2013 Budget Analysis - Paving The Way For Development

2013 Budget
Analysis
Paving the way for development
November 2012
KPMG Sri Lanka
KPMG
(Charted Accountants)
32A, Sir Mohamed Macan Makar Mawatha,
P.O. Box :186,
Colombo 00300,
Sri Lanka.
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Fax
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8 November 2012
For the clients of KPMG Sri Lanka only
Fiscal Proposals 2013 Paving the way for Development

The 8th budget of the Government was presented by His Excellency the President as the Hon. Minister of Finance, in Parliament, this evening. A development oriented
budget that focussed on three key objectives, being a middle class economy, self sustainability with a focus on food and environmental security and an economy driven
by technology.
Appended hereto is a snapshot of the key fiscal and tax proposals which may be of interest to you.
We may mention that these have been compiled on a high level review of the proposals in the limited interim time available to us. May we also emphasise that these
proposals need to be enacted by Parliamentary procedure for legal enforcement.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to
provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in
the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation
CHARTERED ACCOUNTANTS
KPMG, a Sri Lankan Partnership and a member firm of the

KPMG network of independent member firms affiliated with
KPMG International cooperative (KPMG International), a
Swiss entity.
M.R. Mihular FCA

C.P.Jayatilake FCA
Ms. S. Joseph FCA
S.T.D.L. Perera FCA
Ms. M.P.Perera FCA

T.J.S. Rajakarier FCA
Ms. S.M.B. Jayasekara ACA
G.A.U. Karunaratne ACA
Mr P.Y.S.Perera FCA
W.W.J.C. Perera FCA
W.K.D.C. Abeyrathne ACA
R,M,D,B Rajapakse ACA
Principals S.R.I. Perera ACMA, LLB, Attorney-at-law, H.S. Goonewardene ACA
Contents
Page
Focus of Fiscal Proposals
Focus of Tax Proposals
Detail Analysis of Tax Proposals

Income Tax
Value Added Tax
13
Stamp duty
15
Direct and Indirect Taxes
16
Exchange Control
19
Real Property Transaction
21
Tax Appeals Commission
22
Industry Specific Changes
2012 KPMG, a Sri Lankan Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity. All rights reserved.
24
Focus of Fiscal Proposals

A poverty free upper middle
income economy
To reach a per capita income of USD 4000 by 2016

Engage in a framework and incentive structure to promote household economic activities, SMEs and private sector to expand investment in
production .
Diversify domestic production and develop livelihood opportunities in areas of food production, livestock and cottage industries.
Rollout development projects in rural areas focusing on schools and hospitals and facilitate knowledge sharing programmes to eradicate
malnutrition.
Invitation extended to private business community to participate in special poverty reduction programmes.
A country with food, water and

environmental security
Rapid expansion in food production focusing on being a self sufficient agricultural economy .
Focus on export development in items such as tea, rubber, coconut, spices and import substitution in industries such as sugar, dairy & livestock
and fisheries.
Island wide development of irrigation systems to facilitate cultivation and for usage by people, with prime focus on providing quality drinking water.
Encourage exploration of hydro potentials, solar and other renewable energy sources
Implement an environment conservation initiative targeting to preserve natural resources, rain forests, reservoirs , ocean resources wildlife.
Approaching a path to a
technology revolution, through
quality education and skills
development.
Aim to promote knowledge services industry to a billion dollar industry with 150,000 direct employment in the next 3 years.
Incentives extended to private organizations engaged in research and development.
Establish 20 vocational technical university colleges to cater to the skill demands of international markets.
Align skills education and university education to ensure prompt employment and overall to focus on human resource development.
Incentives provided to reduce cost of broadband facilities and focus on providing enhanced training programmes to improve the quality certification
in the IT and BPO industry.
Liberalization of exchange
control
Investment into unit trusts via foreign direct investment

Opening up of Foreign Currency Earners Accounts by persons who provide goods and services for foreign currency.
Liberalizing foreign borrowing regulations
Focus of Tax Proposals
Incentives provided to
domestic industries
Incentives provided mainly to undertakings in agriculture, dairy & livestock and export industries.
Increased import levies to protect domestic industry and to provide confidence in local goods and services.
Incentives for research and development in order to enhance research in agriculture, health and IT sector.
Encouragement for use of

renewable energy.
Concessionary rate of income tax for undertakings operating mini hydro power projects or other alternative energy source.
100% allowance for depreciation for equipment acquired for energy efficiency purposes.
Investment in sustainable energy sources added as qualifying sector for loan advances from Investment Fund Accounts.
Incentives provides to SMEs.
Exemption from VAT and NBT (including wholesale or retail) if annual turnover/supplies less than Rs 12 Mn
Annual turnover for application of concessionary tax rate increased to Rs 500 Mn.
Exoneration from non compliance of tax laws provided monies re-invested in business.
Income Tax holidays
Generation of revenue via

indirect tax
VAT has been extended to businesses of wholesale and retail making supplies of more than Rs 500 Mn per quarter.
Simplification and clarity
Amendments to be incorporated to further simplify the SVAT scheme.
As in the previous years, this years budget proposals too indicate that a significant portion of state revenue would be generated via indirect taxes.
On WHT on interest income from corporate debt security

Taxation of BOI registered enterprises after the expiry of tax holiday
Ambiguities in the Tax Appeals Commission Act
Rulings/clarifications on tax issues to be issued within 6 months.
Detailed Analysis
of Tax Proposals
Income Tax
Value Added Tax
Customs Duty
Stamp Duty
Direct and Indirect Taxes
Exchange Control Regulations
Real Property Transaction
Income Tax
Determination of Business Profits - Deductions

Depreciation Allowance
Proposed
It is proposed to accelerate the capital allowance deduction on plant, machinery & equipment as follows:
50% allowance would be extended to plant, machinery & equipment acquired for technology upgrading purposes or for the purpose of introducing
new technology.
100% allowance for plant, machinery & equipment acquired for energy efficient purposes which provides more than 30% of the total requirement
of the power generation from alternate energy resources.
100% allowance for expenses incurred on establishment of Broker Back Office system to be compliant with the CSE requirements in relation to the
risk management systems.
KPMG Comments
Currently depreciation allowance is granted at 33-1/3% and 50% respectively. The said proposal seeks to grant an incentive to adopt new technology
and the use of alternate energy resources.
Deductibility of research &
development expenditure
Proposed
Proposal seeks to grant a triple deduction for expenses carried out via any private institution.
KPMG Comments
At present a double deduction is afforded for research and development carried out via any private institution and a triple deduction if such is carried
out through a Government agency.
Deductibility of special levies
Proposed
Proposal seeks to grant deduction for special levies paid by Public Corporations and Government owned business undertakings to the Government.
KPMG Comments
At present the said levies are not specifically precluded from deduction the amendment may be to clarify the matter.
Income Tax Exemptions
Source Specific Exemption

Interest income on bonds to
a non-resident
Proposed
It has been proposed to exempt interest income earned by non residents on investment in bonds.
KPMG Comments
Currently the said exemption is granted for foreign loans .The said scope expansion seeks to encourage foreign investment.
Interest exemption on
corporate debt securities
Proposed
Interest income and Withholding Tax on corporate debt securities listed in Stock Exchange on or after 1.1.2013 will be exempt from income tax.
KPMG Comments
The proposal seeks to encourage listing of debt securities in stock exchange.
Interest income on
municipal bonds
Proposed
Interest income on municipal bonds issued with the approval of the General Treasury will be exempt from income tax.
KPMG Comments
The proposal seeks to increase the borrowing capacity of the Municipal Authorities.
Interest income on bonds

and debentures
Proposed
Withholding tax on interest income earned from investment in bonds and debentures listed in the Colombo Stock Exchange will be exempt.
KPMG Comments
Withholding tax on interest income from bonds and debentures is removed to encourage companies to raise capital via debt instruments.
Income Tax Exemptions
Source Specific Exemption

Offshore Business
Proposed
Effective from 1st April 2012 it has been proposed to exempt off-shore businesses which entails the procurement of goods from one country to
another country ( other than through Sri Lanka).
KPMG Comments
Presently this provision is contained in the English version of the tax law. However, there is inconsistency with the Sinhala version. This proposal
seeks to clarify the matter.
Listing of shares with effect

1.4.2013
Proposed
The tax payable by any company listing its shares on or after 1.4.2013, with more than 20% of its shares issued to the general public , will be
reduced by 50% for the year of assessment in which such shares are listed and two Years of Assessments immediately succeeding that Year of
Assessment.
KPMG Comments
The said proposal seeks to encourage companies to list in the Stock Exchange and issue shares to public.
Royalty income, franchise

fee and designing fee
Proposed
Royalty, franchise fee or any payment for designing, made to a foreign collaborator, by a BOI registered company which enjoys a tax holiday under
Section 17A or Section 16D of the Inland Revenue Act is exempt from income tax.
The said exemption will be granted provided the following conditions are met:
- Foreign investment in the said BOI company exceeds USD 50 Mn.
- Services availed are essential to carry out activities in Sri Lanka
- Services are not obtainable in Sri Lanka.
KPMG Comments
Proposal intimates that the said exemption would be granted provided the BOI is satisfied that the company meets the above criteria.
Income Tax
Personal Tax - Exemptions

Undertaking exempt under
Section 16D or 17A of the
Inland Revenue Act
Proposed
The income from emoluments arising in Sri Lanka to any non-citizen individual who is an expert and brought to Sri Lanka by a BOI registered company
enjoying a tax holiday, will be exempt on the meeting of the following conditions.
The total investment should be out of foreign direct investment exceeding US$ 50 Mn.
The number of experts should not exceed five
Services are essential to carry out the activities of the company.
KPMG Comments
Similar incentives were granted in the past to BOI companies.
Offshore income to a resident
Proposed
The profits and income derived from any source outside Sri Lanka by an individual who is a resident and citizen of Sri Lanka, will be exempt from
income tax, if such income is remitted to Sri Lanka through a bank in Sri Lanka.
KPMG Comments
Presently, exemption is for profits and income earned in foreign currency by any resident company, any resident individual, or any partnership in Sri
Lanka from services rendered in or outside Sri Lanka to any person or partnership outside Sri Lanka and rendered in the course of carrying on any
trade, business, profession or vocation, if such profit and income is remitted to Sri Lanka through a bank.
Offshore income to a
permanent resident
Proposed
The present foreign income exemption applicable to a citizen of Sri Lanka who also holds citizenship of another country will be extended to an
individual who is a citizen of Sri Lanka and has a permanent residency status in another country.
KPMG Comments
At present, Section 15 exempts such income only for a dual citizen (i.e. of Sri Lanka and another country).
Income Tax
Personal Tax - Concessionary Rates

Employment income accruing
to pilots
Proposed
The maximum rate of income tax applicable to pilots on the profits from employment referred to at Section 40 A and the qualified employees referred to
at Section 40 B, will be reduced to 16%.
KPMG Comments
Currently, income is liable to tax at 20%.
Employment income accruing

to IT related service
professionals
Proposed
The IT professionals are liable to income tax at a maximum income tax rate of 16%.
KPMG Comments
Presently, the maximum rate of income tax applicable is 24%.
Compensation for loss of office
Proposed
The maximum rate of income tax applicable to compensation for loss of employment in terms of a scheme, which is not uniformly applicable to all
employees will be reduced to 16%.
KPMG Comments
Presently, the rate of income tax applicable is 20%.
Tax concessions to SME

Sector
Proposed
Any individual who returns from foreign employment and invests savings to commence new businesses will be exempt from all taxes payable on
turnover and on profits from such business for a period of 5 years.
KPMG Comments
This proposal is to entice workers returning to employ their funds in the SME sector.
10
Income Tax
Administrative Provisions
Residency rule
Proposed
The present requirement for a person to become a non-resident is absenteeism from Sri Lanka for an unbroken period of 365 days. This is to be
reduced to 183 days.
KPMG Comments
This proposal makes it easier for an individual to become non-resident giving him/her greater flexibility of movement between countries and reduce
exposure for tax.
WHT on corporate debt

securities
Proposed
Withholding tax on corporate debt securities that carry a floating interest rate will be at the point the interest is paid. In all other instances, withholding
would be at the time of issuance.
KPMG Comments
This proposal will enable the companies to issue corporate debt securities that carry floating rate since presently such was not possible due to
withholding provisions.
Time bar for assessments
Proposed
The time bar period is to be reduced to 18 months effective from the Year of Assessment commencing from 1st April 2013.
KPMG Comments
Presently, time bar provision is two years from the filing of the tax return.
Request for rulings
Proposed
Any request for an administrative ruling on interpretations to be dealt with, within six months.
KPMG Comments
This is to expedite the process, as currently tax payers have experienced long delays in obtaining feedback in the absence of a requirement to provide a
ruling in a timely manner.
11
Income Tax
Revenue Administration
Proposed
All large tax files to be brought under one consolidated unit.
Revenue Administration management Information System to be implemented at the Department of Inland Revenue by 2014.
KPMG Comments
The proposals are to intensify tax audits and information gathering by the Department of Inland Revenue.
Specific provisions for
administrative enforcement of
transfer pricing
Proposed
It has been proposed to introduce specific provisions for the determination of arms length price of domestic inter company transactions and provisions
relating to advance pricing arrangement.
KPMG Comments
Provisions have already been introduced with regard to arms length pricing methodologies which are consistent with international principles. Hence it is
interesting to know what changes would be made for the domestic context.
12
Value Added Tax
Imposition and Exemptions

Chargeability - Wholesale and
retail businesses
Proposed
Any person or partnership carrying on a business of wholesale or retail trade will be liable to register for VAT, provided turnover (including exempt
turnover/supplies) per quarter is not less than Rs. 500 million.
Chargeability to VAT will be limited to liable turnover
KPMG Comments
Currently the business of wholesale and retail trade is specifically excluded from chargeability for VAT.
Restriction/ Extension on value Proposed

added services
VAT exemption which results in the improvement of quality, character or value of any fabric or garment will be:
restricted to services provided to non-exporters
extended to services related to yarn
KPMG Comments
Presently there is no restriction to whom the services should be provided and includes services only in relation to fabric or garment.
Threshold for chargeability
Proposed
Liable turnover less than Rs. 12 million per annum will be exempted from VAT.
KPMG Comments
The current threshold for chargeability is Rs. 650,000 per quarter or Rs. 2,500,000 per annum. However, as an incentive to SMEs, this concession has
been granted.
13
Value Added Tax
VAT Suspension Scheme
Proposed
Changes to the SVAT Scheme will be incorporated into the VAT Act with appropriate guidelines.
The guidelines issued will be regularised through Gazette notification.
SVAT registration for the identified persons will be made mandatory and penal provisions will be introduced for non compliance with the statutory
requirement of SVAT scheme.
Tax audits on SVAT system, which was introduced last year will be expanded.
KPMG Comments
This would provide legislative enforceability of the SVAT scheme. Since SVAT registration was not mandatory until now enforcement of same was an
issue to the authorities.
Payment of VAT and filing of

returns
Proposed
Payment of VAT 20th day from the end of the relevant taxable period.
Filing of returns 30th day from the end of the relevant taxable period.
KPMG Comments
Presently both payment and filing of VAT returns are due on the 20th day from the end of the taxable period.
14
Stamp Duty
Exemptions
Proposed
Instrument of transfer of stocks transferred by any person to a margin trading account and vice versa will be exempted.
KPMG Comments
Presently the transfer of shares is liable to Stamp Duty unless Share Transaction Levy is paid on the transaction.
Stamp duty has been revised on the following instruments as specified below:
instrument
Proposed
Prevailing
Affidavit
Rs. 250
Rs. 100
Policy of Insurance
Rs. 1 of every Rs. 1,000 or part thereof the aggregate of the

premia payable on the policy
Rs. 0.50 of every Rs. 1,000 or part thereof
Notary warrant
Rs. 2,000
Rs. 1,000
Periodic license to carry on trade, business, profession or

vocation.
Rs. 2,000 or 10% of license fee whichever is less
Rs. 1,000 or 10% of license fee whichever is less
License for sale of liquor
Rs. 20,000
Rs. 10,000
Demand for usage of a credit card
Rs. 15 for every Rs. 1,000 or part thereof
Rs. 10 for every Rs. 1,000 or part thereof
15
Direct and Indirect Tax
Small and Medium Term Enterprises

Concessionary rate of Income
Tax
Proposed
Currently, any manufacturing and service undertaking with an annual turnover threshold not exceeding Rs.300 Mn. is considered a SME and entitled to
a concessionary tax rate of 10%. It is proposed to increase this turnover threshold to Rs. 500 Mn.
KPMG Comments
This proposal is very likely to incentivise companies to grow their business to formidable entities. Currently, companies with a turnover in excess of Rs.
300 Mn. is liable to tax at 28%.
Exemption from VAT & NBT
Proposed
Any person or partnership with an annual liable turnover not exceeding Rs.12 Mn. from all businesses carried on will not be liable to VAT or NBT.
KPMG Comments
The proposal is likely to reduce the tax compliance obligation on small scale entities.
Exoneration on non payment of

tax and tax incentive on
reinvestment
Proposed
Income tax and other indirect taxes due from a person carrying on a business which derives a turnover of less than Rs.300 Mn. a year will be
exonerated on the condition that past earnings prior to 1st April 2011 are invested into the business prior to 31 March 2014 and tax laws are complied
with thereafter. Profits derived from such business will qualify for a 5 year income tax holiday.
KPMG Comments
The proposal seeks to entice businesses operating outside the tax net to voluntarily operate within same.
Incentives to individuals
returning from overseas
Proposed
There is also a proposal to grant incentives to a person returning to Sri Lanka and investing foreign currency earnings into a new business venture.
This is discussed in slide 10.
16
Interpretations and Proposed Amendments

Contradictions between Inland
Revenue Act and provisions of
BOI Agreements
Proposed
It is proposed that where provisions of BOI agreements are comparatively disadvantageous compared to the Inland Revenue Act, the provisions of the
Inland Revenue Act would apply.
KPMG Comments
This proposal seeks to eliminate the unfair situation faced by BOI companies where agreements prescribed rates of tax which existed at the time of
granting incentives, which are now comparatively higher than the prevalent rates.
Cess to be covered under SDP

law
Proposed
Amendments due to be introduced to the SDP law to cover Cess, so as to provide for an exemption from cess on raw materials not available in Sri
Lanka for the required quantity imported during project implementation period.
KPMG Comments
The SDP law provides for exemption from 10 laws and Cess would be 11th law which can be exempted under same.
Hub Services
Proposed
It is proposed that amendments to the Finance Act No.12 of 2012 would be made to provide for the following:
(1) Regulations on the basis in which the guideline and approval would be granted
(2) Determine scope of the exemption
(3) To declare the relevant areas to be brought within this law.
KPMG Comments
Amendments were introduced last year to promote Sri Lanka as a hub service destination where exemptions were provided under Customs, Exchange
Control and Import & Export Control laws for specified activities. This amendment seeks to introduce administrative guidelines necessary for the
implementation of same.
Telecommunication Levy
Proposed
Telecommunication levy in respect of services provided through internet / broad band to facilitate IT / BPO sector, to be reduced to 10%.
KPMG Comments
Currently, telecommunication levy on these services are imposed at 20%.
17
Institutional Exemption
Institutional
Exemptions
Proposed
Proposal seeks to exempt the profits and income other than dividends and interest of the following institutions:
Income Tax
College of General Practitioners of Sri Lanka established under Act No. 26 of 1974.
Sri Lanka Social Security Board established under Sri Lanka Social Security Board Act No.17 of 1996.
Public Corporations who provide free services via funds voted by Parliament from the Consolidated Fund or
loan arranged through the Government.
Sri Lanka Savings Bank which is merged with National Development Trust Fund
Lankaputhra Development Bank
Proposed
Profits and income of the following would be exempted
Value Added Tax (Including Financial VAT)
Central Bank of Sri Lanka (Including Financial VAT), and
Nation Building Tax
Services by any public corporation provided free of charge on behalf of the Government, out of funds voted by
Parliament from the consolidated Fund, or out of any loans arranged through the Government.
Economic Service Charge
18

Unit trust
Proposed
It has been proposed to permit , Sri Lankans working and living abroad and small time investors to directly invest foreign currency in Unit Trusts
without channelling investment through Securities Investment Account (SIA).
KPMG Comments
Previously investment was mandated to be channelled through SIA. However, the proposal seeks to popularize Unit trusts among Sri Lankans
residing abroad and small time investors where they can directly invest in Unit Trusts.
Sri Lankan firms to borrow

from foreign sources
Proposed
It has been proposed to allow corporate entities to borrow up to US$ 10 million per annum over the next 3 years without prior permission of the
Exchange Control Department.
KPMG Comments
Previously borrowing in foreign currency was restricted to specified industries . The proposal seeks to relax regulations further.
Commercial Banks to borrow

from foreign sources.
Proposed
It has been proposed to permit licensed Commercial Banks to borrow up to US$ 50 million each year for 3 years without prior permission of the
Exchange Control Department.
KPMG Comments
The intention is to improve the mobility of the funding requirement from global financial markets.
Permission to accept foreign Proposed
currency
It has been proposed to permit the service providers who are engaged in the supply of goods and services to tourist and foreign businesses to accept
foreign currency provided such earnings are deposited in the banking system within 7 working days of the transaction.
KPMG Comments
The proposal is a further relaxation of regulation which permits goods and service providers to hold Foreign Exchange Earners account.
19

Foreign Exchange Earners
account
Proposed
It has been proposed to permit all residents to maintain Foreign Exchange Earners Accounts in currencies of their choice in licensed commercial
banks to deposit foreign exchange earnings from services provided to non residents.
KPMG Comments
The said proposal is a further relaxation of the prevailing guideline in force, to allow all residents to open the account . The current regulation prescribes
eligible persons, permitted credits and debits and permitted currencies.
Transfer of foreign savings of

resident Sri Lankans and
expatriates
Proposed
It has been proposed to permit transfer of foreign savings of resident Sri Lankans as well as expatriates into investments in instruments up to US$ 5
million without the approval of the Exchange Control Department.
KPMG Comments
Currently the investment in instruments outside Sri Lanka requires special approval from Exchange Control Department . The proposal seems to relax
such restrictions provided the investment is made via foreign savings.
20
Real Property Transactions

Prohibition on sale of State Proposed
land
It is proposed to prohibit the sale of State land to foreigners.
KPMG Comments
In the recent past the government has been only leasing land to foreign investors . This proposal is likely to provide enforcement requiring same
Leasing of land to a foreign
person .
Proposed
Foreigner leasing state land are to be charged a 100% tax on the lease value as determined by the Government Chief Valuer for the entire lease
period. The tax is payable upfront unless the prescribed investment requirement by way of foreign remittance is exceeded.
KPMG Comments
Previously the payment of the 100% tax was limited only to the purchase of land.
Concessions applicable to
foreign investors on land
leases.
Proposed
It is proposed to give concessions on leasing of lands to foreign investors who form an equity partnership with local investors holding at least 30% of
capital.
KPMG Comments
No details were intimated on concessions to be provided.
Concessions applicable to a
local investor when leasing
government land.
Proposed
It is proposed to give a 25% discount on the lease rental determined by the Government Valuer for the entire term, to all local investors who lease state
land.
KPMG Comments
The intention seems to provide relief to local investors seeking to carry out investment projects.
21
Tax Appeals Commission Act

Extension of time bar on
concluding appeals
Proposed
To extend the time bar on appeal s transferred from the Board of Review to the Tax Appeals Commission
KPMG Comments
There was a technical error in the extension via the previous amendment and this is to rectify same.
Expanding the scope of tax

laws for hearing
Propose
To make provisions to include Inland Revenue Act No. 28 of 1979, No. 38 of 2000 and Finance Act No. 11 of 2004 to the list of specified Acts in
order to commence hearings on appeals made under such statutes.
KPMG Comments
Currently the Commission is not empowered to hear appeals under the above statutes as such statutes have been omitted from the schedules in the
Tax Appeals Commission Act.
Provisions enabling the

referring of determinations
from the Tax Appeals
Commission to the Court of
Appeal
Proposed
It has been proposed to make provisions in the Tax Appeals Commission Act, to enable the referring of determinations of the Commission to the Court
of Appeal
Currently, the provisions of the VAT, ESC, Stamp Duty and NBT Act on the submission of appeal to the Court of Appeal, have been repealed under
the Tax Appeals Commission Act. The proposal seeks to rectify this omission.
22
Tax Appeals Commission Act
Introduction of a time frame to

appeal to the Tax Appeals
Commission
Proposed
The time frame to make an appeal to the tax appeals commission is to be amended to be one month from the date of the transmission of reasons for
the determination, by the CGIR
KPMG Comments
There is an error in the current statute which sought to introduce this provision.
Deposit/ bank guarantee made

to the Commission
Proposed
Provisions are to be introduced to refund any deposit or enable the commission to remit same to the CGIR.
KPMG Comments
There is no provision relating to monies paid to the Commission.
23
Agriculture and Forestry
Industry
Impact
Financial services
Automobile
Sports
Alcoholic Beverages and Tobacco
Exports
FMCG
Power and Energy
Education
Betting & Gaming
Poultry, Fishery and Dairy
Capital Markets & Unit Trust
Industrial
Industry Impact

Income Tax
Income Tax exemption
The profits and income of an undertaking which cultivates renewable energy crops in agricultural land will be exempt from tax for a period of
10 years.
Value Added Tax

It is proposed to exempt the the;
The supply of locally manufactured products out of coconut waste (coco peat, coir fiber, grow pellets, grow bags, twist fiber, coconut husk).
Cess
It is proposed to increase / impose cess on the following;
Item
H.S. Code No
Cut flowers, flower buds and

foliage
06.03 , 06.04
Fresh, preserved, dried

vegetables and fruits/ other
vegetables and fruit products
07.02, 07.04, 07.05, 07.06, 07.07, 07.08, 07.09, 07.10, 07.11, 07.12, 07.14, 08.01 ( except 0801.31.10 and
0801.31.90), 08.02, 08.03, 08.04 (except 0804.10), 0805.10.20, 0805.40, 0805.50, 0805.90, 0806.20, 08.07,
0808.30, 0808.40, 08.09, 08.10, 08.11, 08.12, 08.13, 08.14, 20.01, 20.02, 20.03, 20.04, 20.05, 20.06, 2007.91,
2007.99, 20.08 (except 2008.30.10 and 2008.50.10), 20.09 (except 2009.11.10).
It is proposed to reduce / remove cess on the following

Item
H.S. Code No
Groats and meal of maize
1103.13
Natural honey
04.09
25
Industry Impact

t is proposed to increase cess on the exports of the following
Item
H.S. Code No
Cinnamon
0906.11
Cloves
0907.10.
Special Commodity Levy

It is proposed to revise Special Commodity Levy on the following;
Item
H.S. Code No
Chilies Crushed or ground
0904.22.10
Black gram
0713.31.90
Grapes
0806.10
Coriander crushed or ground
0909.22
Turmeric - crushed
0910.30.90
Ground Nut shelled
1202.42
Mustard seeds
1207.50
Seeds of cumin
0909.30
Palm oil crude and refined
1507.10, 1507.90, 1511.10, 1511.90.10, 1511.90.20, 1511.90.90, 1512.11, 1512.19, 1513.11.11,

1513,11,19, 1513.11.21, 1513.11.29, 1513.19.10, 1513.19.90
26
Industry Impact
Financial Services Banking Sector

Income Tax
interest Income to Development Banks
Investment income derived by DFCC Bank and NDB on to their long term funding projects which have been funded by a foreign borrowing to
be exempt from Income Tax.
Investment Fund Account

The list of qualifying sectors for lending through the Investment Fund Account to be expanded to include:
Investment in sustainable energy sources
Investment in women entrepreneurship venture capital projects where the investment should not be in excess of Rs. 10 Mn.
Funds lying in the Investment Fund Account, not invested as per the guidelines set out by the Central Bank of Sri Lanka/ Department of
Inland Revenue, by 30.06.2013 will be to be transferred to the Government Consolidated Fund .
Introduction of New Levy

It is proposed to introduce a special levy of 1% on profits of a banking institutions and the levy is to be transferred to the National Insurance
Trust Fund in order to establish an insurance scheme for farmers.
Other proposals
Banks have been requested to defer the recovery of related agricultural loans till after the Maha harvest
Interest charged on such loans to be waived
27
Industry Impact
Automobile
Value Added Tax
Import or supply of following items will be exempt from tax:
items
H.S. Code No.
Bowsers
8704.23.10, 8704.23.20, 8704.32.10, 8704.32.20
Bulldozers, graders, levelers, excavators
84.29
Fire fighting vehicles
8705.30.10
Road tractors for semi trailers
8701.20.10
Excise Duty Special Provisions

Duty on the following items will be revised:
items
H.S. Code No.
Go Carts (to be exempt)
8703.21.62
Trishaws
8703.21.51, 8703.21.54, 8703.21.55, 8703.31.50, 8703.31.60
Motor cars (less than 1,000 cc)
8703.21.69, 8703.21.79, 8703.21.92,8703.21.93
Trucks g.v.w. is between 5 & 20 tonnes
8704.22.30, 8704.22.40, 8704.32.30, 8704.32.40
Trucks g.v.w. is exceeding 20 tonnes
8704.23.30, 8704.23.40
Single Cabs
8704.21.81, 8704.21.82,8704.31.71, 8704.31.72
Specially designed racing vehicles (to be exempt)

Finance Act
Definition of semi-luxury dual purpose motor vehicle is proposed to exclude any single cab or light truck less than g.v.w 3,500 kg used for
transport of goods. Such vehicles will not be liable to semi-luxury dual purpose motor vehicle levy payable with effect from 1.1.2013.
* The budget speech has also intimated that duties on all vehicles imported under concessional schemes will be increased by 10 20 percent.
28
Industry Impact
Sports
Income Tax
Advertising costs incurred on or after 1st August 2012 on specific sponsorship of international sports events approved by the Minister of Sports are to
be fully deductible.
Value Added Tax

The supply of hotel accommodation to a sportsman, an organizer or sponsor of any sport event, who comes to Sri Lanka to participate in any sport
event or activity connected with sport, is to be exempt from VAT.
Nation Building Tax

Import of goods for any international sports event approved by the Minister of Finance will be exempt from NBT.
Excise (Special Provisions) Act

Go carts and specially designed racing vehicles are to be exempt from Excise Duty.
29
Industry Impact
Alcoholic beverages and tobacco

Excise duty
Excise duty rates applicable to liquor and ethyl alcohol have been revised via gazettes1778/40 and 1778/42 effective 6 October 2012.
Description
Revised
Prevailing
Liquor other than toddy or liquor made from any cereal (Wine)
Rs. 898 per Proof Litre
Molasses, Palmyra, Coconut and Processed Arrack
Rs. 1,043 per Proof Litre
Country made foreign spirits
Rs. 100 per Bulk Litre
Malt liquor ( Absolute strength less than 5%)
- Up to 10,000 litres per month
Rs. 370 per bulk litre
- 10,001 to 20,000 litres per month
- above 20,000 litres per month
Spirits to be used in the specified purpose as prescribed by gazette
Excise duty rates applicable to cigarettes have been revised via gazette 1778/41 effective 6 October 2012.
Description
Revised
Prevailing
Cigars, cheroots and cigarillos, containing tobacco
Rs. 7,000 per kg net weight
Rs. 5,500 per kg net weight
Cigarettes, each not exceeding 60 mm in length
Rs. 4,612 per 1000 cigarettes
Cigarettes ,each exceeding 60 mm but not exceeding 67 mm in length
Cigarettes ,each exceeding 84 mm in length
30
Industry Impact
Exports
Income Tax
Deemed Exports
The following is proposed to be considered as deemed exports and the profits and income therefrom be taxed at the concessionary rate of 12%:
Supply of locally manufactured goods or provision of services to foreign ships for payment in foreign currency
Sale of any product manufactured in Sri Lanka for payment in foreign currency through a Foreign Exchange Earning Account authorised by the
Central Bank of Sri Lanka
Sale of locally manufactured goods by an export oriented BOI enterprise upto the quantity approved by the BOI as being for import replacement
to :
(a) A BOI company enjoying a tax holiday under section 16C, 16D or 17A of the Inland Revenue Act or the Strategic Development Projects Act
which is permitted to import project related materials on duty free basis under the BOI agreement during the project implementation period
or
(b) Any person eligible to import specific goods on duty free basis under any Government Authority
Non traditional goods
The definition of non traditional goods "is proposed to be extended to include organic tea in bulk. Profits from export or indirect export of
organic tea in bulk will be taxed at the concessionary rate of 12%.
Determination of profits
The capital allowance rate on plant , machinery or equipment acquired on or after 1.04.2013 for any export industry , is proposed to be
increased to 50% (Prevailing 33 1/3%)
It is proposed to allow the actual expenses incurred on product safety testing in Handlooms and similar domestic resource based value added
products.
Export oriented manufacturers
It has been proposed to grant permission to the export oriented manufacturers of ceramic or garment products , to increase domestic sales upto 40%
of total sales subject to the following;
VAT and NBT will be levied in lieu of all indirect taxes
Income tax will be charged at the concessionary rate of 12%
The enterprise will be considered as an exporter under the SVAT scheme.
Current chargeability to VAT of Rs. 25/- per piece on supplies for the local market will cease.
31
Industry Impact
Exports
Rebates
Where Cess and Special Commodity Levy has been paid on imports used for export, such should be repaid in the form of a rebate under the said
laws.
CESS
It is proposed to increase the Cess on export of following items :
Industry
Item
HS Code
0
Agriculture
Mineral
Cinnamon
Cloves
0906.11
0907.10
Natural sands (waste, Other, Other), Quartz, Other,

Clay, Phosphate, Stones (emery, corundum), Stones
(Gravel, Pebbles, etc), Mica (Cured, Waste), Steatite(
Not crushed, Crushed), Other minerals, Ilmanite, Rutile
Titanium, Zirconium, Niobium, tantalum, vanadium
2505.10.10, 2505.10.90, 2505.90, 2506.10.10, 25.07,

2510.10.10, 2513.20, 2517.49, 2525.10, 2525.30, 2526.10,
2526.20, 25.30, 2614.00.10, 2614.00.20, 2614.00.90, 2615.10
2615.9
Port and Airport Development Levy

It is proposed to reduce the levy from 5% to 2.5% on import of consumables for the textile and apparel industry under following HS codes, with a view
to enhancing the competitiveness of domestic apparel products in the global markets
HS Code
84.48.51, 84.52.30, 84.52.90,
84.51.90, 34.02, 34.02.11,
34.02.12, 34.02.03, 4.02.19
Description
Snikers,needles and other articles used in forming stitches, Sewing machine needles, Other parts of sewing
machines, Ironing parts, Organic surface active agents, Anionic, Cationic, Non ionic, Other
32
Industry Impact
FMCG
Cess
It is proposed to increase / Impose cess on imports on the following;
Item
H.S. Code No
Edible oils
15.08, 15.09, 15.10, 1512.21, 1512.29, 1513.21, 1513.29, 15.14, 15.15, 15.16.20
Margarine
1517.10
Sausages and preserved meat products
16.01, 1602.32, 1602.50, 1609.90, 16.03
Honey and jaggery
17.02
Confectionaries
17.04, 18.06
Bakery products
19.05
Food preparations
21.03, 21.04, 21.05
Mineral water
22.01, 22.02
Vinegar
22.09
Salt
25.01
Soap
34.01 (except 3401.20)
Handles for toothbrushes
3926.90.60
Soap wrappers
48.11 (excep4811.10)
33
Industry Impact
Renewable Energy and Waste Management

Income Tax
Exemption on profits and income from cultivation of renewable energy crops in agricultural lands.
Cessionary rate at 12% proposed for profits and income from operating any mini hydro power project or alternative energy source
100% depreciation to be allowed on energy efficient plant machinery or equipment acquired after 1st April 2013 , if more than 30% of the total
requirement of the power generation is out of alternative energy resources.
Value Added Tax
Import or supply of raw material for the manufacture of energy saving bulbs (HS Code 8543.9) to be exempt from VAT
Nation Building Tax
It is proposed to exempt following from NBT;
Solar panel modules, accessories or solar home systems for the generation of solar power energy (HS Code Nos. 8501.31.10, 8541.40,
8513.10.10, 9405.10.10, 9405.10.20, 9405.20.10, 9405.20.20, 9405.40.30, 9405.40.40, 9032.89.10 and 8539.31.20)
Coal (HS Code Nos. 2701.11, 2701.12 and 2701.19)
Ports and Airport Development Levy
Import of items specified under NBT to be exempt for PAL as well.
Customs Duty
Rates have been reduced to 5% on day lighting devices which capture sunlight transfer & diffuse light in a building interior (HS Code Nos.
7610.90.10 and 9405.50.20)
Waterless urinals (HS Code 3922.90.10) proposed to be removed
Cess
Proposed impose of cess on Lubricants (HS Code 2710.19.890)
Cess on Import of waterless urinals ( proposed to be reduced/removed
Other proposals and incentives
Allocation of Rs.250mn to rehabilitate existing water schemes
Improve sanitary facilities through the Deyata Kirula 2013
34
Industry Impact
Education
Income Tax
Exemption on any private school which is;
- assisted by the Government
- not established under the Companies Act
- registered with the Ministry of Education and
- mandated to follow the government curricula set and circular issued by the Ministry of Education
Currently institutions, including charitable institution providing educational services are taxed at the rate of 10%.
Every school falling under the ambit of charitable institutions used to enjoy an exemption on its profits from business up to 31 March 2011.

Education sector allocated with Rs. 306 billion i.e. 4.1% of National Income.
Budgetary allocation of Rs.4000mn for university education expansion the bulk of which is on account of salaries of university staff.
Comprehensive transformation of certain universities.
Allocation of Rs.900mn for recruitment and training of teachers within respective localities
Set up technical colleges attached to vocational technical university colleges
Agricultural training schools to be equipped with modern technology and research facilities.
Develop rural schools and provide students with food, uniforms and shoes.
35
Industry Impact
Betting and Gaming

Income Tax
No person is permitted to carry out the business of betting and gaming without registering with the Inland Revenue Department for tax purpose.
Betting & Gaming Levy
Bookmakers:
Bookmakers
Proposed
Rs.
Prevailing
Rs.
2,000,000 per year
1,000,000 per year
where live telecast facilities are used
500,000 per year
300,000 per year
where live telecast facilities are not used
25,000 per year
50,000 per year
Betting business through agents
Gaming - Gaming including rudjino Rs 100 million per year

In lieu of all indirect taxes apart from the taxes mentioned above a 5% all inclusive levy will be imposed on gross collection as betting and
gaming on a monthly basis.
36
Industry Impact
Poultry, Fisheries and Dairy

Income Tax
Poultry - The tax rate applicable on profits and income from poultry farming will be reduced to 10%
Cess
Cess has been increased or imposed on import of following dairy products.
Item
HS Code
Dairy Products
04.03, 04.04, 04.05, 04.06
Birds Eggs
04.08
Edible Products of animal origin
04.10
Customs Duty
It is proposed to increase the customs duty applicable on import of milk powder to enhance the local livestock industry, under following HS
codes.
Milk Powder category
HS Codes
In powder, granules or other solid forms, of a fat content, by weight, not exceeding 1.5%
0402.10
Not containing added sugar or other sweetening matter
0402.21
Other
0402.21
To encourage local industry, the levies applicable on canned fish and Maldive fish imported under following HS Codes will be revised
HS Codes
Canned Fish
1604.11, 1604.12, 1604.13, 1604.14, 1604.15, 1604.16, 1604.17, 1604.19, 1604.20
Maldive Fish
0305.59.10

Budgetary provision of Rs.2,000Mn for the development of four fisheries harbours.
37
Industry Impact
Capital Markets & Unit Trust

Income Tax
Companies that Lists - The tax payable by any company listing its shares on or after 1.4.2013, with more than 20% of its shares issued to the
general public , will be reduced by 50% for the year of assessment in which such shares are listed and two years of assessments immediately
succeeding that year of assessment.
Share Brokers - Expenses incurred on establishment of Broker Back Office system to be compliant with the CSE requirements in relation to the
risk management systems will be allowed in full.
Interest Exemption - Interest income on corporate debt securities listed in Stock Exchange on or after 1.1.2013 will be exempt from income tax
Unit Trust - The present tax rate of 28% will be reduced to 10% on unit trust management companies
Value Added Tax
The supply of services to a unit trust by a unit trust management company is proposed to be exempt from VAT.
38
Industry Impact
Industrial
Nation Building Tax
Exemption on import of gems subject to special service fee at rates specified under customs ordinance and on subsequent sale of processed
gem. Local sale of unprocessed gems remain taxable.
Customs Duty
Following rates have been proposed to encourage local value added industries.
Item
HS Code
Proposed
Glass beads
7018.20
Free
Maize Starch
1108.12
15%
Molded or pressed articles of paper pulp
4823.70
5%
Polyester resin
3907.91.00
Free
4011.20.10
15% or Rs.70/- per Kg
4011.20.90
4011.10
5601.21.10
30%
5601.21.90
Free
5601.22.10
30%
5601.22.90
Free
5601.29.10
30%
5601.29.90
Free
7308.90.90
30%
4810.22
5%
4810.29
5%
Pneumatic tyres of rubber
Wet cleansing Tissues
Structure and parts of structure Iron or steal

Coated papers printing or graphic purposes
Cess
Cess to be increased/imposed on import of Steel (HS Code 7214.20.90 and 7306.61.90), Aluminium wire (HS Code 7605.11) and
prefabricated building (HS Code 94.06)
39
Effective Dates of Proposed Amendments

All statutory provisions relating to the following taxes are effective from the dates mentioned below unless specified otherwise;
Effective Date
Type of tax
1st April 2013
Income Tax
Economic Service Charge
1st January 2013
Value Added Tax

Finance Act
Telecommunication Levy Act
Betting & Gaming levy Act
Nation Building Tax
Airport Departure Tax
Stamp Duty
Immediate effect
Cess
Ports & Airports Levy
Excise (Special ) Duty
Customs Duty
40
Notes
Key Contacts
Ms Premila Perera
Partner Head of Tax
KPMG in Sri Lanka
Tel: + 94 11 2343106
E-Mail: premilaperera@kpmg.com
Ms Shamila Jayasekara
Partner Tax & Regulatory
KPMG in Sri Lanka
Tel: + 94 11 5426503
E-Mail: sjayasekara@kpmg.com
Mr Suresh Perera
Principal Tax & Regulatory
KPMG in Sri Lanka
Tel: + 94 11 5426502
E-Mail: sperera@kpmg.com
Office Contact
Address: No. 32A,
Sir Mohamed Macan Markar
Mawatha,
Colombo 3,
Sri Lanka
Tel: + 94 11 5426426
Fax: + 94 11 2445872,
+ 94 11 2446058
E-Mail: kpmgsl@kpmg.com
Web: www.kpmg.com/lk
41
The information contain herein is of a general nature and is not intended to

address the circumstances of any particular individual or entity. Although we
endeavour to provide accurate and timely information, there can be no
guarantee that such information is accurate as of the date it is received or that
it will be continue to be accurate in the future. No one should act upon such
information without appropriate professional advice after a thorough
examination of the particular situation.
2012 KPMG, a Sri Lankan Partnership and a member

firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG

2013 Budget Analysis - Paving The Way For Development

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2013 Budget Analysis - Paving The Way For Development

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2013 Budget

: +94 11 542 6426

Fiscal Proposals 2013 Paving the way for Development

KPMG, a Sri Lankan Partnership and a member firm of the

M.R. Mihular FCA

Ms. M.P.Perera FCA

Principals S.R.I. Perera ACMA, LLB, Attorney-at-law, H.S. Goonewardene ACA

Focus of Fiscal Proposals

Focus of Tax Proposals

Detail Analysis of Tax Proposals

Value Added Tax

Direct and Indirect Taxes

Real Property Transaction

Tax Appeals Commission

Industry Specific Changes

Focus of Fiscal Proposals

To reach a per capita income of USD 4000 by 2016

A country with food, water and

Investment into unit trusts via foreign direct investment

Focus of Tax Proposals

Encouragement for use of

Incentives provides to SMEs.

Generation of revenue via

Simplification and clarity

Amendments to be incorporated to further simplify the SVAT scheme.

On WHT on interest income from corporate debt security

Determination of Business Profits - Deductions

Deductibility of special levies

Income Tax Exemptions

Source Specific Exemption

Interest income on bonds

Income Tax Exemptions

Source Specific Exemption

Listing of shares with effect

Royalty income, franchise

Personal Tax - Exemptions

The number of experts should not exceed five

Services are essential to carry out the activities of the company.

Offshore income to a resident

Personal Tax - Concessionary Rates

Employment income accruing

Compensation for loss of office

Tax concessions to SME

WHT on corporate debt

Time bar for assessments

Request for rulings

All large tax files to be brought under one consolidated unit.

Value Added Tax

Imposition and Exemptions

Restriction/ Extension on value Proposed

Threshold for chargeability

Value Added Tax

Payment of VAT and filing of

Rs. 1 of every Rs. 1,000 or part thereof the aggregate of the

Rs. 0.50 of every Rs. 1,000 or part thereof

Periodic license to carry on trade, business, profession or

Rs. 2,000 or 10% of license fee whichever is less

Rs. 1,000 or 10% of license fee whichever is less

License for sale of liquor

Demand for usage of a credit card

Rs. 15 for every Rs. 1,000 or part thereof

Rs. 10 for every Rs. 1,000 or part thereof

Direct and Indirect Tax