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Sri Lanka: Tax proposals in 2021 budget

Sri Lanka: Tax proposals in 2021 budget

The 2021 budget, presented 17 November 2020, includes tax proposals.

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In particular, the 2021 budget proposes certain tax concessions (tax holidays for a period of years) for qualifying investments in export, dairy, fabric, agricultural, shipbuilding, recycling business sectors and for information technology. Other concessions are proposed for multinational entities, with a 25% reduction in tax on dividends in 2021 and a 50% reduction in 2023.

Regarding direct taxes:

  • Measures are proposed to address the deduction of anticipated losses of loans and doubtful debts for purposes of computing the business income of banks and financial institutions.
  • The capital gain tax is proposed to be calculated based on the sale price of the property or the “assessed value” of the property, whichever is greater.
  • It has been proposed to grant an additional deduction in computing business income for cost of funds incurred by the banks and financial institutions on providing loans as start-up capital to individuals who have completed vocational education for approved businesses identified as eligible for tax exemption.
  • Accelerated depreciation (two years) is proposed for investment in technology relating to the collection of milk.
  • Expenditures incurred by commercial banks and financial institutions on the acquisition of, or merger with, subsidiary companies are proposed to be allowed as a deduction.

Regarding indirect taxes:

  • An increased value added tax (VAT) registration threshold is proposed.
  • A voluntary registration scheme would be re-introduced for persons with taxable supplies less than the VAT registration threshold (effective 1 January 2020).
  • A VAT exemption would be provided for the sale of condominium housing units (effective 1 December 2019).
  • A VAT exemption would be provided for information technology and enabling services (effective 1 January 2020).

The VAT rate applicable on import and supply of goods and services was reduced to 8% (from 15%) effective 1 December 2019 and subsequently the change to the VAT rate was published in official gazette No 2151/52 (29 November 2019). The 2021 budget proposes that the VAT rate change to 8% would be maintained consistently during the next five years except for banking, finance, and insurance sectors.

Read a November 2020 report [PDF 158 MB] prepared by the KPMG member firm in Sri Lanka

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