Budget offers tax relief for SMEs - Tax expert | Sunday Observer

Budget offers tax relief for SMEs - Tax expert

29 November, 2020
A. A. Thilakarathne
A. A. Thilakarathne

Several tax relief measures have been granted to Small and Medium Enterprises (SME) under tax relief measure to facilitate post Covid-19 which is a commendable move, Department of Inland Revenue Former Assistant Commissioner, A. A. Thilakarathne said.

He said the waiver of income tax in arrears payable by the SMEs is proposed on the assessments issued up to the year of assessment 2018/2019 by the Commissioner General of Inland Revenue (CGIR), where he is satisfied that there is no fraud involved. This step is commendable in disposing the huge arrears of tax.

“There have been several issues in relation to Sri Lanka’s tax system for a long time. Therefore, it is worthwhile to see how the Budget impacts the trading community and the end-consumer.

“Taxes can be mainly categorised into two groups. They are direct taxes and indirect taxes. The main feature of indirect tax is that the burden of the tax can be passed on the end-consumer.

“He on whom the tax is imposed should pay it and the burden of the direct tax should be borne by the taxpayer himself. With that premise, we have to look at the Budget proposals.

“The tax proposals are as follows:

Removal of With Holding Tax(WHT)

Following payments are exempt from withholding Tax with effect from January 1, 2020

i. interest, specified fees, dividends, charges, natural resource payments, rent, royalty premium or retirement payments made to residents

ii. Employment income

iii. Partners share of profit is subjected to tax at the rate of 6%

Exemptions from income tax

i. Profits and income earned by any person from farming, including agriculture, livestock, and fish farming from April 1, 2019,

ii. Profit and income earned from providing information Technology and enabling services, with effect from January 1, 2020

iii. Profit and income earned from services rendered to persons outside Sri Lanka , including the income earned from foreign sources if the payments for such services or income from such sources are received in foreign currency , through a bank with effect from January 2020

Qualifying payments

i. Personal relief for residents or non-residents but citizens for each year of assessment is Rs. 3,000,000/= with effect from January 2020

ii. Payments made to Consolidated Fund by any public Corporation is deductible in calculating income tax of such Corporation , with effect from April 1, 2019

iii. Following payments subject to maximum of Rs 100,000 per month or Rs. 1.2 million per annum is deductible with effect from January 1, 2020 calculating personal income tax

• Health expenditure including contributions to medical insurance,

• Educational expenditure incurred locally,

• Payments of interest on housing loans,

• Contribution to an approved pension Scheme

• Expenditure incurred for the purchase of equity or security.

Income Tax rate changes

i. Revision of personal income tax rates on taxable income from January 2020

• First Rs. 3 million - 6%

• Next Rs. 3 mn. - 12%

• Balance - 12%

ii. Advance Income Tax

a. Advance personal income tax can be deducted from regular fixed income remuneration and interest) of individuals, subject to the written consent of such individuals from April 1, 2020.

(b) Advance income tax can be collected at the source subject to the written consent of the taxpayer with effect from April 1, 2020.

Tax relief measures to facilitate post Covid-19 economic recovery

i. Waiver of income tax in arrears, payable by the SME as defined in the Inland Revenue Act No. 24 of 2017 on the assessments issued upto the year of Assessment 2018/2019 by the CGIR, where he is satisfied that there is no fraud or willful neglect involved in the disclosure of income or any claim for any deduction or relief.

ii. The income Tax return furnished by the SMEs for the Year of Assessment 2019/2020 is proposed to be accepted and additional assessment not to be issued for that year on tax payers, who furnish the income Tax Returns for the year and pay the tax declared in the Return.

iii. A grace period proposed to be granted to settle the taxes in arrears/default, as agreed with the legacy Unit, Default Tax Recovery Unit and the Revenue Administration Management Information System (RAMIS) Unit of the Department of Inland Revenue.

iv. The payment or/and submission of the return of any tax administered by the CGIR which is due for the period from March 1, 2020 to June 30,2020 proposed to be treated as paid or/and submitted on the due date if such payment /submission is made on or before December 31,2020.

Value Added Tax (VAT)

i. Increase of threshold for the registration for Value Added Tax (VAT)from Rs. 3 million per quarter or Rs. 12 million per annum to Rs. 75Million per quarter or Rs. 300 million per annum with effect from January 1, 2020

ii. Granting permission for the voluntary registration for VAT upon a written request made by any person who carries on or carries out a taxable activity, even if such person is not within the VAT registration threshold.

iii. Exemption of the sale of Condominium housing units from VAT with effect from December 1,2019.

iv. Reduction of VAT Rate on the import and/or supply of goods or supply of services other than financial services from 15% to 8% from December 1, 2019

• Current 8% VAT will continue for the businesses with a turnover of more than 25 million per month

• Reduce the maximum interest charged on housing and property loans of public servants granted by banks under housing loans and advance up to a maximum of 7%.

• Steps to be taken to construct a 300 MW coal power plant and a 600 MW natural gas power plant.

• Personal income tax will apply on earnings from employment, rent, interest, dividends or any other source only if it exceeds Rs. 250,000 per month. Withholding tax on rent, interest, or dividends and the PAYE tax and taxes on interest have been abolished.

• Individuals and companies engaged in farming including agriculture, fisheries, and livestock farming will be exempted from taxes in the next five years.

• A 50 percent tax concession for the years 2021-2022 for local companies that are listed with the Colombo Stock Exchange before December 31, 2021 and to maintain a corporate tax rate of 14 percent for the subsequent three years.

“A prominent feature of the Budget proposals is the reduction of VAT rate from 15% to 8%. VAT threshold has been increased to Rs. 300 million per annum from 12 million. Nation Building Tax (NBT) which was charged at 2% was abolished from January 1, 2019 and the VAT rate was reduced to 8%. Advantages of the reduction of these two taxes should go to the end-consumer.

“Due to the reduction of the taxes, and increase of the VAT threshold, a considerable amount of traders will be exempted since they are below the threshold.“Since the VAT is an indirect tax, the burden of the tax is passed on to the end-consumer. If so, prices of a large number of consumer items should go down.

“Personal income tax threshold has gone up and as a result, a large number of public and private sector employees will be exempted from paying income tax. PAYE scheme has been done away with. But it should be noted that individuals who receive Rs. 250,000 per month are allowed to pay due taxes through their employer on a written request.

“Under tax relief measures to facilitate business post Covid-19, several tax relief measures have been granted to small and Medium Enterprises (SME).

“The government has proposed a special goods and services tax on alcohol, cigarettes, telecommunication, betting & gaming and on vehicles. Real Estate Investment Trust stamp duty is proposed at the rate of 0.75. This is the additional tax that the government has hoped to fulfil the deficit to some extent.

Investment opportunities

“Five years tax exemption has been granted subject to a maximum of US $ 25 million to be invested in dairy farming. At the same time they are given a capital allowance for their equipment for two years.

“There is a proposal for an additional two rupees for the conversion of foreign remittances by foreign employees. As a result, black money hidden in the country can be added to the money market and there is an opportunity for them to make investments in the country.

“A five-year tax holiday for the regenerative power industry has been introduced and this opportunity can be used by investors without paying tax for five years.

“Three year tax holiday has been proposed for the gem and jewellery industry and this opportunity can be made used by investors.

“The import of batik products has been banned and this proposal will be immensely advantageous for local producers.

“In the context of investment in the country, the Budget has provided a greater opportunity for local and foreign investors to invest their money in the country which can stimulate the economy towards overall development.