Types of Tax

• INCOME TAX

• TURNOVER TAX

• STAMP DUTY

• NATIONAL SECURITY LEVY

• SAVE  THE NATION CONTRIBUTION

• GOODS AND SERVICES TAX

History
Income tax was introduced in Sri Lanka in 1932 by Income Tax Ordinance  No.2 of  1932 with effect from 1st April 1932.

Basis of Liability
Income tax is charged for every year of assessment in respect of the profits and income of every person for that year of assessment. "Person" is defined to include the following :

·  An Individual

·  A Company

·  Body of Persons

·  Any Government

A "resident" person is liable to tax in Sri Lanka on that person’s income arising in Sri Lanka and income arising outside Sri Lanka. A ‘non-resident’ person is liable to tax in Sri Lanka only on that person’s  income arising in Sri Lanka.

Year of Assessment / Income Period
An year of assessment is the period of twelve months from the 1st of April of an year  to the 31st March of the following year.e.g.: The year of assessment 1997/98 covers the period 1st April 1997 to 31st march 1998.

Resident or Non-resident
Whether an individual is ‘resident’ or ‘non-resident’ depends normally on the length of his stay in Sri Lanka.

A company is deemed to be resident in Sri Lanka if its registered  or principal office is in Sri Lanka or it is controlled and managed in Sri Lanka.

Exemption Limits
A resident individual is liable to tax for any year of assessment only if his assessable income exceeds the exemption limit for that year.

Exemption limit for  the year of assessment
     1996/97  - Rs.60,000
     1997/98  - Rs.100,000
     1998/99  - Rs.144,000

Sources of Income
A person is liable to tax on his profits and income from the following sources:

• Trade, business (including agriculture), profession or vocation;

• Income from house properties and buildings;

  • Net annual value -Owner occupied houses,

  • Net annual value -Occupier’s income,

  • Rents;

• Dividends;

• Capital gains;

• Interests;

• Royalties, premiums, discounts, charges or annuities;

Rates of Income Tax   -  1998/99 

WITHHOLDING TAX 
Payment to non-residents, of interest, rent, royalties or annuities attracts a withholding tax of 33 1/3%.
Dividends paid by companies are subject to withholding tax of  15%. 

Payment of Taxes
Every person is  required to pay income tax in installments on a self-assessment basis as follows:

Each of the first four payments is on an estimated basis of not less than 1/4th of the income tax for the tax year immediately preceding. Any balance of income tax due must be paid as the final installment on or before 30th September following the end of the year.

The tax return for any year is due by November 30th following the end of that tax year.
 

Rates of Depreciation

PLANT, MACHINERY OR FIXTURES
  (1) 25% per annum on the cost

   Motor vehicles
   Lorry
   Bus
   Tractor
   Office furniture (metal or wooden)

  (2)  50% per annum on the cost of

   All other plant ,machinery or fixtures
   Computer Software

 BUILDINGS
 OOO6 2/3%  per annum on the cost of construction

History
Business Turnover tax was first  introduced  in Sri  Lanka by the Finance Act No.11 of 1963. In 1981, the Business Turnover Tax introduced by Finance Act No.11 of 1963 was replaced by the Turnover Tax Act No. 69 of 1981 and is effective from 13th November 1981.This Act introduced an input credit mechanism in respect of the manufacturing  sector.

Imposition of Turnover Tax
Turnover Tax is charged  for every quarter  from every  person who carries on any business in Sri Lanka or renders any service out side Sri Lanka for which payment is made from Sri Lanka. Business is defined   to include the following ;

Trade
Profession
Vocation
Agricultural undertaking
Racing of horses
Letting of commercial premises by a company
Business of  a manufacturer
Business of taking commissions or fees for any transaction or services rendered
Business of an independent contractor
Every adventure or concern in the nature of trade
Services rendered outside Sri Lanka for which payments is made from Sri Lanka.

The tax is payable for a quarter in respect of any business, if the Turnover for that quarter is not less than  Rs.25,000.
 

Exemption
The Turnover Tax Act empowers the Minister of Finance to grant exemptions from the levy of turnover tax to any specified business if in the opinion of the Minister  it is essential for the economic progress of Sri Lanka.
 

Turnover Tax - Exporters
In terms of order made by  the Minister any business for the export  of any manufactured  or processed article is exempt from turnover tax. The exemption is available to the manufacturer who exports the goods manufactured by him and also to the exporter who purchases the goods  from another person who manufactured  them.

STAMP DUTY
Stamp Duty is charged in terms of the Stamp Duty Act No.43 of 1982 and is applicable from 1st January 1983.

The Stamp Duty Act imposes the duty to be paid and  specifies the documents and instruments in respect of which the duty is chargeable.

In December 1991 the Government imposed a new levy  called ‘Defence Levy’. By the Defence Levy (Amendment ) Act No.36 of 1995 the name ‘Defence Levy’ was  changed to  ‘National Security Levy’.

The levy is payable by the following categories of persons-

Every  person who carries on the business of manufacture of any article
Every importer
Every person who carries on the business of insurance, banking or   finance

The operative period of the tax was originally fixed only for the year 1992. Later it was extended to cover the years 1993,1994,1995,1996 and 1997.

The Government has imposed a levy under the name ‘Save the Nation  Contribution’ with effect from 1st April 1996. The levy is  payable for every quarter commencing on  or after April 1, 1996.

The following are liable to pay the contribution.

Every citizen of Sri Lanka who is in receipt of  income from employment other than any income from  employment as;

A member of the Sri Lanka Police Force or
A member of the Sri Lanka Army, Sri Lanka Navy or Sri Lanka Air Force.

Every  citizen of Sri Lanka engaged on his own or in partnership  with others in carrying on any  profession, vocation  or similar occupation of an independent character.

A recommendation was made in 1990 for the introduction of a Goods and Services Tax to replace the existing Turnover tax. Act No. 34 of 1996 providing for the implementation of GST has now been enacted. The date from which the GST is operative in Sri Lanka and the rate at which the tax is  levied will be fixed by the  Minister of Finance and  will be declared by order  published in the Government Gazette.

INTERNATIONAL RELATIONS

With the opening up of the economy,the promotion of foreign investments to assist the economic development has become imperative. One major barrier to such promotion is the double taxation of income in the country of source of income and the country of residence of the tax payer entity.

Double Taxation  Avoidance Treaties are aimed at removing such barriers and ,in addition ,providing  positive impetus to encouraging cross-border flow of investment, technology, know-how, managerial and administrative expertise etc.

Sri Lanka has entered into such Treaties with most of the countries of concern to her. The number of treaties in force is  twenty seven, with six other Treaties awaiting entry into force.

Countries with which treaties are in force

Incentives & Grants

The Board of Investment (BOI) is charged with the promotion of investment in Sri Lanka and functions directly under the President of Sri Lanka.

The BOI can grant exemption from ,or modify the application of certain laws of the country, in order to offer investors a suitable and attractive package. It may offer an exemption from income tax or reduce tax rates for several years depending on the magnitude of the fixed capital investment, the number of people employed,  introduction of new technology and net foreign exchange earned.

The Department of Inland Revenue has embarked on a computerization programme in 1992 to transform the manual work processes into one based on Electronic Data processing technology.

This programme, which commenced as a pilot project encompassing only the largest 500 taxpayers, has since then, been extended to cover the entire range of corporate taxpayers , all employers who are required to deduct tax from employees under PAYE scheme and all taxpayers subject to the manufacturing turnover tax. All these taxpayers are assigned a Taxpayer Identification Number (TIN).

• Reports of Ceylon Tax Cases:

Volume 1(Income Tax, Excess profit duty and Profits Tax)
Volume 2(Stamp Duty and Estate Duty)

• A Digest and Index of Ceylon Tax Cases

• Reports of Sri Lanka Tax Cases:

Volume 3(Income Tax ,Business Turnover Tax, Estate Duty ,Stamp Duty etc.)

• Manual of Turnover Tax Law

• Manual of Income Tax Law and Wealth Tax Law

• Inland Revenue Act No.28 of 1979

(Incorporating Amendments upto 31st December 1992)

• Administration Report of the Commissioner General (Annual)

• Taxation   1996/97 ,1997/98

These publications are available for sale at

 The Taxpayer Assistance Centre,
 Inland Revenue Department,
 Sir Chittampalam A Gardiner Mawatha,
 Colombo 2,
 Sri Lanka.

Telephone: (94 1) 320726 Fax: (94 1) 430816

COMMENTS & INQUIRIES

For comments and further information please contact:

·  Research & Policy Division,

·  Inland Revenue Department,
Sir Chittampalam A Gardiner Mawatha,
Colombo 2,
Sri Lanka.

Telephone: (94 1) 440045, Fax: (94 1) 430816