Investment Incentives -2021

Fiscal Incentives

  1.  Incentives under the Inland Revenue Act

The Inland Revenue Act No. 24 of 2017, as amended by Act No. 10 of 2021, provides an incentive regime consisting of tax exemptions; zero and reduced corporate income tax (CIT) rates, for specific sectors and enhanced capital (ECA) allowances based on capital investments made by the investors.

 

1.1 Reduced Tax Rates

The Standard CIT Rate is 24%.

The following activities enjoy a reduced tax rate of 14%.

  • SMEs (excluding betting and gaming, and the sale of liquor which is not merely incidental to another business).
  • Sale of goods or merchandise including export of goods, where the payment is received in foreign currency.
  • A specified undertaking, namely;
  • entrepot trade involving import, minor processing and re-export.
  • offshore business where goods can be procured from one country or manufactured in one country and shipped to another country without bringing the same into Sri Lanka.
  •  providing front end services to clients abroad.
  • headquarters operations of leading buyers for management of financial supply chain and billing operations.
  • logistic services such as bonded warehouse or multi-country consolidation in Sri Lanka.
  • transshipment operations.
  • freight forwarding.
  • supply of services (related to the manufacture or provision of goods and services), to any exporter, where the payment for services is received in foreign currency. 
  • production or manufacture, and supply to an exporter of non-traditional goods
  • the performance of any service of ship repair ship breaking repair and refurbishment of marine cargo containers, provision of computer software, computer programs, computer systems or recording computer data for payment in foreign currency;
  • sale for foreign currency, of any gem or jewelry (where authorized by the Central Bank of Sri Lanka)
  • sale of goods manufactured in Sri Lanka by an export-oriented company which has entered into an agreement with the BOI-SL to, 
    1. A BOI company, (including a company enjoying tax holidays under the Strategic Development Projects Act 2008) which is permitted to import project related goods or raw materials on duty free basis during the project implementation period; or
    2. An entity eligible to import specific goods on duty free basis under any Government Authority.

       Up to the quantity approved by the BOI-SL as import replacement, until 1 April 2024.

  • Bunkering services provided for the supply of marine fuel, including the supply of marine fuel to local bunker suppliers within a specified port premises.
  • Educational services.
  • Tourism.
  • Construction services.
  • Agro processing.
  • Health care services.
  • Dividends received from a resident company. 
  • Export company registered with the BOI-SL providing health protective equipment and similar products supplied to the Ministry of Health, Department of Health Services, Sri Lanka Army, Sri Lanka Navy, Sri Lanka Air force, Sri Lanka Police and COVID Center.
  • Any company which lists its shares on or after January, 1 2021, but prior to December 31, 2021, in the Colombo Stock Exchange, for three years of assessment commencing from April 1, 2022.
  • Consideration received in respect of gems and jewelry.

Where the lesser rate of 14% is not applicable, the following activities enjoy a reduced tax rate of 18%:

  • Manufacturing (Local Market).

A higher CIT rate of 40% will be applicable for the following sectors:

  1. conducting betting and gaming.
  2. gains and profits from the manufacture and sale or import and sale of any liquor or tobacco product.
 

1.2 Tax reductions

  • A company which lists in the Colombo stock exchange is entitled to the following tax reduction:
Conditions to be fulfilled to be eligible for the tax reductionApplicable reduction
List its shares in the Colombo Stock Exchange on or after January, 1 2021, but prior to December 31, 2021, 

For the year of assessment commencing from April 1, 2021:

50 % aggregate income tax payable by the company (other than tax on gains from the realization of investment assets).

  • A multi-national company is entitled to the following tax reduction:
 
Conditions to be fulfilled to be eligible for the tax reductionApplicable deduction

An increase in exports (other than specified undertakings) by 30% in the year of assessment commencing from April 1,2021, compared to the immediately preceding year (first year) 

or

An increase in exports (other than specified undertakings) by 50% in the year of assessment commencing from April 1, 2022, compared to the first year and maintains such status in the subsequent year of assessment.

For the year of assessment commencing from April 1, 2021:

25 % of the income tax payable on dividends received by the company.

And

For the next two years of assessment:

50% of the  income tax payable on dividends received by the company.

  • If an entity utilizes agro farming produce produced by the same entity for its agro processing or manufacturing business activity in Sri Lanka, the portion of the tax payable only in respect of such activity shall be reduced by 25%, until 1 April 2026.
  •  

1.3 Tax Exemptions

The following activities are exempted from corporate income tax:

  • Agro farming until 1 April 2024:

Where an entity is utilizing agro farming produce produced by the same entity for agro processing or manufacturing:  

  • The use of the agro farming produce in the agro processing or manufacturing activity will be treated as a sale at the market price prevailing at the time of the deemed sale. *

*the entity is entitled to a tax reduction of 25%, until 1 April 2026, with respect to that agro processing or manufacturing. (See Above, Tax Reductions)

  • providing information technology and enabled services as may be prescribed.
  • service rendered to any person to be utilized outside Sri Lanka, for payment in foreign currency.
  • any other foreign source of income derived in foreign currency.
  • any vocational education programs of any TVET standardized Vocational Education Institution and regulated by the Tertiary and Vocational Education Commission if   such institution has doubled its student intake compared to the preceding that year of assessment, until April 1, 2026.
  • business of export of gold, gems or jewelry or the business of cutting and polishing of gems which are brought to Sri Lanka and exported after such cutting and polishing, where payment received in foreign currency.
  • laboratory services or standards certification services provided by a non-resident person.
  • The business income received from a new undertaking for the following activities –
  • sale of construction materials recycled in a selected separate site established in Sri Lanka, for a period of 10 years. *
  • manufacturing and supply of boats or ships in Sri Lanka, for a period of 7 years*
  • renewable energy project established with a capacity to produce not less than 100 MW of solar or wind power and supplied to the national grid, for a period of 7 years. *
  • construction and installation of communication towers and related appliances using local labour and local raw materials in Sri Lanka or provision of required technical services for such construction or installation, for a period of 5 years. *
  • letting bonded warehouses or warehouses related to the offshore business in the Colombo and Hambanthota Ports.

*from the year in which the business commences to make profits or from the third year of commercialization, whichever occurs earlier.

 

1.4 Dividend Tax Exemptions

The following dividends are exempted from income tax:

  • Dividends paid to a member who is a non-resident person
  • Dividend paid by a company which is engaged in the following commercial hub activities under an agreement with the Board of Investment of Sri Lanka:
  • entrepot trade involving import, minor processing and re-export.
  • offshore business where goods can be procured from one country or manufactured in one country and shipped to another country without bringing the same into Sri Lanka.
  • providing front-end services to clients abroad.
  • headquarters operations of leading buyers for management of financial supply chain and billing operations.
  • logistics services including bonded warehouse or multicounty consolidation in Sri Lanka.

1.5 Enhanced Capital Allowances

Enhanced capital allowances are granted to a person (an individual or entity) in addition to the normal depreciation allowance, as given in the below table. This facility is available for persons who make new investments in Sri Lanka

Total Investment Made

(US$ Mn.)

Enhanced Capital Allowance (ECA)Period for Deducting Unrelieved Losses
Northern ProvinceOther than Northern Province
> 3 and > = 100200%100%10
>100 and > = 1,000200%150%10
>1,000200%150%25
  • Depreciable Assets:

Class 1: computers and data handling equipment together with peripheral devices.

Class 2:  buses and minibuses, goods vehicles, construction and earthmoving equipment, heavy general purpose or specialised trucks, trailers and trailer-mounted containers, plant and machinery used in manufacturing.

Class 3: railroad cars, locomotives, and equipment, vessels, barges, tugs, and similar water transportation equipment, aircraft, specialised public utility plant, equipment, and machinery, office furniture, fixtures and equipment, any depreciable asset not included in another class.

Class 4: buildings, structures and similar works of a permanent nature.

Class 5:  intangible assets, excluding goodwill.

Class 6: Milking machines with latest technology, used to manufacture local liquid milk related products.

Exemption of income tax Employment Income during the ECA: 

During the period covered by the ECA, the employment income of the company’s expatriate employees is entitled to a 0% rate, where: 

  • The company has incurred more than US$ 250 Mn on depreciable assets in Sri Lanka, for the period in which that payment is made, or for 5 years from the commencement of commercial operations, whichever is higher.
  • the number of expatriate employees at any time during that period does not exceed twenty.

Exemption of tax on dividends during the ECA:

  • Dividend paid by a company to a nonresident member prior to January 1, 2020:
  • Dividends paid out of profits sheltered by the ECA are entitled to be tax at the rate of 0%, if the company paying the dividend has incurred more than USD 250 million on depreciable assets (other than intangible assets) in Sri Lanka.
  •  Dividend paid by a company to a nonresident person on or after January 1, 2020:
  • Exempted form income tax (See above heading 1.4)

1.6 Temporary concessions 

  • Investments below US$ 3 Mn are entitled to the following temporary ECAs:

Total Investment Made

 (US$ Mn.)

Enhance Capital Allowance (ECA)Applicability
Northern ProvinceOther than Northern Province
< 3 200%100%Until April 2024
  • Depreciable Assets:

Class 1: Computers and Data handling equipment

Class 4: Buildings and structures and 

Plant or machinery that are used to improve business processes or productivity and fixed to the business premises

Other Temporary Concessions:

SectorIncentivesApplicability
Research and Development200% deduction of the total amount of research and development expensesUntil April 2023
Marketing and Communication

200% deduction of the total amount of Marketing and Communication expenses

The additional deduction shall not exceed Rs. 500,000,000 in any year of assessment; 

The additional deduction is subject to the following conditions: –

  • the payment shall be made to a person who is not an associated person of the tax payer;
  • internal marketing expenses such as salaries of marketing staff are not considered for the purpose of the additional deduction.
  • expenditure shall be attributable to goods and services with 65% of local value addition, the mode of calculation of which shall be as specified by the Commissioner-General;
Until April 2024

1.7: Incentive on the remittance tax

A non-resident person or entity which retains the total income earned in Sri Lanka for a minimum period of three years succeeding the year in which the income is earned, and invests the same in Sri Lanka for the following methods is entitled to a 0% remittance tax rate.

  • to expand its business 
  • to acquire shares or securities from the Colombo Stock Exchange
  • to acquire any treasury bill, treasury bond or Sri Lanka International Sovereign Bond issued on behalf of the Government of Sri Lanka

 (The standard remittance tax rate is 14%)

2.PAL Exemptions

Importation of Capital Goods – Investment over US$ 50 Mn 

Exemption from PAL on importation of project related capital goods by BOI enterprises, for the use in any project of such enterprise having a capital investment of not less than US$ 50 million in a stage wise during the project implementation or construction period and prior to the commencement of commercial operations, except any project approved under Commercial Hub Regulations and Strategic Development Project (SDP) Act, No. 14 of 2008.

Importation of Raw Materials 

Exemption from PAL on importation of raw materials for any export oriented projects for the life time of the project.

Pharmaceutical machinery and equipment

Exemption from PAL on importation of Pharmaceutical machinery and equipment including accessories and spare parts for pharmaceutical machinery and equipment, by the pharmaceutical manufacturers for the manufacture of pharmaceuticals.

3. CESS Exemptions 

4. VAT Reductions/Exemptions/Deferments

The VAT rate applicable on import or supply of goods and services (other than financial services) has been reduced to 8% (from 15%) with effect from 1 December 2019. 

The following VAT exemptions and deferments are applicable for Importation of Capital Goods & Raw Materials.

 

Within Zones1 

EPZs other than under  1 and  Outside Zones

Export oriented

Exempted2 for Capital Goods  

Deferred for Capital Goods (Plant, Machinery, Equipment and Construction items) – During project implementation period

 

Further deferred for Plant, Machinery and Equipment for Life time of the project

Exempted for Raw Materials :  Life time of the project

Deferred for Raw Materials :  Life time of the project

 

Special Exemptions for importation of raw materials by Garment manufactures and Fabric manufactures for Life time of the project

Non-Export Oriented 

Deferred for Capital Goods 

Plant, Machinery, Equipment and Construction items : During project implementation  period

1 Katunayake EPZ, Biyagama EPZ, Koggala EPZ, Kandy IP, Wathupitiwala EPZ, Malwatta EPP, Mirigama EPZ 

√2 If the investor intends to get local purchases by registering under SVAT, he may enjoy the deferment facility under Section 22(7) of VAT Act.

Note: All exempted suppliers need to pay VAT at the time of importation. They cannot enjoy either VAT exemption or deferment facility

Recent Exemptions from VAT:

  1. Machinery and equipment including medical, surgical and dental instruments, apparatus, accessories and parts, hospital and medical furniture and drugs, chemical and similar items   recommended by the Secretary to the Health Ministry as required for the provision of health services to address the Covid 19 pandemic, with effect from May 20, 2020.
  1. Sale of any residential accommodation, if such supply has taken place, on or after December 1, 2019. 
  1. Information Technology and enabled services as shall be prescribed, commencing on or after January 1, 2020.
  1. Services in respect of inbound tours, by a travel agent registered with the Sri Lanka Tourism Development Authority, commencing from April 1, 2020.
  1. Health protective equipment and similar products supplied by any BOI exporter to Health Ministry, Department of Health Services and Forces and Police, on or after April 29,2020.
  1. Local supply of any goods [other than goods referred to in paragraph (c) i.e., goods exempted at the point of import], which would have been exempted on importation, if imported with effect from 13 May 2021.

VAT Reduction on garments sold locally by BOI Companies:

 

  • VAT rate applicable on the local sale of garments* by export-oriented BOI companies has been reduced to Rs.25 /- (from Rs.100 /-)

 *-For each piece of garment other than panties, socks, briefs and boxer shorts, as per the HS.

  -For six pieces of panties, socks, briefs and boxer shorts, as per the HS.

Importation of Capital Goods – Investment over US$ 50 Mn 

Exemption from CESS  on any goods imported by any enterprise and Strategic Development Project, which invests US$ 50 million or above in each stage on a project on or after March 06, 2019, during the project implementation or construction period of the said project but prior to commencement of commercial operations.

Importation of Raw Materials 

Exemption from CESS for Raw materials, components and parts imported by export-oriented enterprises which have entered into an agreement with the Board of Investment of Sri Lanka under Section 17 of the BOI Law, for the purpose of processing and re-export or to be used for the manufacture of goods for exports.

Tourism Projects 

Exemption from CESS on importation of any furniture, classified under the HS Heading 94.03 imported by any tourism enterprise, which has entered into an agreement with BOI and registered with the Sri Lanka Tourism Development Authority. 

Health protection equipment

Health protection equipment and similar products supplied or donated by any export oriented enterprises, which have entered into an agreement with the Board of Investment of Sri Lanka under Section 17 of the Board of Investment Law, No. 04 of 1978, to the Ministry of Healthcare, Sri Lanka Army, Sri Lanka Navy, Sri Lanka Air Force, Sri Lanka Police and COVID Center (National Operation Center for Prevention of COVID -19 Outbreak) on their request.

5. Customs Duty Exemptions 

 

Importation of Capital Goods 

Importation of Raw Materials

Export oriented

Exempted for Capital Goods (Plant, Machinery, Equipment and Construction items) – During project implementation period.

 

Further exempted for Plant, Machinery and Equipment for Life time of the project.

Exempted for Raw Materials :  Life time of the project 

Non-Export Oriented 

Exempted for Capital Goods (Plant, Machinery, Equipment and Construction items) – During project implementation period.

Customs duty is applied

6. Exemptions under Hub Regulation No. 1 of 2019 

Qualifying Criteria

Eligible Activities

Minimum Investment

Annual Re-export /export turnover

Location

Free Port

(Colombo/ Hambantota)

Bonded Area

KEPZ/KGEPZ/BIA

Specified Bonded Area MRIA/ Mirijjawila

Outside Free Port/Bonded Area

  1. Entrepot Trading
  • An import, minor processing and re-export

 

  • Any manufacturing activity for export as defined in the principle act and established in a Specified Bonded Area.

US$ 5 Mn

(50% in Fixed Assets within 12 months)

US$ 20 Mn 

(Within 5 years)

 

 

 

 

 

 

  1. Off-shore business where goods can be procured from one country or manufactured in one country and shipped to another country without bringing the same into Sri Lanka.

US$ 1 Mn

(40% in Fixed Assets within 12 months)

US$ 10 Mn 

(Within 5 years)

(c) Providing front-end services to client abroad.

  1. Operations of headquarters of leading buyers for the management of the finance supply chain and billing operations

(e) Logistic services such as bonded warehouse or in the case of operation of multi-country consolidation in Sri Lanka

US$ 3 Mn

(30% in Fixed Assets within 12 months)

US$ 15 Mn 

(Within 5 years)

KEPZ- Katunayake Export Processing Zone, KgEPZ- Koggala Export Processing Zone, BIA- Bandaranayake International Airport, MRIA – Mattala Rajapakse International Airport

Note: 

  • At least 65% of total Investment to be from foreign sources including transfers from any approved Foreign Exchange Account.
  • No approval will be granted for logistic services to any re-export business/activities or transshipment related to;
  • Spices and allied products namely pepper, arecanuts, nutmeg, mace, tamarind, cinnamon, clove, ginger, turmeric, and cardamom
  • Waste and /or processing of waste or resource recycling business
  • Enterprises referred to the commercial hub regulations are subject to the restrictions and prohibitions imposed in Schedule B to the Customs ordinance.
  • If any enterprise established in a specified  bonded area, and if more than 65% of the domestic demand for such goods/product is being met out of imports to the country, 40% of the annual re-export turnover (ex-factory value) of the enterprise is allowed for domestic sale for a maximum period of 08 years on annual reconciliation basis. Above concession is limited to; any auto fuels, liquid petroleum gas, propane, butane, and fertilizer or any other good as approved by the Cabinet of Ministers & subject payment of applicable taxes/ duties on goods released to the local market.
  • Any enterprise fails to reconcile the value of sale to domestic market during a year with its export turnover on annual basis, shall be allowed to carry forward that unreconciled value of domestic sales during the initial 4 years from the date of first commercial sale.
  • Any goods/product brought for re-export, should not be warehoused or stored for more than 18 months, if stored more than 18 months, will be ordered to send within 30 days from the completion of such 18 months

Exemptions

  • Exemptions from the application of Provisions of the following Acts 
  • Customs Ordinance (Chapter 235)
  • Foreign Exchange Act No. 12 of 2017
  • Imports & Exports (Control) Act, No. 1 of 1969, 
  • Acts referred to in schedule of Part IV of Finance Act No. 12 of 2012 as amended by 

Finance Act No. 12 of 2013;

  • VAT Act No. 14/2002
  • Export Development Act No. 40/1979 
  • Special Commodity Levy Act No. 48/2007
  • PAL Act 18/2011
  • Excise SP Act. No 13/1989
  • Supply of any goods to an enterprise engage in the above eligible activates shall be treated as export and VAT will be zero rated.
  •  14% reduced CIT rate and the exemption from the dividend tax, under the provisions of the

Inland Revenue Act No. 24 of 2017. (See above, Headings 1.1 and 1.4)

 

 

 

Non-Fiscal Incentives

 

1. Foreign Equity

100% foreign ownership permissible except for Pawn broking, Retail trade (where a capital contributed by a person resident outside Sri Lanka) with a capital of less than five million USD and Coastal fishing.

 

2. Repatriation of Earnings

All income, proceeds on sale of the investments can be repatriated through an Inward Investment Account opened by the Investor

Expenses incurred on Depreciable Assets (US$ Mn.) Enhanced Capital Allowance (ECA) Period for Deducting Unrelieved Losses Tax exemptions on dividends & employment income
Northern Province Other than Northern Province
> 3 and > = 100 200% 100% 10 x
>100 and > = 1,000 200% 150% 10 x
>1,000 200% 100% 25
*Depreciable Assets
  • Class 1 : computers and data handling equipment together with peripheral devices
  • Class 2 : buses and minibuses, goods vehicles; construction and earthmoving equipment, heavy general purpose or specialized
    trucks, trailers and trailer-mounted containers; plant and machinery used in manufacturing.
  • Class 3 : railroad cars, locomotives, and equipment; vessels, barges, tugs, and similar water transportation equipment; aircraft;
    specialized public utility plant, equipment, and machinery; office furniture, fixtures, and equipment; any depreciable
    asset not included in another class.
  • Class 4 : buildings, structures and similar works of a permanent nature
  • Class 5 : intangible assets, excluding goodwill – applicable only for normal depreciation