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A dialogue on Sri Lanka tax amendments

09 Jun 2021

  • Chamber Academy hosts webinar with IRD

By Karen Hapuarachchi According to the Inland Revenue Department (IRD), the tax system in Sri Lanka was first introduced in 1932 with the “First Year of Assessment 1931/1932”. Almost 90 years since its establishment, amendments were recently made to the Inland Revenue Act. The Chamber Academy, an institute providing high-impact work, based-training programmes under the Ceylon Chamber of Commerce, hosted a webinar last Wednesday (2) on the recent amendments to the Inland Revenue Act, which was moderated by Ceylon Chamber of Commerce Deputy Vice Chairman Duminda Hulangamuwa. In light of this, IRD Deputy Commissioner Nihal Wijewardane, initiating the dialogue, discussed the amendments available in the Inland Revenue Act No. 10 of 2021. “The first exemption is for the banking sector. According to the notice published by the Commissioner General, with effect from 1 April 2018, we have introduced several exemptions.” According to the exemptions, non-resident persons who are receiving discounts from the sovereign bonds are exempted, according to the principal Act. Wijewardane explained that according to the proposals made with effect from April 2018, there was no exemption given for gains on realisation from relevant bonds. “Now you can gain interest, discounts, and realisation gains on sovereign bonds, but you have to have made an investment of $ 100,000,000 as an aggregate investment to qualify for the exemption,” Wijewardane commented. Agro-farming exemptions As per the agriculture sector exemptions, gains and profits from the sale of agricultural products, he said that some agro-farmers’ produce have been exempted from the income tax. As mentioned, the exemptions were granted with effect from 1 April 2019/20. “In accordance with the agricultural exemption, the gains and profits from the sale of agro-farming products are exempted from income tax. Thus, you can apply these exemptions only for the sale of agro-farming producers and you have to find what the gains and properties are in relation to this,” Wijewardane added. The IRD Deputy Commissioner further clarified that the exemption can be claimed based on the deemed sales provided by the Act, in the case of agro-farmers using the same producers for the processing or manufacturing operations. Furthermore, Wijewardane highlighted that the aforesaid exemption will only be available for a period of five years, as proposed in the 2021 Budget. In addition to this, it was also mentioned that agro-farming has been defined in the Act for better understanding and processes of exemptions. “If you look at this exemption, it covers most of the farming activities, including cultivation in land and cultivation in a greenhouse, as well as animal-related activities in this. It can also be noted that rearing of fishes is covered, but deep-sea fishing or sea fishing is not,” he pointed out. Primary processing activities and manufacturing Wijewardane noted that farming activities will be extended in the Act to include certain primary processing activities such as claiming, sizing, sorting, cutting, raiding, acting, and chilling. Accordingly, this exemption is applicable to and can be claimed by agro-farmers who primarily produce these agro-products (first stage of production) by primary processing activities. However, purchasing harvests and processing it primarily will not be applicable for the exemption and such parties will not be able to claim it. “You cannot process imported harvests. It is basically locally produced in other countries. Some activities of processes include dehydrating, canning, and packaging for the purpose of product preparation,” he explained. Furthermore, he spoke of a concessionary tax rate for companies that take part in agro-processing and manufacturing activities. As such, according to the amendment, it is to be a reduced rate of 18% and the Act will accordingly provide the definitions for better clarifications, under Section 195. “Farmers produce basic agro-produce, and without any processing, farmers resale the produce. In the hands of the buyer, the sale of unprocessed agro-produce is purchased and primary processing is done as well. Each party in these stages can claim the exemption to their contribution,” Wijewardane stated. Thereby, the relevant part of the gains of agro-processing was revealed to be taxed at 14% and the relevant part of the manufacturing activities at 18%. He also noted that if the same farmer is partaking in producing and primary processing with effect from April 2021, the farmer is entitled for a tax reduction on the gains generated from the production. Income tax exemptions While noting that commercial hub enterprises were also given an exemption from tax, Wijewardane highlighted an explanation revolving around the dividend and the exemptions involved in commercial hub enterprises. “Companies A, B, and C are a group of companies and we can assume company A declared a dividend to company B, which is Rs. 1,200, out of which company B has to pay tax for income. When declaring these dividends, companies can deduct expenses or losses subject to the provisions of the Inland Revenue Act,” he explained, giving an example. According to Wijewardane’s example, company B had Rs. 200 of expenses and arrived at Rs. 1,000, and as the tax rate is 14%, Rs. 140 is paid as taxes and in the hands of company B, gains and profits available to distribute to its shareholders is Rs. 860. As such, company B pays dividends to company C and in the hands of C, the Rs. 860 is exempted. Also, considering that company A is a commercial hub enterprise, in the hands of company B, the gains are exempted. The IRD Deputy Commissioner explained that by using this exempted profit, company B can deduct expenses and thereafter company B can declare the profit to company C, adding that in this case, company C can also claim this exemption further. “The Act says the dividend paid by resident company B and its shareholder company C is exempted if the company declared the same amount after deducting expenses and taxes,” he said. Foreign exchange exemptions In terms of foreign currency exemptions, the foreign exchange must be brought into the country in order to qualify for this exemption and it was said to be with effect from January 2020, in which gains and profits from foreign sources are exempted. “If there is any income that has a foreign source, you can claim this exemption subject to the foreign currency remittance requirement. Even a dividend paid by a non-resident company can be considered as a foreign source,” he clarified. Services can be provided, he said, stating that in Sri Lanka, the condition is that the service must be utilised outside of Sri Lanka, as per the 2006 Act. As for information, technology, and enabled services, as the relevant ministries must be informed in order to claim this exemption, the gazette for this will be issued for this exemption in the near future. Wijewardane further declared that prior to the end of June this year, the gazette will be issued and will consist of information of what the qualifications and extensions for these exemptions are. With regard to the interest income, the IRD Deputy Commissioner stated that if one is maintaining a deposit account in a bank or financial institution, who has received any interest in foreign currency with effect from January 2020, the interest is exempted. “Next one is a special type of deposit introduced as gazette by the Central bank of Sri Lanka. It’s called the special deposit account and is the reason for a separate exemption; special deposit accounts are permitted to be opened in local currencies as well,” Wijewardane informed. He further stated that the account is exempted in case of generating interest income from the special deposit account. Wijewardane, in conclusion, further delved into the segments of foreign currency exemptions in detail while mentioning some other prominent exemptions and reduced rates of tax. The other panellists of the webinar included KPMG Partner/Head of Tax Shamila Jayasekara, Carson Group of Companies Director – Tax Amal Badugoda Hewa, and Aitken Spence Vice President Dilani Katipearachchi.

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