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Sri Lankan Budget Provides Tax Cuts

by Mary Swire,, Hong Kong

27 October 2014

On October 24, Sri Lanka's President, Mahinda Rajapaksa, in his additional role as the Minister of Finance and Planning, presented Sri Lanka's 2015 Budget, which aims through a variety of incentives to stimulate the country's further economic development.

Gross domestic product (GDP) growth of eight percent is targeted for next year, along with a deficit of 4.6 percent of GDP, down from 5 percent of GDP in 2014. The Government expects to be able to cut the deficit to 3.8 percent and to 3 percent of GDP in 2016 and 2017, respectively.

The headline tax cuts for next year include a cut to the maximum pay-as-you-earn personal income tax rate to 16 percent "to ease the burden of wage earning employees and professionals," while the value added tax (VAT) rate would also be reduced to 11 percent from 12 percent.

It is proposed that the tax registration threshold for VAT and the National Building Tax will be hiked to LKR15m (USD114,600) per month "to create a tax- free environment for small business." Small traders with a monthly turnover that is less than LKR50,000 will also be exempted from all levies imposed by local authorities.

The Budget also concentrates on the modernization of Sri Lanka's export industries. An accelerated depreciation provision and exemption from income tax on dividends will be granted to exporters that invest more than USD2m in machinery and equipment.

To encourage exports, the duty on imports of gold by jewelry exporters using their foreign currency accounts will be decreased to 3.5 percent by way of a 50 percent duty waiver. Pension schemes for apparel sector employees and for Sri Lankan migrant workers will also be introduced.

In addition, to reduce the deficit, a USD100 levy will be charged on entry to casinos and a ten percent gaming levy will be levied on industry turnover. The imposition of a special excise tax on motor vehicle imports tax, in lieu of all multiple taxes at the point of import, will also generate additional tax, as will hikes to excise taxes on cigarettes and alcohol.

Other measures are aimed at increasing tax compliance rates. To stop the growth in tax arrears, the Government will provide for a five-year credit at a reduced interest rate to enable taxpayers to pay their overdue tax and social security arrears upfront. Other measures include modernization at the Inland Revenue Department to facilitate the use of Personal Identification Numbers and improve tax administration.

TAGS: compliance | Finance | tax | investment | small business | economics | business | value added tax (VAT) | tax compliance | Sri Lanka | fiscal policy | gross domestic product (GDP) | employees | budget | tax thresholds | tax rates | social security | import duty | dividends | individual income tax | business investment | Tax

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