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  • SRI LANKA

    Indirect Tax News - Febraury 2020

Tax cuts and rate slashes to boost economic growth

Despite macroeconomic challenges, Sri Lanka has had steady growth over the past decade. Now, thanks to changes in the Indirect Tax regime that have been in effective since 1 December 2019, experts foresee economic growth in GDP per capita.

The chart below offers a glimpse into the Value Added Tax (VAT) and Nation Building Tax (NBT) rate changes.

 

VAT

NBT

Then

15%

2%

Since 1 December 2019

8%

Abolished

 

While the rate revisions make Sri Lanka a country with one of the lowest Indirect Tax rates globally, the registration threshold for VAT has also been increased from LKR 12 million per year to LKR 300 million per year, effective 1 January 2020. This means that most small and medium-sized enterprises do not have to charge VAT.

Stakeholder impact

Despite these unprecedented changes to the Indirect Tax Regime having a short-term negative impact on government finances, the changes are intended to provide key stakeholders – taxpayers and the general public – relief from the considerable reductions expected in the prices of goods and services consumed. This relief has resulted in economic stimulation as a result of the increase in productivity caused by the increase in demand for goods.

Further, the changes have encouraged international investors with diverse industrial backgrounds to venture into the Sri Lankan economy in hopes of benefitting from the long-term economic revival of the country.

For instance, the supply of residential condominium housing units for accommodation has been made completely exempt from VAT since 1 December 2019. Sri Lanka has attracted many apartment developers from across Asia seeking to invest in the Sri Lankan housing market.

Further, Sri Lanka, a land known for its beautiful nature and neighbourhoods, has also been highly ranked as a travel destination by the ‘Lonely Planet’. And, to benefit tourism, since 1 December 2019, VAT on the supply of services by hotels, guest houses, restaurants, and other similar services are taxed as 0%, so long as:

  • The business is registered with the Sri Lanka Tourism Development Authority; and
  • More than 60% of the total value of the inputs are sourced from local supplies/sources.

Conclusion

With the radical changes in the indirect tax regime and the gradual transition from a more rural-based economy to an urbanised economy, Sri Lanka is primed to grow economically over time.

Sarah Afker
[email protected]

Dinusha Rajapakse
[email protected]