Sri Lanka's First Full Post-War Budget Cuts Corporate Tax

22nd November 2010, www.lbo.lk

Sri Lanka has cut a series of taxes on banks in a bid to increase banking activities, but raised a tax on stock trading, President Mahinda Rajapaksa said presenting the budget for 2011 in parliament.

A debit tax on withdrawals from banks would be lifted and a so-called financial value added tax would be cut from 20 to 12 percent, Rajapaksa said.

Rajapaksa said a 0.2 percent tax on stock trading will be raised to 0.3 percent because there were no capital gains taxes.

Withholding tax on earnings of mutual funds would be the same as Treasury bills, he said. Interest on T-bills are now at 10 percent.

Unit trusts would be freed from economic service charges and foreigners would be allowed to buy them.

Re-insurance would be freed from value added tax.

Sri Lanka will cut corporate income taxes from 35 to 28 percent except for tobacco, alcohol and casinos.

At present companies and non-governmental organizations are taxed at rates around 30 percent, 33.3 percent and 35 percent, the budget speech said.

But income taxes on tobacco, alcohol and casinos will be raised to 40 percent.

A manufacturer exporting under a Sri Lankan brand name will be taxed at 10 percent, down from an earlier 15 percent.

Corporate tax on financial institutions has been cut from 35 to 28 percent. Another income tax like tax of 20 percent (financial VAT) has been cut to 8.0 percent.

But the firms will have to put in the equivalent of 8.0 percent of financial value added tax to a an investment account with Sri Lanka's central bank for three years.

The money has to be used by the banks to give to "grant long term loans at a lower rate of interest" the budget speech said. The interest from such loans are to be free of income tax.

A tax exemption for charities engage in education has been removed, while charities engaged in environmental protection activities.
Firms in fisheries and making seed or planting material have been exempted from income tax for five years.

Start-up companies which invest between 5,000 to 10 million US dollars in sectors to be specified, will get a blanket five year tax holiday.

Unit trusts and mutual funds invested in listed debt or equity will be free from income tax.

Sri Lanka Ports Authority, Ceylon Electricity Board, National Water Supply and Drainage Board, Ceylon Petroleum Corporation have been exempted from income tax and two state firms Sri Lankan and Mihin Lanka have been exempted from income tax.

In many countries, state energy monopolies and ports authorities are sources of large volumes of income tax. Both the Sri Lanka Ports Authority and Ceylon Electricity Board was a large contributor to income taxes at one time.

The budget said the firm will have to pay a 25 percent dividend to the Treasury.

Many of these institutions now run losses, and are sustained with Treasury handouts charged from taxes on the people. Sri Lanka has high rates of taxes on basic foods.

Current tax incentives given under the Board of Investment laws would be revised.

Related Info:
BUDGET-WRAP -President presents development-oriented budget 2011 - TIMES Online (sundaytimes.lk)