(Revitalize the Economy (2021) with plethora of income tax incentives – Part 2)
This is a continuation of the analysis of the web notification issue by the Commissioner General of Inland Revenue (CGIR) dated 13th January 2021 titled ‘Tax proposals announced in the Budget 2021’,wherein proposed income tax incentives are detailed. This provides an indication of tax proposals which will be implemented from 1st April 2021 after formal amendment to the Inland Revenue Act No. 24 of 2017 (IRA).
Certain tax proposals could be clearly identified as incentives proposed with the objective of capital market development. A synopsis of such incentives are as follows.
Incentives for SL REIT
In the Budget speech 2021, incentives were proposed to promote investments in the housing market through SL Real Estate Investment Trusts (REITs). The web notification published in the Inland Revenue Department web site reiterates the income tax exemptions proposed for REITs as follows.
· Gains made by a person on or after April 1, 2021 from the realization of land which were sold, exchanged or transferred to a Sri Lanka Real Estate Investment Trust (SLREIT)listed in Colombo Stock Exchange and licensed by the Security Exchange Commission of Sri Lanka.
· Income tax exemption for the unit holder (from SL REIT) on dividends or gains on the realization of units or gains from the realization of capital asset of a business or investment
In the Budget Speech 2021, a reduction was proposed on the applicable stamp duty rate on REITs. A confusion looms as to whether the reference made to Stamp Duty was on the transfer of immovable properties or for the lease. It seems we would need to wait bit longer to clear this doubt.
Promote listing of companies in the CSE
As an incentive to companies to list in the Colombo Stock Exchange (CSE) in the year 2021, an income tax discount of 50% is granted for the Y/A 2021/22 i.e reduction of 50% of the aggregate income tax payable by the company in the Y/A 2021/22. Further, the listed company will enjoy a concessionary tax rate of 14% for a period of three years of assessment commencing from April 1, 2022 (2022/2023 to 2024/2025). The notification states that the concessions would not apply for Capital Gains Tax.
Currently as for publicly available information there are 285 companies representing 20 GICS industry groups as at 30th November 2020 in the CSE.
Investment in International Sovereign Bonds
Income tax exemption is proposed on gains from the realization of Sri Lanka international sovereign bonds (issued by the Government of Sri Lanka) derived by a commercial bank or authorized dealer for aggregate investment exceeding USD 100 million on or after April 1, 2021.
PE’s encouraged to retain profits in Sri Lanka for investment purposes
As mentioned in the earlier article, non-resident company carrying on business in Sri Lanka through permanent establishment ( such as branch, project office etc) are encouraged to retain their profits earned after 1/4/2021 for a minimum period of 3 years within Sri Lanka and to invest the same on acquiring shares or any securities from Colombo Stock Exchange or to acquire treasury bills, treasury bonds or Sri Lanka International sovereign bonds issued on behalf of the Government of Sri Lanka. This seems a fresh proposal made in order to route such profits for investment in capital market development. The non-resident party can choose to invest in expansion of its business also. The incentive is the removal of the remittance tax of 14% on the remittance of profits after the three year period.
(await Part 3 of this article for income tax rates and deductions/QP reliefs)
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The views expressed in this article are the author’s own and in her personal capacity.
Rifka Ziyard is a Fellow Member of the Chartered Institute of Management Accountants, UK, Chartered Global Management Accountant (CGMA), Fellow member of the Sri Lanka Institute of Taxation, and holds a MBA from the University of Colombo and a Bachelor of Commerce from the same University.