Tax changes in 2006 budget

VAT on Financial Services

Sri Lanka to hike value added taxes and excise duties to fund its welfare budget, finance minister Sarath Amunugama said Tuesday. VAT on Financial Services

Sri Lanka to hike value added taxes and excise duties to fund its welfare budget, finance minister Sarath Amunugama said Tuesday. • VAT rate on financial services will go up from 15 percent to 20 percent. Estimated revenue is Rs. 2,700 million. Since VAT on financial services is computed on the basis of net profit this will not impose any burden on the people.

Excise Taxes

On a recommendation of the Presidential Taskforce on alcohol and tobacco and illicit drugs, taxation on alcohol and tobacco is being increased to:

• Excise special provision duty on cigarettes has been increased by cents Rs. 0.50 per cigarette.
• Excise duties on hard liquor has already been raised by Rs. 15 per litre and soft liquor by Rs. 5 per litre.

“I expect a total revenue of Rs. 2,550 million,” he said.

Mobile Phones

The prevailing 10 percent excise duty on mobile phones has encouraged smuggling of poor quality mobile phones hurting quality supply.

“Therefore, I have removed this duty,” he said.

Motor Bikes

Special excise duty for motor-bicycles has been removed to correct prevailing anomalies in the present duty structure.

“This will also reduce the price of motor-bicycles. Locally assembled new motor vehicles which will qualify under FTA arrangements will be exempted from special excise duties,” he said.

Exemptions for Livestock Development

A new 50,000 litre per day milk plant is to be commissioned next year in Kilinochchi, with investments from expatriate Sri Lankans.

Local dairy producers have also spent over a billion rupees to expand existing milk collection and processing plants.

“To promote this industry I propose to exempt milk processing machinery from import duty and VAT. I also propose to increase producer price of milk to Rs. 25-30 per litre range next year and gradually remove the prevailing duty waiver on milk powder to promote the local milk industry.”

Printing and Packaging Industry

• Remove the 15 percent duty on all categories of paper to stimulate the local printing and packaging industry.

• Reducing duty on raw material imports to six percent to reduce packaging costs.

Construction Industry

• Capital of the construction guaranteed fund increased to Rs. 3.2 billion from the present Rs. 250 million.

• Setting aside Rs. 200 million at subsidise interest rate to establish a credit guarantee scheme for construction companies to import modern machinery and equipment on concessionary financing terms.

• Duty and VAT exemptions on imports of large construction machinery and equipment over the next two years.

Corporate Income Tax

• Corporate tax for cooperative societies have been reduced to five percent (from 20 percent).

• Low income tax rate for SME to 15 percent from 20 percent.

• To simply tax system, corporate income tax kept at 33 1/3 percent for quoted companies (who’s income exceeds Rs. 5 million) and 35 percent for non quote companies.

The government hopes to raise Rs. 2 billion through this revision.

Social Responsibility Levy

The 0.25 percent cess has been increased to one percent to raise Rs. 1 billion for the national action plan for children.

Corporate Debt Securities

While interest derived from banks and financial institutions are taxed at a flat rate of 10 percent the interest from corporate debt securities are taxed at the standard marginal tax rates ranging from 5 percent to 30 percent.

“I propose that the interest from corporate debt securities be treated in the same way as in the case of interest earnings from banks.”

Shipping Agent

Shipping agents will be taxed 15 percent in respect of profits attributable to transshipment agency fees received in foreign currency.

Introduction of Stamp Duty

Re-introduce stamp duties on instruments and documents other than those subject to debt tax, letters of credit. The government hopes to raise Rs. 3.7 billion through this measure.

When stamp duty was removed in 2002, it brought in over Rs. 8.5 billion in revenues.

VAT Rate Changes

• VAT rate on medicated soft drinks such as Ginger beer and Peyawa, will be reduced from 20 percent to 15 percent to promote the use of local agricultural produce.

• Computers and accessories will be exempted from VAT to popularize computer usage.

• Imports of unprocessed timber logs will be exempted from VAT to help local saw mill operators, the construction industry, furniture manufacturers and to protect our natural forests.

• Reflecting a realistic trading margin, the markup on the CIF for charging VAT at customs will be revised to seven percent. Expected revenue from this change is Rs. 2 billion.

• In order to minimize the cascading effect on essential food items classified in the five percent rate band, such items will be liable for VAT only at the point of customs and not at subsequent sales. This should reduce the prices of sugar , dhal, potatoes, dried fish, chillies and onions.

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