CHALLENGES OF GLOBALIZING TAX SYSTEMS : SRI LANKA - PowerPoint PPT Presentation

1 / 30
About This Presentation
Title:

CHALLENGES OF GLOBALIZING TAX SYSTEMS : SRI LANKA

Description:

Title: PowerPoint Presentation Last modified by: Gaj Created Date: 1/1/1601 12:00:00 AM Document presentation format: On-screen Show Other titles – PowerPoint PPT presentation

Number of Views:314
Avg rating:3.0/5.0
Slides: 31
Provided by: karachita5
Category:

less

Transcript and Presenter's Notes

Title: CHALLENGES OF GLOBALIZING TAX SYSTEMS : SRI LANKA


1
CHALLENGES OF GLOBALIZING TAX SYSTEMS SRI
LANKAS JOURNEY
  • N. R. GAJENDRAN FCA
  • Partner, Gajma Co

2
DOING BUSINESS INDICATORSA Copublication of the
World Bank and the International Finance
Corporation

Ease of Doing Business World Rank 101 120 76 107 111 60 119
Ease of Doing Business SAARC Rank 3 7 2 4 5 1 6
Starting a Business World Rank 29 111 59 92 60 34 52
Starting a Business SAARC Rank 1 7 4 6 5 2 3
Dealing with Licenses World Rank 160 134 93 116 125 8 119
Dealing with Licenses SAARC Rank 7 6 2 3 5 1 4
Employing Workers World Rank 111 85 132 129 155 7 14
Employing Workers SAARC Rank 4 3 6 5 7 1 2
Registering Property World Rank 134 112 88 171 25 178 33
Registering Property SAARC Rank 5 4 3 6 1 7 2
Sri Lanka
Maldives
Pakistan
Bangladesh
Bhutan
India
Nepal
3
DOING BUSINESS INDICATORS (Contd)

Getting Credit World Rank 97 36 68 48 97 135 158
Getting Credit SAARC Rank 4 1 3 2 4 5 6
Protecting investors World Rank 64 33 19 15 64 64 122
Protecting investors SAARC Rank 4 3 2 1 4 4 5
Trading across borders World Rank 60 79 94 112 151 110 149
Trading across borders SAARC Rank 1 2 3 5 7 4 6
Enforcing Contracts World Rank 133 177 154 175 123 94 38
Enforcing Contracts SAARC Rank 4 7 5 6 3 2 1
Closing a Business World Rank 39 137 51 102 95 120 178
Closing a Business SAARC Rank 1 6 2 4 3 5 7
Bangladesh
Sri Lanka
Pakistan
Maldives
Bhutan
India
Nepal
4
PAYING TAXES

Paying Taxes World Rank 158 165 146 81 92 1 68
Paying Taxes SAARC Rank 6 7 5 3 4 1 2
Payment (Number per year) World Rank 62 60 47 17 33 1 19
Payment (Number per year) SAARC Rank 7 6 5 2 4 1 3
Time (Hours per year) World Rank 256 271 560 400 408 - 274
Time (Hours per year) SAARC Rank 2 3 7 5 6 1 4
Total tax rates ( of profit) World Rank 63.7 70.6 40.7 39.5 32.5 9.1 39.8
Total tax rates ( of profit) SAARC Rank 6 7 5 3 2 1 4
Pakistan
Bangladesh
Bhutan
Sri Lanka
Maldives
India
Nepal
NOTE SAARC ranking not done by World Bank
or IFC
5
TAX SYSTEM IN SRI LANKA
  • Taxes in Sri Lanka consist the following
  • Income Tax
  • Economic Service Charge
  • Partnership Tax
  • Social Responsibility Levy
  • Taxes on goods and services
  • Value Added Tax
  • Excise Duty
  • Custom Duty
  • Turnover Tax
  • Ports and Airports Development Levy
  • Tourism Development Levy
  • Bank Debit Tax
  • Stamp Duty
  • Share Transaction Levy
  • Betting and Gaming Levy
  • There is no tax on capital gains, no gift tax
    and estate duty

6
TAXES ADMINISTERED BY THE DEPARTMENT OF INLAND
REVENUE
  • Taxes administered by the Department of Inland
    Revenue include
  • Income Tax
  • Value Added Tax.
  • Economic Service Charge
  • Stamp Duty
  • Bank Debit Tax
  • Social Responsibility Levy
  • Partnership Tax
  • Betting and Gaming Levy
  • Economic Service Charge (ESC) was introduced as a
    minimum alternative tax

7
TAXES ADMINISTERED BY THE DEPARTMENT OF INLAND
REVENUE (Contd)
  • ESC is payable on the turnover of a business if
    it exceeds Rs 7.5 million per quarter and rates
    varies from 0.05 to 1
  • ESC is an advanced payment against income tax
    for those who are liable to income tax
  • If a person is liable to ESC, 5 withholding tax
    on services is not applied
  • Partnerships are liable to a partnership tax
    at the rate of 10 on its aggregated amounts of
    divisible profits and other income
  • The partnership tax attributable to the share of
    profits of the partners is allowed against the
    income tax liability of the partners

8
CHARGEABILITY TO INCOME TAX
  • A resident is taxed on his worldwide income
  • A non resident is taxed on profits and income
    arising in or derived from Sri Lanka
  • Profits and income arising in or derived from
    Sri Lanka
  • Property in Sri Lanka
  • Services rendered in Sri Lanka
  • Business transacted in Sri Lanka

9
CHARGEABILITY TO INCOME TAX (Contd)
  • Resident Person
  • A company is resident if
  • The registered or principal office is in
    Sri Lanka or
  • the control and management of its business
    are exercised in Sri Lanka
  • An individual is resident if present in Sri
    Lanka for more than 183 days

10
ASCERTAINMENT OF PROFITS AND INCOME
  • All outgoings and expenses incurred in the
    production of profits and income are deductible
  • Entertainment expenses, 50 of advertising
    expenses and traveling outside Sri Lanka (other
    than for exports) are disallowed
  • Management expenses are restricted to the
    lower of Rs. 1 million
  • or 1 of the turnover
  • No tax depreciation for motor vehicles
    used for traveling
  • 10 presumptive tax on dividend income
  • 10 presumptive tax on interest income, in the
    case of individuals

11
ASCERTAINMENT OF PROFITS AND INCOME (Contd)
  • THIN CAPITALIZATION RULE
  • Interest payment between group companies
    are restricted
  • If the borrower is a manufacturer and if the loan
    exceeds 3 times
  • of equity and reserves, interest on the
    excess is disallowed
  • In the case of others, if the loan exceeds 4
    times of equity and reserves , interest on
    the excess is disallowed

12
ASCERTAINMENT OF PROFITS AND INCOME (Contd)
  • TRANSFER PRICING PRINCIPLE
  • Transactions between associated enterprises
    should be at arms length price
  • An undertaking shall be an associated
    undertaking of another undertaking, if the
    first mentioned undertaking participates in
    the control of the second to an
    extent as may be prescribed
  • Arms length price is the price applied in
    uncontrolled conditions in a transaction between
    persons other than associated undertakings
  • Methods of arms length price should be
    prescribed

13
TRANSFER PRICING PRINCIPLE (Contd)
ASCERTAINMENT OF PROFITS AND INCOME (Contd)
  • Commonly used arms length pricing methods
  • Comparable Uncontrolled Price method
  • Resale Price method
  • Cost Plus method
  • Profit Split method
  • Transactional Net Margin method

14
ASCERTAINMENT OF PROFITS AND INCOME (Contd)
TRANSFER PRICING PRINCIPLE (Contd)
  • NON RESIDENT COMPANY
  • Head office expenditure of a non resident company
    is restricted to 10 of the profits
  • Head office means executive and general
    administration expenditure incurred outside
    Sri Lanka
  • This includes cost of remuneration and traveling
    of persons managing the Head office and
    cost of premises

15
DOUBLE TAX AGREEMENTS
  • MFN clause of the protocol may be used to ones
    advantage in the
  • India Sri Lanka DTA
  • eg (1) Establishment of construction site PE
    may be extended to 12 months
  • ( as a result of Sri Lanka- Iran DTA)
  • (2) Establishment of Service PE
    may be extended to 275 days
  • (as a result of Sri Lanka Romania DTA)
  • Absence of securing orders in the Agency PE
    clause may mitigate
  • the establishment of PE under DTA between
    India - Sri Lanka and Pakistan - Sri Lanka
  • Tax sparing clause is present in the DTA
    between India - Sri Lanka
  • and Pakistan - Sri Lanka
  • The absence of an article for Fees for Technical
    Services (FTS) may mitigate withholding
    payments on management / technical fees from
  • Sri Lanka
  • No capital gains tax in Sri Lanka

16
ENCOURAGEMENT OF VOLUNTARY COMPLIANCE
  • Self assessment system is in operation in
    Sri Lanka
  • Other than a Quoted Public Company, audited
    accounts are not necessary , if the turnover
    is less than Rs 250 million or the profits
  • is less than Rs 100 million
  • In the case of an individual, 10 discount is
    granted if he pays his quarterly installment of
    income tax one month before the due date
  • An individual who has paid more than Rs.
    250,000/- as income tax consecutively for five
    years is entitled to a reduction of 25 of all
    import levies in the import of a motor vehicle
  • The income tax return of an individual will be
    accepted without any question if he pays 20 more
    income tax compared to that of the previous
    year

17
ENCOURAGEMENT OF VOLUNTARY COMPLIANCE (Contd)
  • TIME BAR FOR INCOME TAX ASSESSMENT
  • 1 ½ years, if returns are filed on time
  • In other cases 3 years
  • No time bar for fraud or evasion
  • Income tax outstanding cannot be recovered after
    5 years from
  • the date on which the tax becomes
    final and conclusive

18
VOLUNTARY COMPLIANCE (Contd)
  • TAXPAYER PRIVILEGE CARDS
  • An individual who pays more than Rs. 1 million as
    income tax
  • is entitled to a Gold Card. (for non
    citizens it is Rs. 2million)
  • An individual who pays more than Rs. 500,000/- as
    income tax
  • is entitled to a Silver Card (for non
    citizens it is Rs. 1 million)
  • Privileges of the card holder
  • Overdraft facility
  • Credit Card facility
  • Priority treatment at Government agencies
  • Use of business class lounge at the airport

19
TAX INCENTIVES
  • Income tax exemption is available for the
    following
  • Agriculture
  • Agro processing
  • Industrial and machine tool manufacturing
  • Machinery manufacturing
  • Electronics
  • Export of non -traditional products

20
TAX INCENTIVES (Contd)
  • Income tax exemption (Contd)
  • Information Technology
  • Large scale projects exceeding Rs. 1 billion
  • Infrastructure development for generation of
    power
  • Tourism
  • Recreation
  • Warehousing and cold storage
  • Garbage collection or disposal
  • Construction of houses
  • Construction of hospitals

21
TAX INCENTIVES (Contd)
  • Income tax exemption (Contd)
  • Relocation of undertakings outside Colombo and
    Gampaha Districts
  • Research and development
  • Venture capital
  • Manor houses or thematic bungalows
  • New or upgraded cinemas
  • Reopening of abandoned factories
  • New undertakings in the Eastern Province
  • New undertakings in lagging regions

22
FOREIGN DIRECT INVESTMENTS
  • FDI is protected under Article 157 of the
    Constitution of the Democratic Socialistic
    Republic of Sri Lanka
  • Sri Lanka has entered into investment protection
    agreement with India and Pakistan
  • Sri Lanka is one of the founder members of
    Multi-lateral Investment Guarantee Agency (MIGA)
    of the World Bank.
  • The Board of Investment (BOI) is a one-stop
    investment facilitation agency
  • BOI can enter into agreements to grant special
    concessions and privileges overriding income tax,
    Custom and Exchange Control laws
  • Entire Sri Lanka is considered to be an
    Investment Promotion Zone (IPZ)
  • 100 foreign investment is possible for other
    than areas specifically reserved for Sri Lanka,
    regulated areas and areas subject to conditional
    approvals

23
AREAS FOR FOREIGN INVESTMENT
  • Areas Totally Reserved for Sri Lanka
  • Money lending
  • Pawn- broking
  • Retail trade investment with a capital less than
    US 1 million
  • Coastal fishing

24
AREAS FOR FOREIGN INVESTMENT (Contd)
  • Areas Subject to Automatic or Conditional
    Approval
  • Foreign investments in the areas listed
    below will be
  • approved limited to 40 . Foreign ownership
    in excess
  • of 40 will be approved on a case by case basis
    by the BOI
  • Export of goods subject to quota restriction
  • Tea, rubber, coconut, coca, rice, sugar and
    spices
  • Non renewable natural resources
  • Timber based industries using local timber

25
AREAS FOR FOREIGN INVESTMENT (Contd)
  • Areas Subject to Automatic or Conditional
  • Approval (Contd)
  • Fishing (deep sea fishing)
  • Mass communications
  • Education
  • Freight forwarding
  • Travel agencies
  • Shipping agencies

26
AREAS FOR FOREIGN INVESTMENT (Contd)
  • REGULATED AREAS
  • The following areas has to be specifically
    approved
  • Air transportation
  • Coastal shipping
  • Manufacture of arms, ammunitions, explosives,
    military vehicles and equipment air-craft and
    other military hardware
  • Manufacture of poisons, narcotics, alcohols,
    dangerous drugs and toxic, hazardous or
    carcinogenic materials
  • Producing currency, coins or security documents
  • Large scale mechanized mining of gems
  • Lotteries

27
VALUE ADDED TAX
  • Value Added Tax (VAT) is imposed on a person who
    carries on a taxable activity, if the
    turnover exceeds Rs1.8 million per annum
  • VAT may be computed using the addictive method
    (supply of financial services) or deductive
    method (other supplies)
  • VAT Rates - 0, 5, 15 and 20
  • VAT exemptions are available for certain
    goods and services
  • Input tax can be deducted from the out put tax
    subject to maximum of 85 of the output tax
  • No input tax deduction is available if the
    out put tax rate is 5
  • The input tax rate cannot exceed 15
  • No input tax deduction against exempt
    supplies
  • Whole and retail activity is excluded from
    VAT

28
VALUE ADDED TAX (Contd)
  • VAT ON FINANCIAL SERVICES
  • Accounting profit before income tax has
    to be adjusted for
  • remuneration and for economic depreciation to
    compute the value addition
  • VAT rate is 20
  • Credit is available for normal VAT paid

29
CHALLENGES
  • Inflation
  • Interest rates
  • Rupee depreciation
  • Heavy dependence on women
  • External shocks

30
  • THANK YOU
Write a Comment
User Comments (0)
About PowerShow.com