Sri Lanka to limit tax holidays – Update II

Nov 07, 2007 (LBO) – Sri Lanka would cap tax holidays to a maximum of three years from 2008, and extend tax incentives only to low income housing and projects in difficult rural areas, President and finance minster Mahinda Rajapaskse said. “(We will) give only three year tax holidays other than for flagship investments, or to those engaged in development activities in lagging regions or building housing facilities for lower income groups,” he said,

Local and foreign investors get a minimum 5 year tax holiday even for relatively small investments with approval of the Investment promotion agency.

“I propose that grant of tax holidays from 2008 will be restricted as aforesaid and that, such companies will be permitted to graduate through a lower tax rate during the 3 years next ensuing” according to the president.

A five percent corporate tax rate will apply in the first year after the three year tax holiday which will increase by 5 percent annually in the ensuing two years.

Three years after the tax breaks are over companies will be paying 15 percent tax on profits, the same rate paid by export companies in Sri Lanka.

Sri Lanka’s long tax holidays have been blamed for low government revenues.

State revenues this year is expected to reach 17.1 percent of GDP, the highest in seven years boosted by growing income and profit tax from companies and individuals.

Finance ministry expects limiting tax holidays, which will broaden the tax base, will generate up to 500 million rupees in additional revenue next year

However tax breaks on offer for setting up businesses in poor rural areas or shifting existing ones to those areas will continue to apply.

“This is a practical beginning to ensure the prevailing high tax rates are reduced over the next 5 years ensuring they are aligned with those in other countries in the region” says Rajapakse.

Sri Lankan corporate tax rates at 35 percent of profits are some of the highest in the region but only a few companies actually pay the full rate.

“Further, I propose that finance ministry approval will be mandatory prior to availing a tax holiday”, the president added.

Rajapaksa told parliament in his budget speech that the government would impose a 0.25 percent port and airport development levy on apparel exports.

Sri Lanka would also set up a three man commission to examine unpaid income taxes to see what can be collected and also authorize the commission to write off and clear old files.

However dividends and salary incomes earned abroad and remitted to Sri Lanka would be freed from income tax.

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