Tax Advisory Services

Value Added Tax (VAT) is an indirect tax imposed on final consumers. However it is collected via persons who are VAT Registered. Any person who conducts a taxable activity is within the ambit of VAT Regulations.

A taxable activity is defined to include any activity carried on as a business, trade, profession or vocation, or every action in the nature of a trade and anything done in connection with the commencement or cessation of such activity.

Note :

• The applicable rate of VAT on goods and services will be reduced from 15% to 8% with effect from 1 December 2019.
• VAT on banking, financial services and insurance is to be maintained at 15%
• The VAT registration threshold is to be revised from Rs. 3 million per quarter (Rs. 12 million per annum) to Rs. 75 million per quarter (Rs. 300 million per annum).
• The VAT on businesses engaged in the tourism sector will be reduced to 0%, provided that 60% of the turnover is sourced from local supplies i.e., local agriculture and locally manufactured goods.

Who are liable for VAT Registration?

VAT is payable when a company reaches a certain turnover threshold, at which time it must obtain VAT registration. The current VAT registration turnover threshold is Rs. 3 million per quarter or Rs. 12 million per annum. For a company engaging in wholesale and retail trade, the applicable VAT registration turnover threshold is Rs. 12.5 million per quarter. When a company reaches these turnover thresholds, it must obtain VAT registration and charge VAT on the taxable supplies made by the company.

VAT Payments

The VAT registered company must set off the input tax credits made against the output VAT credits received and the excess must be paid to the Department of Inland Revenue (IRD) on a monthly basis.

• Any person or partnership who supplies services other than Financial Services or imports and supplies of goods or engaged in the business of wholesale or retail is required to make the payment as follows:- for the period 1st day – 15th day of a month – on or before end of the month
  – for the period 16th day – end of a month – on or before 15th day of the following month
• Any other Person or Partnership (other than above)who supplies goods manufactured by such Person or Partnership who engaged in supply of Financial Service is required to make the payment for the particular month on or before 20th day of the following month.

Applicable Rates

The standard VAT rate is 15%. However, there are certain supplies which are considered to be exempt supplies and zero-rated supplies (such as the export of goods and services).

NBT is payable by an importer of any article into Sri Lanka, including any Person (Company, Body of Persons) carrying on the business of manufacturing any article, service providers providing services in Sri Lanka, and wholesale and retail traders importing articles into Sri Lanka.

Note :

• The current NBT of 2% imposed on liable turnover will be removed in respect of goods and services supplied, with effect from 1 December 2019.
• NBT on banking, financial services and insurance to be removed.
• NBT at import point will be amalgamated with Ports and Airports Development Levy (PAL).
• The higher PAL rate of 7.5% will be revised to 10%, inclusive of NBT. It is not certain but expected that the concessionary rate of PAL at 2.5% will continue.

Who are liable for Registration?

NBT is payable on the import of any article into Sri Lanka by a Person (Company, Body of Persons) carrying on the business of manufacturing any article, or providing services in Sri Lanka, or who acts as a wholesale or retail trader and who imports any article into Sri Lanka, when that business reaches a certain turnover threshold.

The current NBT payment turnover threshold is Rs. 3 million per quarter and Rs. 12 million per annum. For the processing of any locally procured agricultural produce in the preparation for sale, the liable turnover threshold is Rs. 25 million per quarter. When a Person (Company, Body of Persons) reaches these turnover thresholds, it must obtain NBT registration and pay NBT on the liable turnover made by the Person.

NBT Payments

NBT is payable on self-assessment basis in three (3) monthly installments. Each installment is an amount not less than one third of the NBT payable for the quarter. The due dates are as follows.

• 1st Installment – On or before the 20th day of the second month of that relevant quarter
• 2nd Installment – On or before the 20th day of the third month of that relevant quarter
• 3rd Installment – On or before the 20th day of the month immediately succeeding the end of that relevant quarter

Applicable Rates

The standard NBT rate is 2%. For wholesale and retail traders, one half of the turnover is exempt from NBT and the balance of the turnover will be subject to a rate of 2%.

Every person (Company or body of persons) and partnership which carries on or carried out any trade, business, profession or vocation, where that person’s turnover reaches a certain threshold.

Note:

• It has been proposed that the current ESC rate of 0.5% will be abolished. The effective date of this amendment is yet to be announced.

Who are liable for Registration?

Any person and partnership must pay ESC whose relevant turnover reaches the threshold of Rs. 12.5 million per quarter and must pay ESC on their turnover. The ESC paid can be set off against the corporate income tax liability of the company, and any ESC credit can be carried forward for a period of two (2) years.

ESC Payments

ESC is payable on self-assessment basis in four quarters. Payments should be made using the specific paying-in-slip.

• 1st Quarter – on or before the 20th July
• 2nd Quarter – on or before the 20th October
• 3rd Quarter – on or before the 20th January
• 4th Quarter – on or before the 20th April

Applicable Rates

ESC is charged at a rate of 0.5% on relevant turnover.

Stamp duty is imposed on specific instruments which are executed, drawn or presented in Sri Lanka, as well as specific instruments that are executed outside Sri Lanka in relation to property situated in Sri Lanka which are presented in Sri Lanka. Stamp duty is calculated as a percentage of the value of the instrument.

Specified Instruments

Stamp duty is payable at the point of execution of specific instruments identified by the regulations. Those instruments are as follows:

• A policy of insurance.
• A warrant to act as a notary public.
• A periodic licence to carry on a trade, business, profession or vocation.
• A claim or demand from a credit cardholder for payment on account of usage of the card.
• A mortgage for a definite sum of money which affects any property.
• A promissory note.
• A lease or hire of any property.
• A receipt or discharge given for any money or other property.
• Any other instrument specified by the Minister by Gazette Order.
• Stamp duty is chargeable on the instrument and not on the transaction.

Applicable Rates

Stamp duty is calculated as a percentage of the value of the instrument.

Sri Lanka has a Pay-As-You Earn (PAYE) scheme where the tax law imposes a liability on every employer to deduct the income tax from the remuneration of his employees at the time of making such payments to the employees.

The employer makes deduction of taxes at source based on PAYE Tax Tables provided by The Department of Inland Revenue (IRD) and the total deducted amount should remit to the department on or before 15th of the following month.

Resident companies are required to withhold tax at 14% on interest, discount, charge, natural resource payment, rent, royalty, premium or retirement payment, or pay amounts as winnings from a lottery, reward, betting, or gambling, and where the payment or allocation has a source in Sri Lanka.

Every bank and financial institution is required to withhold income tax at 5% on the amount of any interest paid to a company on any sum of money deposited with it. The depositor is entitled to receive a certificate setting out the gross amount of interest, the amount of tax withheld, and the net amount of interest paid.

With respect to Treasury bills and Treasury bonds issued by the Central Bank, No WHT is deductible at the time of the sale of the Treasury bills and Treasury bonds by the Central Bank in the primary market.