrative Review was made under section 139
• Action will be taken to issue the refunds within 6 months of the claim by taxpayer. If not, interest will be paid on the refundable amounts
• If particular asset (ex: depreciable asset) used to produce different gains and profits taxable at different rates, then the disposal gains can also split in to parts , to apply the relevant tax rate for each part.
• Allowed to file a single capital gains tax return (covering all capital gains transactions of the month) and make the payments within 30 days after the end of the relevant calendar month in which the realization occurred.
• All limited liability companies whether resident or non-resident, including Public Corporations shall be filed its tax returns only through e-filing.
• Separate financial statements should be maintained to identify each gains and profit or exempted gains and profits, if different tax rates are applicable in computing income tax payable or may having exempted amounts (from year of assessment 2021/2022)
• Predominant rule is removed and tax rates should be applied for each gains and profits of a business or source of income , if having different business activities or sources of income
• Changed the definition for consideration.(section 38). The consideration received for the realization of an investment asset of a person shall be the amount received or receivable by the person in respect of such asset or the assessed value at the time of realization, whichever is higher.
  • “Assessed value” means the value at the time of the realization, certified by a professionally qualified valuer in a valuation report.