budget 2011

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P.E. MATHEW & CO., CHARTERED ACCOUNTANTS

SRI LANKA BUDGET – 2011

Changing Contours of the Sri Lankan Economy

1. Measuring profits and income for tax purposes

1.1 Capital Allowances 1.2 Research Expenditure

1.3 Listing Expenses. 1.4 Advertisements 1.5 Foreign Travel and foreign training expenses 1.6 Management Fees 1.7 Employee tax paid by employer 1.8 100% NBT allowed as a deduction 1.9 Unabsorbed VAT input tax credit – 25% allowed per annum 1.10 Qualifying Payments

loyees

2. Tax Rates 2.1 Normal corporate tax rate 2.2 Banks and Financial Institutions 2.3 Liquor and Tobacco 2.4 Concessionary Tax Rate 2.5 Value added exports 2.6 Clubs and Associations 2.7 Storage, software and supply of labour 2.8. Small and Medium Enterprises (SMEs) 2.9. Venture capital companies, petroleum exploration 2.10 Partnership tax 2.11. Agriculture 2.12 Deemed dividend tax 2.13 A levy on Telecom Industry 2.14 Share Transaction Levy 2.15 Levy on Tele‐ dramas, Films and television Commercials

3. Individual taxation

3.1 Tax free allowance increased.

and income slabs expanded 3.2 Tax rates reduced3.4 Senior Citizens

Cancellation of existing files of Individuals 3.5

4. Employment Income 4.1 PAYE is to be a final tax

rs 4.2 Employed under several employeAYE 4.3 Payments not subject to P

4.4 Public Sector employees 4.5 Private sector emp4.6. Terminal benefits



5.

itutions

Lanka Government Securities

.4 Specified Fees

6. xe Holidays

cy rials

l Organizations (NGOs) al Funds

g offices of Textile, Leather products, footwear and bags

tee Fund Levy (CIGFL)

6.15 Exclusions ‐ Motor Vehicle Concession under PART I of the Finance Act No 11 of 2006

7. Tax (Value Added Tax Act No 14 of 2002)

shold

Scheme

8. n ing Tax (NBT)

Tax

9. Charge (ESC)

old

10. Taxes removed / abolished

Withholding Tax (WHT)

5.1 Interest Income – Individuals and charitable inst

5.2 Interest payments to persons outside Sri5.3 Corporate and 5

Tax E mptions / Tax

6.1 New Investments

6.2 Income Earned in Foreign Curren6.3 Fishing and planting mate6.4 Exempted institutions ‐ 1 6.5 Exempted institutions ‐ 2 6.6 Taxation of Non Governmenta6.7 Unit Trusts or Mutu6.8 Investment Funds 6.9 Headquarters of buyin6.10 Existing Tax Holidays 6.11 Co‐ operative Societies 6.12 Construction Industry Guaran6.13 Port and Aviation Levy (PAL) 6.14 Exclusions ‐ Charitable Institutions

Value Added

7.1 Rates

7.2 Exemptions 7.3 Registration Thre7.4 Input tax claims 7.5 VAT Suspension7.6 Optional VAT 7.7 VAT on Financial services

Natio Build

8.1 Rate

8.2 Liability to8.3 Threshold 8.4 Exclusions from NBT 8.5 Removal of exemptions

Economic Service

9.1 Thresh

9.2 Rates 9.3 Exemptions 9.4 Submission of Returns



11. Tax Administration

11.1 Maintenance of accounts

11.2 Time bar on assessments 11.3 Partnership Tax 11.4 The collection of tax pending decision of the courts 11.5 Provisions relating to recovery of tax. 11.6 Inclusion of members of AAT as authorized representatives 11.7 Penal provisions to Auditors/ tax practitioners: 11.8 Tax refunds. 11.9 VAT Refunds 11.10 Appeal provisions ‐ VAT. 11.11 Agent to pay VAT 11.12 Time bar relating to VAT assessments 11.13 VAT advance payments (WHT) 11.14 Proceedings for recovery before a Magistrate 11.15 Nonpayment of tax and non submission of returns 11.16 Filing of VAT returns on quarterly basis 11.17 Tax treatments of Islamic Finance Instruments 11.18 Independent Appeal Commission 11.19 Recovery Courts 11.20 Writing off of Taxes of SME sector

12. Customs Duty

12.1 Exemptions

12.2 Telecom/ICT/BPO Sectors 12.3 Agriculture Sector 12.4 Confectionery and Bakery Products Manufacturing 12.5 Health, Pharmaceuticals and Cosmetics (including Ayurvedic preparations) 12.6 Tourism and Construction industry 12.7 Shopping for Branded Products 12.8 Vehicles Assembly 12.9 Instruments and Apparatus for Health, Education and Scientific Research. 12.10 Electric and Hybrid Vehicles 12.11 Depreciation Table for Used Motor Vehicles 12.12 New Policy Framework for Customs bonded Warehouses and Places 12.13 Tariff Reductions under the Free trade Agreements

13. Excise Duties and Cess 13.1 Revision of excise duties 13.2 Cess

14. Investment Friendly Action 14.1 Creation of an Investment Fund Account 14.2 Government investment and action

15. Exchange control facilitation to promote exports and develop local capital markets



SRI LANKA BUDGET – 2011

Changing Contours of the Sri Lankan Economy The Budget 2011 encourages manufacturing and service industries to go for more value added products.

Value addition requires innovation, research, product development, technology, investment and new markets.

Budget proposals discuss all such activities and have taken care of them by making avenues open, targets

reachable and returns attractive by leaving in the hands of business entities and entrepreneurs a bigger

proportion of the fruits of their hard work. The objective underlying the budget is to expand the scope and

range of economic activity on a national scale to generate and accrue more revenue in Sri Lanka which will

eventually improve living standards, increase employment and enhance GDP.

Special emphasis has been paid to capture the revenues and gains accruing to foreign players in dealing with

our raw or half processed raw materials. This is to be achieved by encouraging value addition in domestic

manufacturing industry. Proposals are there to penalize non value added exports such as raw rubber and tea.

Tourism, IT/ BPO and Apparel Sectors have received a prominent place in the budget. In the case of tourism

there is a vast potential for development and growth. The market is global and unlimited. Resources are

immense that can be converted, reshaped or redefined as tourist resources. Many such resources such as sea,

heritage, geography, climate, bio diversity etc. are not wasted over tourist use and hence long lasting.

Government envisages a high profile market and revenue inflows larger in absolute terms and, therefore,

penalize low profile low priced operations.

Greater is the emphasis on knowledge based economy which again is working mainly on non‐wasting

resources. IT/BPO industry can change the economic contours of Sri Lanka not only by becoming itself a

flourishing industry but by assisting all other industries and even agriculture in improving management of

resources, eliminating waste and getting marketing efficiency. This is to be achieved by making IT products

available at affordable prices in the local market.

What matters more for business development and growth is the push at the beginning rather than thanks

giving at the end. Proposed low cost funding possibly at 8% through Investment Funds to be created by banks

and financial institutions can give this push to business entities especially high risk agro processing and

innovative industries. Tax exemptions and tax holidays apply only after several years of hard work. If

implemented properly and effectively this proposal can make a significant change in the business climate in

our country.



Curbing wasteful operations in both public and private sectors is also vital for economic growth. It must be

emphasized that waste is not only in the public sector but in the private sector as well. It is often said that

wasteful operations are more costly than fraud. The critical problem is inability or unwillingness to see waste

as waste. Because, a person going himself in a procession cannot see the procession. Waste is very often taken

for granted and hence obscured. In the government sector one contributory source of waste is its sacrosanct

procedure orientation which should be changed to result orientation. This is vital for implementing budget

proposals which would otherwise remain forever as nicely written words.

Agriculture and agricultural marketing plays a crucial role in Sri Lankan economy the relative share of which in

GDP can diminish but its absolute contribution to GDP must grow. It provides food security and livelihood to

majority. If income levels of this majority do not grow the domestic market shrinks in terms of purchasing

power and the demand for products of local industries goes down. Domestic market is the testing ground for

innovative value added products the budget is targeting to encourage. An economy cannot grow only relying

upon the global up market like high spending tourists.

Agriculture must be able to provide food to the nation at relatively low prices. India is an example. Food

expenses of an American which was 30% of his income have been reduced to 10% during the last 30 years.

This does not mean that the American meal has been reduced in its content. His income has increased and

food prices have relatively decreased. The list of other requirements has grown. He has reached an income

level to afford them.

It is noted that the Budget envisages trickledown effect apparently as an alternative to heavy social welfare. It

is good as a long term vision but addressing short term issues is also vital especially to maintain industrial

peace for business entities to flourish to lead the economy. The application of NBT at 2% to wholesale and

retail trade will exert an upward thrust on the general price levels.

We will examine in the next few pages the impact of budget proposals on economic activity, investment,

business profits, tax implications, changes in tax law, tax rates and tax computations. Ours is a general analysis

not targeting at any specific issue. As far as taxes are concerned the budget proposals will have a real tangible

impact only after they are made into law by drafting new laws or amending existing laws. The wordings in the

legal documents may sometimes give a different meaning to that we grasped from the budget speech.

Therefore, we advise readers of this document to consider specific issues on a case by case basis with

professional advice before coming into conclusions.

P.E. MATHEW & CO. COLOMBO DECEMBER 03,2010



1. Measuring profits and income for tax purposes

Business profit as computed in the statements of account need to be recalculated according to tax laws to ascertain the profit and income for tax purposes. Not all but certain accounting revenues and expenses are treated differently under tax laws. Every year before settling the final tax liability accountants do this calculation for their clients. In fact accountants monitor this process right through out especially when clients request them to do evaluation of new investments. Income tax law carries certain disallowable expenses ( E.g. entertainment, 50% of advertisement‐ changed to 25% in this budget, foreign travel falling outside set criteria etc.) and certain expenses allowed on different basis ( E.g. depreciation of assets) . Given below are changes made in this budget in regard to such expenses. Those unchanged allowable expenses(S: 25of the Inland Revenue Act) and unchanged restrictions (S: 26 of the Act) continue to apply.

1.1 Capital Allowances

Accelerated depreciation - Invest in technology and automation Depreciation will be allowed on plant and machinery acquired on or after April 1, 2011 , at the rate of 33 1/3% on the cost of acquisition . The prevailing rate ( other than for printing and packaging industry) is 12 ½%

Recovering construction cost faster Depreciation will be allowed on new buildings constructed on or after April 1, 2011 for commercial use at the rate of 10% ( 10 years) on the cost of construction. The prevailing rate is 6 2/3% ( 15 years)

1.2 Research Expenditure

Innovation and product development encouraged The expenditure, including capital expenditure incurred in carrying on any scientific, industrial, agricultural or any other research for the upgrading of any trade or business carried on by such person which is allowable in terms of section 25(i) of the Act will be enhanced by allowing a double deduction, so far as such research is conducted within Sri Lanka through an institution established for research purposes. To avail the benefit provided the administrative procedures in the public sector must be liberalized to facilitate working with the private sector. They must be changed from procedure orientation to result orientation.

1.3 Listing Expenses

Broad basing ownership and access to low cost funds Expenses on listing a company will be deductible subject to a limit of 1% of the value of the Initial Public Offer. Listing expenses are considered capital and not allowed as at present. Development of the capital market is the objective which is dependent on many more socio‐economic parameters.

1.4 Advertisement

Increased allowable portion –Handle with care

The present restriction of 50% will be reduced to 25%. Accordingly, 75% of advertisement expenses will be allowed.

1.5 Foreign Travel and foreign training expenses

Timely move as businesses become more global



Deduction of expenses on foreign travel will be allowed if incurred in the production of income provided that the aggregate of expenditure on foreign travel and foreign training will not exceed 2% of the previous year’s statutory income from the respective business. The present restrictions of limiting allowable expenses to foreign travel incurred in relation to export promotion, provision of services for payment in foreign currency or participation at Tourist Board approved programs will be removed. In the case of foreign training expenses the present restriction will be removed and the deduction will be allowed subject to the ceiling referred to above.

1.6 Management Fees

Limit needs to control siphoning off profits although present business models have to accommodate management fees.

The present upper limit of management fees allowed will be increased from ‘Rs 1 million or 1% of the turnover whichever is less’ to ‘Rs. 2 million or 1% of the turnover whichever is less’.

1.7 Employee tax paid by employer

The tax paid by an employer on behalf of an employee will not be a deduction for the employer. However, in such cases the tax on tax is paid and there is no revenue loss to government.

1.8 100% NBT allowed as a deduction

Normalcy reinstated even late The present restriction applicable to 2/3 of the NBT will be removed and accordingly, the NBT in full will be deductible.

1.9 Unabsorbed VAT input tax credit – 25% allowed per annum

Unabsorbed VAT input tax credits accumulated as of December 31,2010 will not be allowed to be carried forward. Instead, will be allowed as a deductible expense to be claimed in four equal annual installments commencing from year of assessment 2010/11 if the input tax credit relates to revenue expenditure. If relates to capital expenditure that part of the input tax credit should be added to the asset concerned and capital allowances claimed.

1.10 Qualifying Payments

The present structure of the qualifying payments referred to in section 34 will be revised and the deductions will be restricted to the following:

Donation to the Government in money or otherwise remained to be deductible in full . That is maintaining the status quo

Investments in specific projects (already considered under certain tax holiday schemes) will be deductible as already specified.

Donations in money to an approved charity will be allowed for deductions only if the charity is established for the provision of institutional care for sick and needy. In the case of an individual the following deductions are also allowed.



Premiums paid for life or health insurance and donations to approved charitable institutions providing institutional care for sick and needy will be allowed subject to 1/3rd of the assessable income, or Rs 75,000/‐ whichever is less. A deduction in respect of premiums paid for a special health insurance schemes which cover incurable sicknesses etc will be allowed in full but without a carry forward facility (The amendments to the Inland Revenue Act will be effective from April 1, 2011 unless another date is specifically stated)

2. Tax Rates

Owner of the business profit and income has to pay tax on it. Business profit can be owned by the entity : corporate, partnership , club, NGO or individual. Tax rates differ according to the person who owns profit and income and also according to the nature of the profit which refers specially to the source of profit and business activity. As a result different profits in the hands of a same person could be taxed at different rates. In some cases ( E.g. interest income) tax is deducted at source which is called Withholding Tax (WHT) or Tax Deducted at Source (TDS).Given below are the proposed changes to tax rates. Rates not changed continue to apply.

Tax rates for individuals are given in “3. Individual Taxation”

2.1 Normal corporate tax rate The present rates of 30%, 33 1/3% or 35% applicable to companies will be reduced to 28%.

2.2 Banks and Financial Institutions The rate applicable to banks and other financial institutions will also be reduced from 35% to 28%. This rate will apply uniformly to all off‐ shore banking activities as well as to finance companies, leasing, insurance and other specialized banking services.

2.3 Liquor and Tobacco The rate applicable to any person engaged in the manufacture or import of liquor or tobacco products on such part of taxable income as consists of profits or income from the sale of such products, will be increased to 40%.

2.4 Concessionary Tax Rate – 12%

The present concessionary rate of 15% will be reduced to 12%. This rate will be applicable to Tourism , Export profits and Companies with taxable income less than Rs. 5 Mn. Currently there are many other sectors and persons liable to tax at 15% and the exact application of the reduced rate of 12% will depend on how the tax rate schedules in the Act would be amended .

2.5 Value added exports – 10% ‐ Encouragement to generate more revenue in Sri Lankan soil The maximum rate applicable to any person engaged in an undertaking for the manufacture of any product, having domestic value addition in excess of 65% and Sri Lankan brand name with patent rights reserved in Sri Lanka, on such part of taxable income as consists of profits or income from the export of or by supply to an exporter for the export of such product will be 10%.

2.6 Clubs and Associations – 10%

The prevailing tax rate of 20% reduced to 10%



2.7 Storage, software and supply of labour – 10% The rate will be reduced to 10% in the case of: Undertaking for operation and maintenance of facilities for storage Local software development Supply of labour

(Comment: Encouragement of ‘supply of labour” might have an adverse impact on the long term development of the HR function in companies and industrial peace.)

2.8 Small and Medium Enterprises (SMEs) – 10%

SME s will be defined in the Act. For writing off tax arrears SMEs have been defined in the budget speech as entities having a turnover not exceeding Rs.100 Mn per annum.

2.9 Venture capital companies, petroleum exploration

The current tax rate of 20% will be reduced to 12%

2.10 Partnership tax Tax rate on the divisible profits of a partnership will be reduced from 10% to 8%.

2.11 Agriculture

The profits and income of any agricultural undertaking referred to in section 16 of the Act hitherto exempt from tax up to March 31,2011 will be taxed at rates not exceeding 10% from April 01,2011.

2.12 Deemed dividend tax

Declare 10% of distributable profit as dividend to avoid deemed dividend tax

The minimum quantum of dividends to be distributed out of the distributable profits to relieve from the liability of minimum dividend tax referred to in section61(1)(b)(ii) will be reduced from 25% to 10% .

2.13 A levy on Telecom Industry A telecommunication levy of 20% will be introduced on telecom services in lieu of the existing levies which are proposed to be removed.

2.14 Share Transaction Levy

The present rate of 0.2% will be increased to 0.3% with effect from January 1, 2011

2.15 Levy on Tele‐ dramas, Films and television Commercials The present levy imposed under the PART II of the Finance Act No 11 of 2006, will be extended to cover cable television as well. (Refer Gazette No 1680/29 dated 19.11.2019

(The amendments to the Inland Revenue Act will be effective from April 1, 2011 unless another date is specifically stated)

3. Individual taxation 3.1 Tax free allowance increased. Tax free allowance applicable to individuals and charitable institutions has been increased from Rs.300, 000 to Rs.500, 000. This will be extended to non‐ residents who are citizens of Sri Lanka as well. Non residents are not entitled to this allowance as at present.



3.2 Tax rates reduced and income slabs expanded

The highest tax rate of 35% has been brought down to 24%, all income slabs expanded and rates reduced. As a result an individual with an assessable income of Rs. 3,500,000 who has to pay Rs.670,000 as income tax under prevailing rates will have to pay only a tax of Rs.400,000 under proposed rates coming into operation from April 01,2011. The effective tax rate at this income level would be 11.4% as against 19.1% under prevailing rates. Income tax payable under proposed rates will be as follows.

Assessable

income (Rs.)

Cumulative Income (Rs.)

Tax rate (%)

Tax on the income slab

(Rs.)

Cumulative tax (Rs.)

500,000 500,000 0 0

500,000 1,000,000 4 20,000 20,000

500,000 1,500,000 8 40,000 60,000

500,000 2,000,000 12 60,000 120,000

500,000 2,500,000 16 80,000 200,000

1,000,000 3,500,000 20 200,000 400,000

Balance 24

3.4 Senior Citizens – No tax up to Rs.500,000

The present exemption of income from interest accruing to Senior Citizens on moneys deposited in State Banks will be raised from Rs. 200,000 to Rs. 500,000. State banks listed for this purpose are : National Savings Bank, Bank of Ceylon, Peoples Bank, State Mortgage and Investment Bank, Housing Development Finance Corporation Bank, SME Bank Ltd, Lanka Puthra Development Bank Ltd and Banks established under Regional Development Banking Act.

3.5 Cancellation of existing files of Individuals The existing files of individuals, whose taxes paid at source are treated as final will be cancelled.


4. Employment Income Tax reduced, No files, No directions, No refunds

Employment is a separate source of income. Employers are required to deduct tax described as PAYE from employees on their employment income as defined in S: 4 of the Act. Inland Revenue maintains around 475,000 employee accounts. Given below are the changes made. In fact it is not a change. It’s a major overhaul of the employee tax system.

4.1 PAYE is to be a final tax Income tax deducted from employment income of both Government and private sector employees under the PAYE Scheme will be treated as final. Tax free allowance applicable to employment income will be set at Rs. 600,000. Therefore employment income less than Rs. 50,000 per month will not be taxable. Applying for directions will not be available and no refunds will be made. Accordingly, the requirement of filling returns by them will not arise unless they have any other sources of income, the tax in respect of which is not treated as final.



Where employment is the only source of income and tax is deducted under PAYE tax files will not be opened.

4.2 Employed under several employers In the case of an individual employed under several employers, the normal PAYE table will be applied in respect of only the income from the main employer. Tax will be deducted at the rate of 16% from other employment income which will be considered as other income and taxed under normal rates with due credit being given to tax deducted at 16%.

4.3 Payments not subject to PAYE – Tax increased Remuneration paid or benefits provided to a Director or any other person not considered as an employee and hence PAYE Table not applied will also be subject to WHT at 16%, if such payment exceeds Rs.25, 000/‐ per month. Otherwise, the existing rate of 10% will be applicable.

4.4 Public Sector employees Tax imposed. PAYE Table applies The tax credit allowed on the tax on emoluments of public sector employees will not be applicable with effect from April 1, 2011. Employment income will be taxed from the Year of Assessment 2011/12

However, (a) the payments and benefits relating to pension or any retiring benefits, (b) motor vehicle provided or/and any vehicle allowance paid up to Rs.50, 000/‐ per month, and (c) rental value of any Official bungalow provided by the Government will not be taxable. Any rewards or distribution of a share of fine received in the official capacity (referred to in section 157 of the Act) will continue to be taxed at the normal rates.

4.5 Private sector employees PAYE Table applies. Concessions granted.

Motor vehicle benefits as specified in the Gazette under section 4 (2) of the Inland Revenue Act will be exempted from tax. If an allowance is paid instead of providing a motor vehicle, the exemption will be applicable up to a maximum limit of Rs. 50, 000/‐ per month.

4.6 Terminal benefits Terminal benefits from employment paid from a Provident Fund referred to in section 35(2) (d) and (e) will be excluded for computing tax liability.

The present exemption of the benefit from Share allotment referred to in section 8 (1) (p) will be removed. The existing files of employees will be closed, if tax on other sources is also treated as final.


5. Withholding Tax (WHT)

As mentioned in “2. Tax Rates” in certain instances tax is deducted at source. In some cases tax deducted at source is considered the final tax and hence the income earner need not submit a tax return unless he / she has other income on which such tax is not deducted at source. But it is to his / her advantage to disclose all income including income on which final tax is deducted at source if he / she is filing a return. This will help in explaining the increase in wealth, a key point Inland Revenue is always looking at.

5.1 Interest Income – Individuals and charitable institutions

The assessable income limit of individuals and charitable institutions for self direction purposes in the case of withholding tax on interest from deposits in banks or financial institutions as referred to in section 133 (4) (b) and (c) will be raised from Rs.300, 000/‐ to Rs.500, 000.



The next level of assessable income for direction purposes for the purposes of the application of the concessionary rate of 2. 5% will be raised from Rs. 1 m to Rs. 1.5 m.

The WHT rate of persons other than companies will be 8%. ‐ For companies, the 10% rate will remain unchanged.

The tax rates applicable on interest income for individuals will be as follows.

Proposed Present

Interest Income (Rs.) Tax rate Interest Income (Rs.) Tax rate

0 – 500,000 No tax 0 – 300,000 No tax

500,000 – 1,500,000 2.5 % 300,000 – 1,000,000 2.5%

Above 1,500,000 8.0% Above 1,000,000 10.0%

5.2 Interest payments to persons outside Sri Lanka

Provisions will be made in section 95 of the Act to remove the application of the tax deduction requirement under that section (normally at 20%) on any interest, which is exempt from tax under any of the provision of the Inland Revenue Act.

5.3 Corporate and Government Securities

Withholding tax on corporate debt securities will be treated on par with Government Securities. The provisions relating to Government Securities will remain unchanged.

5.4 Specified Fees

The present withholding tax applicable on specified fees will be discontinued with effect from April 01. 2011. (Sections 151 and 153 of the Act) (Note: Withholding tax on rental income under Section 154 at 10% will continue). (The amendments to the Inland Revenue Act will be effective from April 1, 2011 unless another date is specifically stated)

6. Tax Exemptions / Tax Holidays Full or part tax exemptions are given to identified sectors or entities for a specified period depending on government macro policies with regard to investments and direction of the economy.. Given below are the new additions, modifications and exclusions.

6.1 New Investments

A five year tax holiday will be offered for any company, which carries on a new undertaking, with an investment within specified minimum and maximum limits in foreign currency or an amount equal to such amount in rupees in such activities as specified by the Minister from time to time by order published in the Gazette having regard to the development of the national economy. The prior approval is required to be obtained on the basis of criteria specified and a mechanism will be introduced to monitor the specified activities.



6.2 Income Earned in Foreign Currency

No tax for earning foreign exchange by providing services to entities abroad The present exemption referred to in Section 13(ddd) will be extended to cover any service provided to a person or partnership outside Sri Lanka but will not cover commissions, discounts or similar type of receipts for activities carried out in Sri Lanka. Exemption applies to any person , partnership or individual. Service can be rendered in Sri Lanka to be consumed abroad.

The section that granted exemption to any service provided to a person abroad and paid in foreign currency (S: 13 dddd) will cease to operate on March 31,2011.

6.3 Fishing and planting materials – 5 year tax holiday

A five year tax exemption will be granted reckoned from the year of assessment commencing from April 1. 2011 for Fishing, and Cultivation and primary processing of agricultural seeds or planting material.

6.4 Exempted institutions – 10 year tax holiday

The following institutions will be exempted from income tax from all sources for a period of 10 years with effect from the year of assessment commencing from April 1, 2011.

Sri Lankan Airlines Limited Mihin Lanka (Pvt) Limited

6.5 Exempted institutions – 5 year tax holiday

The following institutions will be exempted from income tax from all sources for a period of 5 years with effect from the year of assessment commencing from April 1, 2011.

Ceylon Electricity Board National Water Supply and Drainage Board Ceylon Petroleum Corporation Sri Lanka Ports Authority

However, these institutions will be subjected to payment of a dividend to the Government at 25% on the annual gross profits.

6.6 Taxation of Non Governmental Organizations (NGOs)‐ modified

The taxation provisions of NGOs will remain unchanged. However, the scope of tax remission provisions will be expanded considering requirements of the society. (Section 102 of the Act will be amended)

Currently 3% of the funds received by NGOs is considered as income and is taxed at 30%. Criteria for measuring income (3% of the funds received) will remain unchanged. The tax rate applicable will be 28%

6.7 Unit Trusts or Mutual Funds – Tax exemption From investment in listed debentures and equity.

6.8 Investment Funds The interest on investments by a bank or financial institution in the Fund will be exempt from income tax.



6.9 Headquarters of buying offices of Textile, Leather products, footwear and bags

Foreign exchange earnings from supplies made to foreign buyers, who establish their headquarters in Sri Lanka for management, finance, supply chain and billing, by manufacturers of textile, leather products, and footwear and bags will be exempt from tax (Sections 7, 13 and section 61 of the Act)

6.10 Existing Tax Holidays

(a) Tax Holiday under section 17 – The areas for which the exemption is applicable will be specified to avoid ambiguities.

(b) Tax holidays under section 24C and 24D – The application of the exemption will be restricted to profits from the specific business.

6.11 Co‐ operative Societies It is proposed to extend the income tax exemption to co‐operative societies registered under the Provincial council statutes.

6.12 Construction Industry Guarantee Fund Levy (CIGFL)

The exemption will be considered for special projects approved by the Minister in charge of Finance.

6.13 Port and Aviation Levy (PAL)

Import of goods to specific projects carried on, out of foreign funds or donations received by the Government will be exempt from PAL.

6.14 Exclusions ‐ Charitable Institutions

The present exemption applicable on profits of a business carried on by charitable institutions as referred to in section 7(e) of the Act will be removed. At present the profits of a business of a charitable institution is exempt from tax if that profit is used for the charitable purpose. The definition of charitable purpose will be amended by excluding educational activities carried out by any institution established under the Companies Act or for business purposes and adding activities carried out by institutions engaged in activities of environmental protection and eco friendliness.

6.15 Exclusion ‐ Motor Vehicle Concession under PART I of the Finance Act No 11 of 2006

The concession of 25% duty waiver to individuals will be removed with immediate effect. The concessions already granted will be valid. The Finance Act No.11 of 2006 provided for a 25% duty waiver on the import of motor vehicles for individuals who has paid Rs. 250,000 annual income tax for five consecutive years of assessments commencing 1st April 2000 or who is a primary a holder of Sri Lankan Nation Building Bonds ( SLNBB) with an aggregate value of USD 50,000 or its equivalent in any other currency. (The amendments to the Inland Revenue Act will be effective from April 1, 2011 unless another date is specifically stated)



7. Value Added Tax (Value Added Tax Act No 14 of 2002) 7.1 Rates

There will be only one rate (12%) from January 01, 2011 other than the zero Rate applicable to exports as the present 20% rate for luxury items will be reduced to 12%.

7.2 Exemptions

Certain supplies are exempt from VAT. Given below are the new additions to the existing exempt list. Telecommunication services Locally manufactured briquettes and pallets using bio mass wastes. Any goods (including importation) or services to a specific project carried on, out of foreign funds or donation received by the Government, as approved by the Minister considering the economic benefit to the country. Any goods or services by an institution set up by the Ministry of Defense for the rehabilitation of disable soldiers, so far as the activities are carried out by the participation of such soldiers Locally developed software Receipts from re‐insurance by way of commission or compensation in an insurance business Leasing facilities for (a) Motor coaches with seating capacity not less than 28 passenger seats and used for public transport service, (b) Lorries and (c) Tractors

The import or Supply of :

Coal ( specified items) ,Bitumen ( specified items), Machinery and equipment for leather or footwear industry or manufacture of bags High tech medical and laboratory equipment Electronic and hybrid vehicles (Environment and Tourism sectors) Items specified to promote International Shopping and Fashion Jewellery Machinery and equipment for manufacture of grain mixed bakery products Machinery and high – tech equipment imported for the telecom industry

7.3 Registration Threshold

The present registration threshold of Rs 650,000 per quarter or Rs.2,500,000 per annum for normal VAT will remain unchanged.

7.4 Input tax claims

The present restriction of 85% of the output tax will be removed and extended to 100% in respect of any tax invoice or custom declaration issued on or after January 1, 2011. Anything above 100% of output tax should normally be able to carry forward. But it is not clearly stated. The unabsorbed input credit as at December 31, 2010 will be allowable to be deducted as expenditure for income tax purposes as follows: If such input credit relates to revenue expenditure , deduction will be allowed in 4 equal annual installments which would be set off in 4 years of assessment commencing from the year of assessment 2010/11, subject to the provisions specified in section 25 and 26 of the Inland Revenue Act If the input credit relates to capital expenditure, the unabsorbed input credit will be treated as part of the capital asset for the purposes of deduction for capital allowances. It is assumed that this claim can be completed within the remaining useful life of the asset concerned.



7.5 VAT Suspension Scheme

An inherent feature of a VAT system is the reclaiming of input VAT. This involves refunds by Inland Revenue as well which is a long delayed procedure. To avoid paying to claim it back suspension schemes have been developed where invoices of the supplier and receiver are matched and VAT not paid. Administration of such systems is not easy and always leads to delays and disputes.

The VAT Suspension Scheme presently monitored through EDB and TQB will be removed from those institutions and administrated in a separate Unit established for this purpose in the Department of Inland Revenue.

Apart from the above suspension scheme, a special category of supplies will be brought under a scheme of VAT suspension to be monitored by a Special Unit established under the supervision of the Commissioner General. These are supplies made to:

A registered person who/which carries out any special project exempted under the VAT Act Any exporter of any goods or services other than supplies covered under the existing suspension scheme A deemed exporter who manufactures goods in Sri Lanka to be supplied to an exporter; or A supplier who provides value added supplies to any article exported

The necessary guidelines will be published for the implementation of the above Schemes. Date of implementation to be informed later.

7.6 Optional VAT

It is mandatory for any person to register for VAT upon reaching the taxable threshold. A person can register voluntarily for VAT and pay tax at a lower rate before reaching the threshold and continue to pay VAT at lower rates for a given number of years even if the threshold was overtaken. The existing system has a failure in its design and was not attractive to anybody for such voluntary registration. The proposed scheme is a meaningful one in contrast to the existing scheme. Under this scheme a person can register for VAT and has 12 years to reach the status of a fully fledged VAT payer. During this period VAT can be paid at concessionary rates as described below. The moment the input tax credit advantage is realized switching over to the main stream is possible.

The rates applicable and the period in which the business could remain in the status of optional VAT will be expanded as follows.

Period Rate Up to the end of the 3rd year from the date of registration 2% From the commencement of the 4th year to the end of the 6th year 4% From the commencement of the 7th year to the end of the 9th year 8% From the commencement of the 10th year to the end of the 12th year 12%

There is no upper limit of turnover for the application of the above rates. However, the option is available to register for normal VAT at any stage.

7.7 VAT on Financial services

The present rate of 20% will be reduced to 12%. The value addition for tax purposes will be calculated after deducting the VAT on financial services payable.



To ensure uniformity in the calculation of VAT on financial services, the Commissioner General will issue a guideline specifying the basis of calculation of the profits liable to VAT on financial services and the adjustments to be made where necessary on an acceptable realistic basis

Submission of returns will be bi‐annually with payments on monthly basis as of now.

(The amendments to the Value Added Tax Act will be effective from January 1, 2011 unless another date is specifically stated)

8. Nation Building Tax (NBT)

Nation Building Tax was first introduced in February 2009 for a limited period of two years.(‐The budget speech 2009 Part 11 Para 35). Now it has become a permanent tax and has replaced the Turnover Tax administered by the Provincial Councils. The introductory rate in February 2009 was 1%. The rate was increased to 3% in May 2009.

8.1 Rate The present rate of 3% will be reduced to 2%. The concessionary rate of 1.5% applicable on the liable turnover from the sale of rice manufactured from locally procured paddy will be removed with effect from April 1, 2011.

8.2 Liability to Tax The present scope of chargeability will be extended to include the carrying on the business of wholesale or retail trade of goods. (Effective date January 01, 2011)

(Comment: Wholesale and retail trade will come under NBT (2%) instead of Turnover Tax (1%). Government expects additional revenue of Rs.12,000 Mn. on this count Traders will insist higher margins from manufactures and suppliers of goods eventually giving rise to an increase in general price levels. Manufactures already struggling to emerge from the economic downturn will face problems.)

8.3 Threshold

The present threshold of Rs 650,000 per quarter will be reduced to Rs 500,000 per quarter. However, in the following categories the threshold will be increased from Rs. 500,000 per quarter to Rs 12,500,000 per quarter

Operating a hotel, guest house, restaurant or other similar business; Local value added agricultural produce, rice based products Local educational institutions; Supply of labour (man power) or employment

8.4 Exclusions from NBT Excluded institutions in addition to those already excluded:

Government Institutions (Departments) including schools funded by the Government;

Sri Lanka Airline Ltd; Mihin Air (Pvt) Ltd; Air Lanka Catering Services Ltd

Excluded Goods and Services in addition to those already excluded:

Supply of any goods (including importation) or services to a specific project carried on, out of foreign funds or donations received by the Government, as approved by the Minister considering the economic benefit to the country



Importation of raw materials and packing materials for the manufacture of ayurvedic preparations which belong to the Ayurveda Pharmacopoeia or ayurveda preparation subject to the approval of the relevant authority

Services provided to the port or airline in relation to international transportation;

Services provided in relation to ship building for the international market for payments made in foreign currency

Services of sub contractors in a construction contract

Telecommunication services

Supply of locally developed software

Import or supply of following articles

Bitumen under HS Code No 2714

Tractors

8.5 Removal of exemptions

Services of star hotels above the rank of three Star Any person registered for optional VAT

9. Economic Service Charge (ESC) The Economic Service Charge, as name implies, is not a tax. It is a charge imposed for using infrastructure in doing business. As such, ESC has to be paid even if a loss is incurred. However, in a profit situation when income tax has to be paid ESC is allowed to be treated as an advance payment of tax. ESC is administered by the Inland Revenue. 9.1 Threshold The present threshold of Rs. 7. 5 Mn per Quarter will be increased to Rs 25 Mn.

9.2 Rates The existing rates schedule of ESC will be simplified in the following manner.(The definition of turnover for ESC purposes remain unchanged)

Type of Turnover Rate BOI enterprises ( liable to income tax) Apparel exporters BOI trading Houses 0.1% Manufacturers of textiles to apparel exporters

(2) Exempt/ cessionary rate or others Exempt from income tax (including tax holiday companies) During the period which make losses Subject to tax under concessionary rates Wholesale or retail trade other than manufactured or produced by the seller 0.25% (except distributors or dealers in motor vehicles or liquor) Primary conversion of any tea, rubber or coconut plantation including Desiccated coconut, coconut oil or fiber, copra and sheet rubber, but excluding any conversion which produces any alcoholic beverage.

(3) Commercial operations ‐ Advertising Agents 0.5%

(4) Others (including dealers in motor vehicles, liquor, tobacco and petroleum) and turnover of businesses which are defined under the gazette notification 1.0%



9.3 Exemptions

The turnover of the following businesses will be exempt from ESC Distributors as defined in the ESC Act; Dealers in Lottery; Unit trust or mutual fund All air lines and shipping lines

9.4 Submission of Returns The present requirement of submission of quarterly basis returns for ESC will be converted to annual returns with the existing scheme of quarterly payments of tax. (The amendments to the Economic Service Charge Act will be effective from April 1, 2011 unless another date is specifically stated)

10. Taxes removed / abolished

Debit Tax (Debits Tax Act No 16 of 2002)‐ Removed with effect from January 1, 2011.

Social Responsibility Levy (SRL) ‐ SRL on income tax removed with effect from April 1, 2011. The SRL on other Levies will be removed with immediate effect.

Turnover Tax (TT) collected by the Provincial Council. Abolished with effect from January 01, 2011

Regional Infrastructures Development Levy (RIDL) ‐ Removed with effect from January 1, 2011.

Cellular Mobile Subscribers’ Levy ‐ Removed with effect from January 1, 2011.

Environment Conservation Levy ‐ Environment Conservation Levy on telecommunication services will be removed. (Relevant Gazette No 1680/28 dated 19.11.2010)

Administrative charges imposed by the Government ‐ Certain identified charges collected by the Government institutions for any specified approvals will be removed with effect from January 1, 2011.

With the abolition of TT transfer of revenue to the Provincial Councils will be effected as follows: (i) 100% of the total collection of Stamp Duty (ii) 70% of the total collection of the motor Registration fee (iii) 33 1/3% of the total collection of NBT

11. Tax Administration

11.1 Maintenance of accounts S: 106(11) of the Inland Revenue Act requires maintenance of books in such a way so as to identify the profits from different activities when a person carries on more than one trade, business or profession. Provision will be incorporated in this subsection to specify the requirement of maintaining separate accounts in relation to separate units or undertakings carried out as one business.

11.2 Time bar on assessments

The time bar of two years for making income tax assessments will be reckoned from the statutory date for the submission of the return that is November 30 and not March 31. (Section 163(5).



11.3 Partnership Tax

Amendments will be made to avoid the disadvantageous position in cases where the partners are also subject to tax on salaries under PAYE with regard to the credit available for partnership tax paid on the profit sharing basis. (Section 78 of the Inland Revenue Act will be amended.)

11.4 The collection of tax pending decision of the courts

The Court will be empowered to order the payment of full tax or part thereof pending determination of the appeal. Any excess tax arises as a result of final determination will be refunded.

11.5 Provisions relating to recovery of tax

Provisions similar to section 48 of the VAT Act will be made to the Inland Revenue Act with regard to recovery of tax from the principal officer and others of a company.

11.6 Inclusion of members of AAT as authorized representatives)

The members of AAT will be recognized as authorized representatives for the purposes of the Inland Revenue Act. (Section 217 of the Act will be amended).

11.7 Penal provisions to Auditors/ tax practitioners:

Penal provisions will be introduced for auditors and tax practitioners who misuse statutory provisions of any Act or regulation by deliberate misinterpretation of any provisions therein. “Misuse” and “Misinterpretation” have to be defined.

11.8 Tax refunds

Provisions will be made to credit refunds, both income tax and VAT, directly to the bank account of the tax payer.

11.9 VAT Refunds

Provisions will be made to credit VAT refund cheques directly to the bank account of the tax payer.

15 day refunds will be removed and a suspension scheme will be introduced.

A proper mechanism to cross check input credit will be introduced.

Provisions will be incorporated to disregard the claim of refunds in cases where there is no response within a reasonable time.

The time frame will be fixed considering the circumstances of the case.

11.10 Appeal provisions ‐ VAT

Certain administration provisions applicable to income tax appeals (and objections) will be extended to the VAT Act as well.

11.11 Agent to pay VAT

Provisions relating to the taxation of Agent on the liability on behalf of the principal will be incorporated.

11.12 Time bar relating to VAT assessments

The present time bar provisions of 5 years relating to fraud or willful evasion will be removed.



11.13 VAT advance payments (WHT)

The present provisions referred to in section 26A will be removed.

11.14 Proceedings for recovery before a Magistrate

The time frame for deferment of proceeding, similar to section 179(2) of the Inland Revenue Act will be introduced in section 43(1) of the VAT Act.

11.15 Nonpayment of tax and non submission of returns

Penal provisions will be introduced for nonpayment of VAT on self assessment basis under installments and the non submission of return for VAT on Financial services.

11.16 Filing of VAT returns on quarterly basis

Provisions will be made to file VAT returns on quarterly basis other than for zero rated persons.

11.17 Tax treatments of Islamic Finance Instruments

Appropriate amendments where necessary will be considered in identifying the financial instrument for tax purposes under the relevant tax laws.

11.18 Independent Appeal Commission

An independent appeal Commission will be established comprising a team of legal, technical and operational experts in handling any appeal made against the determination of the Commissioner General (the present Board of Review level). The present functions of the Board of Review will be removed from the Relevant Acts administered by the Commissioner General of Inland Revenue and will be brought under a separate Act . Apart from the Acts administered by the CGIR the activities of the Commission will cover the appeals on taxes in dispute under other statues namely, Custom Duty, Excise Duty etc. The time frame fixed for the determination of appeals forwarded to the Commission will be 90 days. Any further action after receiving the determination will be allowed only upon the payment of the disputed tax to a special account which will be refunded (if applicable) on the final determination of the Courts. The functions of the Board of Review will be discontinued.

11.19 Recovery Courts

Necessary steps will be taken to establish a separate recovery Court.

11.20 Writing off of Taxes of SME sector

Income tax, Esc, NSL, GST and obsolete taxes not charged or paid due to conflict environment and financial constrains of persons or partnerships with current annual turnover below Rs. 100 Mn. will be written off with the assurance of compliance thereafter. For this purposes tax payers will be required to obtain a certificate from the Department for future compliance.

12. Customs Duty

12.1 Exemptions Import of goods to specific projects carried on out of foreign funds or donations received by the Government.

12.2 Telecom/ICT/BPO Sectors

Customs duty will be removed for goods relating to telecommunication, Information and Communication Technology (ICT) and Business Process Outsourcing (BPO) sectors.



No Customs duties will be applied on software. The WTO decision on the valuation of carrier media bearing software for data processing equipment will be implemented.

12.3 Agriculture Sector Customs duties on goods pertaining to post harvest storage and transportation systems, will be removed/ reduced while protecting the local industries.

12.4 Confectionery and Bakery Products Manufacturing Customs duty on selected raw materials used in these industries will be removed/ reduced.

12.5 Health, Pharmaceuticals and Cosmetics (including Ayurvedic preparations)

Customs duties on naso gastric tube feeding preparations will be removed and Customs duties on certain glass and plastic bottles used for packing of pharmaceuticals and cosmetics including Ayurvedic preparations and rocess will be reduced. p

12.6 Tourism and Construction industry

Customs duties on selected goods and raw materials will be reduced. Furthermore, Customs duty on vehicles referred to as "motor homes" will be reduced.

12.7 Shopping for Branded Products

To promote Sri Lanka as an attractive destination for international shopping for branded items internationally branded items are exempted from VAT and Import duty. (They are liable only to Port and Aviation Levy and Nation Building tax).

12.8 Vehicles Assembly

To support vehicle assembling industry, with local value addition, Customs duty on parts and components will be reduced.

12.9 Instruments and Apparatus for Health, Education and Scientific Research

Customs duty will be removed on instruments and apparatus for health, education and scientific research, covered under Chapter 90 of the Harmonized System.

12.10 Electric and Hybrid Vehicles

To reduce the cost of fuel and damage to the environment, use of electrically operated vehicles and hybrid electric vehicles will be encouraged by reducing prevailing customs duty to a lower duty, i.e. 30% to 15%, 15% to 5% and 5% to zero, on all such vehicles covered within the Chapter 87 of the Harmonized System.

12.11 Depreciation Table for Used Motor Vehicles

The depreciation table for used motor vehicles of HS headings 87.01, 87.02, 87.03, 87.04 and 87.11 will be revised in accordance to the WTO Valuation Agreement.

12.12 New Policy Framework for Customs bonded Warehouses and Places

Sri Lanka will be developed as a trading hub by taking the maximum benefit from its strategic location to main shipping routes. A new policy framework for the Customs bonded warehouses will be introduced with electronic communication and monitoring systems for effective management and flow of bonded goods.



12.13 Tariff Reductions under the Free trade Agreements

The agreed tariff reductions under the Pakistan Sri Lanka Free Trade Agreement and South Asia Free Trade Area (SAFTA) will be implemented with effect from November 23,2010.

Negative List : Duty free imports under concessional agreements by BOI will be permitted in respect of the following items only if local supplies are unable to meet the required quantities. Cement, Asbestos Sheets, Spare Parts for Motor Vehicles, Wires & Cables, PVC Pipes & Fittings, Paints Furniture including Pantry cupboards, Steel, Tiles (Floor, wall & roof), Granite, Electrical Fittings, Aluminum Extrusion, Lubricants

13. Excise Duties and Cess

13.1 Revision of excise duties

Excise duty rates applicable under Section 22(1) of the Excise Ordinance have been revised. The new rates are published in the Gazette Notification No. 1680/23 dated November 19 ,2010 and will be effective from November 23, 2010.

Category Rate Rs per Litre

Liquor other than Toddy or any Liquor made from Cereal 668.00 Molasses, Palmyra, Coconut and Processed Arrack 813.00

Country made foreign spirits 953.00

Malt Liquor (Alcohol percentage – below 5%) 80.00 Malt Liquor (Alcohol percentage – 5% and above) Rs. 96.00 per 96.00

The License fees enforced under section 25& 32 of the Excise Ordinance have been revised. The new rates are published in the Gazette Notification No. 1680/24 dated November 19, 2010 and will be effective from November 23, 2010.

13.2 Cess The Cess rates applicable on most of the Raw Materials & Machinery have been removed. Certain Cess rates have been revised considering the local value added industries. The new rates are incorporated in the Gazette Notification No. 1680/25 dated 19.11.2010.

14. Investment Friendly Action 14.1 Creation of an Investment Fund Account

Mandatory diversion of tax savings accruing to banks and financial institutions towards investment

Every person or partnership who or which is in the business of banking or financial services will be required for three years commencing from the 1st of April 2011 or from the year of assessment in which businesses operations commenced ,whichever is later to invest at the end of each year of assessment , in an Investment Fund Account, which will be established at the Central Bank of Sri Lanka, an amount equal to the aggregate of (i) 8% of the profits calculated for VAT on Financial Services; and (ii) 5% of the adjusted profits calculated for income tax purposes before tax for that year of assessment in lieu of having single rate at 28 percent for offshore and on‐shore transaction.

The investment in an investment fund shall only be utilized by the investor to grant long term loans at a lower rate of interest.

The interest on investments by a bank or financial institution in the Fund will be exempt from income tax.



14.2 Government investment and action

List below are the investment programs and actions proposed by the government. Some proposals have direct and immediate impact on business activity. Some, such as human resource development have indirect but very significant impact. Government investments and action are categorized under sectors in this listing.

Agriculture

Tea new planting and replanting subsidy is to be increased by Rs. 50,000 per hectare for small tea growers.

Accelerated seed farm development initiative at a cost of Rs. 700 Mn. for 3 years from 2011.

Five year subsidy scheme for plating and replanting spices.

Financial assistance for spice processing industries to produce value added products.

Promotion of floriculture cultivation, packaging and dissemination of scientific knowledge – Rs. 100 Mn.

Rehabilitation of 25,000 minor irrigation schemes over a 3 year period Rs. 900 Mn.

Fishing

Credit facilities at 8% interest to promote aquatic resources and inland fishery.

Concessionary loan facilities for deep sea fishing.

Development of traditional fishery village (Rs. 300 Mn.)

Dairy

Increase farm gate price of liquid milk to Rs. 50 per liter.

Granting credit facilities at 8% interest to promote small scale livestock development.

Industry

Reduction in taxes and duties on machinery, equipment to make world class technology affordable.

Encourage research and development, registration of patents, trademarks and designs, automation through technology and workforce training and allowing double deduction of expenditure for tax purposes.

Promoting partnership between government, private sector and universities to undertake research by relaxing administrative procedures hindering working together and setting up a fund of Rs. 1,000 Mn. earmarked for innovation and Technology Development

Encourage processing of grain mixed bakery products by exempting customs duty and VAT on machinery and equipment required for this industry.

Establishing a knowledge city in each province and intensification of tax incentives IT/BPO sector.

New legislation to counter the anticompetitive practices in shipping trade.

Exemption from customs duty and VAT of machinery and equipment to manufacture textiles, leather, footwear and bags.

Encouraging leading buyers to establish their headquarters in Sri Lanka for management, finance, supply chain and billing operations. Foreign exchange earnings on these operations will be exempt from income tax.



Tourism

Reduction in taxes and duties on passenger transportation vehicles by 25%.

Exemption of electric and hybrid vehicles from excise tax and VAT to promote environmental friendly tourism.

Human Resources

Training 300,000 youth in wide range of new skills over a period of 3 years with an investment of Rs. 16 bn. The investment in 2011 will be Rs. Rs. 5bn.

Upgrading 1,000 secondary schools over a period of 5 years – Rs. 15 bn.

Upgrading 17 state universities over a period of 3 years – Rs. 3,000 Mn.

SMEs

Restructuring SMEs and underperforming business activities to optimize their businesses at a cost of Rs. 5,000 Mn. supported by the World Bank.

Writing off unpaid taxes of SMEs whose current turnover is below Rs. 100 Mn. per year.

Exemption of SMEs from Economic Service Charge

Concessionary income tax rate of 10% for SMEs.

Promoting supplies to government of Thriposha, surgical gauze, selected pharmaceutical products, school text books, uniforms, furniture etc. by local industries. The market is Rs. 10 bn. annually.

Exemption of high tech medical and laboratory equipment from import duties and VAT.

Transport

VAT on leasing of assets is to be removed for lorries, trucks and three wheelers.

Self employment

Daily credit scheme for self employed persons.

15. Exchange control facilitation to promote exports and develop local capital markets

The relevant circulars granting permission for the activities listed below can be found in the web site of the “Central Bank of Sri Lanka”

1. Foreigners to invest in rupee denominated debentures issued by local companies. 2. Sri Lankan companies to borrow from foreign sources 3. Foreign companies to open places of business in Sri Lanka 4. Foreigners on tour or businesses in Sri Lanka to open accounts in foreign currency 5 The staff of foreign embassies in Sri Lanka to open new foreign currency accounts 6. Increase the advanced payments for imports from US $ 10,000 to US $ 50,000 7. Sri Lankan residents to invest in equity of overseas companies and make payments in respect of setting

up of places of business outside Sri Lanka. 8. Insurers to invest up to 20 percent of the long term fund and technical reserves aboard. 9. Importers and indirect exports of gem and jewellery to open foreign currency accounts DECEMBER 03, 2010

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