2011 BUDGET IN A NUTSHELL

The Government has implemented a US$2 billion reconstruction programme in the North. These major reconstruction activities are expected to be completed by 2012.
‘Mahinda Chintana - Vision for the Future’ targets a per capita income in excess of US$ 4,000 by 2016.

It has been targeted to increase private investments from both foreign and domestic sources from the present level of 19-21 percent of GDP to a range of 26 -28 percent over the next 6 years.
 

This together with public investment of around 6-7 percent, the government is confident that total investment can be raised from around 25-27 percent to 32 - 35 percent of GDP, to support the targeted economic growth in excess of 8 percent in the medium term and 10 percent thereafter.

Highlights of proposals in Budget 2011

Exports

• Impose a CESS on all exports in raw and semi processed form to encourage value added exports from Sri Lanka. Exports of finished goods will only be free from such CESS.
• Reduce duties and taxes on machinery, equipment and raw material to enable our enterprises to have affordable access to world class technology.
• Lower income tax from
15 percent to 10 percent for industries with domestic value addition in excess of 65 percent and Sri Lankan brand names with patent rights reserved in Sri Lanka.
• Income tax of all export companies will be reduced from 15 percent to 12 percent to encourage general exports
• Reduce income tax on profits from 35 percent to 28 percent.

‘I hope these drastic reductions of taxes will promote our export- import economy to increase its contribution from 50 percent to 60 percent during this decade.”
- President

Hotels and tourism

• Impose a levy of US$20 per bed on all five star hotels which charge a room rate that is less than US$125 per night from January 2011 in order to compel all hotels to charge better rates.
• Reduce tax on income earnings from tourism and related business from 15 percent to 12 percent.

Tourist Boards
• The separation of the former Sri Lanka Tourist Board into four agencies has not served the intended purpose. It has therefore been proposed to merge all agencies except the Hotel School as a single agency capable of effectively promoting tourism.
• New legislation will be introduced to enable this in the first 100 days of 2011.
Motor vehicles
• Reduce duties and taxes on passenger transportation vehicles by 25 percent.
• Exempt the importation of electric and highbred vehicles from Excise Tax and VAT in order to promote environmental friendly tourism.

Banking
• Abolish the bank debit tax so that withdrawals from banks will not be liable for any tax
• Reduce VAT on financial services from 20 percent to 12 percent.
• Reduce tax on profits of banking and financial institutions, from 35 percent
to 28 percent. However, all banking and financial institutions will be required to register separate Investment Fund Accounts with the Central Bank to transfer all tax savings arising from these proposals.

Capital market
• Recognise expenditure in relation to listing of new companies and debt instruments as a deductible expenditure for tax purposes subject to a 1 percent of the value of the IPO.
• Increase the Share Transaction Levy from 0.2 percent to 0.3 percent.
• Exempt reinsurance commissions and claims from VAT to reduce the transaction cost of insurance.
• Exempt unit trust companies from the Economic Service Charge while exchange control restrictions on foreigners and foreign funds investing in unit trusts will be exempted.
• Exempt income derived by unit trusts from investments in listed debentures and equity, from income tax

IT/BPO
• Establish a knowledge city in each province linked to university townships.
• Intensify tax incentives already available for IT/BPO businesses.
• Remove VAT and Nation Building Tax on software.

Telecommunications
• Combine all complex taxes in telecommunications industry and impose a Telecommunications Levy of 20 percent.
• A 2 percent licence fee on gross revenue will be levied in place of licence fees and CESS imposed by the Telecommunication Regulatory Commission.
• Exempt high-tech equipment and machinery items from duties and VAT at the point of Customs.
• Levy of Rs. two per minute for outgoing International calls and reduce the minimum floor rate for local calls from Rs. two per minute to Rs. 1.50 per minute from July 2011 for the benefit of consumers.

Gem and jewellery
• Increase foreign exchange allowances granted to import raw gem stones from US$ 10,000 to US$ 50,000 per person.
• A simplified procedure will be introduced jointly by the Customs, Exchange Control and Export and Import Control Departments to facilitate importation of gems to the country for processing
• Remove all taxes on raw gem stones at the point of import.

SME sector
• The Government will commit its own resources through the Ministry of Youth Affairs and Skills Development to train 300,000 youths in a wide range of new skills.
• Out of a three year commitment of Rs.16 billion, an allocation of Rs.5bn is provided in this Budget for investment in skills development
• All SMEs and underperforming business activities will be assisted to restructure to optimise their businesses. The Government has mobilised Rs.5,000 million from the World Bank for this
• Write off unpaid tax liabilities up to March 2009 of all enterprises with a turnover below Rs.100
• Exempt SMEs that operate on sub contracting arrangements from the Economic Service Charge from January 1, 2011.
• Offer a concessionary income tax rate of 10 percent for SMEs.

R&D

• A 200 percent deduction of expenditure incurred by R & D enterprises on activities such as Research and Development, registration of patent, trademarks and designs, automation through technology and training of their work force.
• Allocate Rs1,000m to set up an Innovation and Technology Development Fund to finance high quality research and innovations.

Liquor, tobacco and casinos
• Allocate a sum of Rs.200m to implement ‘Mathata Thitha’ initiative aggressively in every single village and township as a national priority.
• Increase tax on profits of businesses engaged in the manufacture and distribution of liquor, cigarettes, and casinos from 35 percent to 40 percent.

Education
• Develop 1,000 well-equipped secondary schools throughout the island over a period of five years. Each secondary school will be linked to a number of primary schools. Required funding of Rs.15bn has been mobilised from the World Bank and the Asian Development Bank.
• ‘English as a Life Skill’ initiative that was commenced in 2009 will be formally expanded in 2011 by the Ministry of Education. For this initiative, an allocation of Rs.750m in 2011 has been proposed.
• Allocate Rs.100m in 2011 to support programmes under the relevant line ministries for “Trilingual Sri Lanka” initiative.

Universities
• A three year development initiative with Rs 3,000m from 2011 for all state universities to project with a unique core identity for each university.
• This accelerated development programme will also aim at developing university townships with required facilities such as transportation, accommodation and recreation.
• Grant a further Rs600m to transform Peradeniya, Moratuwa, Colombo, Sri Jayawardenapura, Kelaniya and Ruhuna universities to become world class universities in their chosen fields.
• Introduce a Presidential Awards System to our national universities to be assessed based on their academic and research performances.

Health
• A three-year action plan targeting the control of non communicable diseases will be implemented from 2011 through improvements in the primary healthcare system. An additional allocation of Rs900m for this has been proposed.
• Exempt the import of pharmaceutical products from Port and Airport Levy to reduce the cost of medicine.
• Exempt high tech medical and laboratory equipment from import duties and VAT to promote investments in health services.
Airlines
• SriLankan Airlines and Mihin Lanka will be expanded with new aircrafts to increase the fleet to 30 by 2012.
• Exempt SriLankan and Mihin Lanka from all taxes for a period of 10 years to strengthen the two enterprises.
Board of Investment (BOI)
• Revise BOI regulations to offer its incentives to carefully targeted priority sectors.
• Cancel forthwith, all BOI approvals granted before June 30, 2010, if such investment has not commenced or has remained closed as of today. Those who have not commenced work but wish to proceed must obtain fresh approvals.

Income tax
• Reduce the current tax rates on personal income ranging from 5 to 35 percent to 4 to 24 percent.
• Increase the tax free threshold income from Rs.300,000 to Rs.500,000 and the tax slabs from Rs.400,000 to Rs500,000.
• Extend this to non-resident Sri Lankans as well.
• Exempt any employee earning Rs 600,000 per year (Rs.50, 000 per month) from PAYE tax.
• Applicable tax rates for employees earning over Rs 600,000 will be reduced subject to a maximum rate of 24 percent.
• The new PAYE system will be a final tax at source. Employees will not be required to file returns unless they have other sources of income.
• Apply the new PAYE system to the public sector as well.
• Increase the tax free threshold on interest income from Rs. 300,000 to Rs. 500,000. The applicable tax slab will also be increased to reduce the tax burden on those who live from interest income.
• Exempt terminal benefits from Employees Provident Fund from income taxation.
• Set up an Employees’ Pension Fund to provide post retirement pension benefits to employees in the private and corporate sectors. Towards this, a 2 percent contribution from employees and a 2 percent contribution from employers to this fund has been proposed.
• The employers will be required to transfer the entirety of the gratuity payment to this fund.
• Employees too will be required to transfer 2 percent of their Pension Fund balance at the time they withdraw the Pension Fund, in lieu of future pension benefits from the Employees’ Pension Fund.

Pension Fund
• Set up an Overseas Employees’ Pension Fund (OEPF) for Non Resident Sri Lankans
• Each employee will be required to contribute at least Rs12,000 per annum to this fund. The contribution can be made in stages during the year.
• Set up a Citizens’ Pension and Insurance Fund (CPIF) for the unorganised sector.
• Merge all existing schemes under various agencies to this new Citizens’ Pension and Insurance Fund. Every one seeking membership would have to contribute a minimum of Rs 5,000 per year as and when they have money. Pension will be available after contributing for a period of 10 years and after reaching 65 years of age. The Government will contribute Rs1,000m in 2011 to form this new fund. Nearly 3m persons engaged in agriculture, fisheries, transport, construction, self employment etc. will be the target groups of this fund.

Construction
• Reduce income tax on the construction industry from 15 percent to 12 percent.
• In order to maintain a proper data base and to ensure that every house is added to the system, an Information Secretariat will be established.
• Allocate Rs. 500m for the early completion of the already initiated housing schemes.

Plantation
• Increase the subsidy by
Rs 50,000 per hectare to small holder tea in order to encourage replanting and new planting
• Give a six months notice period for companies to put unused lands into productive use. If plantation companies do not comply with this deadline, such unutilised lands will be distributed among small holders for re-plantation.
• Increase the export CESS on bulk tea to Rs. 10 per kg.
• Give a 50 percent subsidy to popularise the use of rain guards, to increase production from the existing plantations. Therefore, increase the budgetary allocation of the Department of Rubber from Rs 500m to 750m.
• Increase the CESS on the export of raw rubber from Rs four per kg to Rs eight per kg to encourage value added exports.
Agrarian economy and food security
• A three-year accelerated seed farm development initiative from 2011 at a cost of Rs 700m is to be established.
• Grant a five-year tax exemption for investment in seed farming.
• Implement a 5 year subsidy scheme for planting and replanting of spices
• Rs. 900m will be allocated for a three-year partnership initiative between the Provincial Councils and the Department of Agrarian Services to rehabilitate all minor irrigation schemes in the country.

Fishing
• Remove registration fees, renewal fees and operational charges on annual licences for fishery boats to give relief to small holder fishery activities and simplify administration.
• Grant credit facilities at a concessionary interest rate of 8 percent to promote inland fishery and aquatic resources activities.
• Implement a long term concessionary loan facility for deep sea fishing.
• Exempt the fisheries industry from income tax for period of five years.
• The Tourism Development Authority will allocate
Rs 300m for the development of traditional fishery villages and improve fishery industry based tourism.

Self-employment
• Remove the VAT on leasing of assets for three wheeler operators, lorry and truck operators and private bus operators.
• Custom duties on spare parts will also be reduced to moderate the maintenance costs.

Electricity tariff
• Reduce tariff by 25 percent to religious places, government hospitals, schools, vocational training institutions and universities. The present tariff rate will continue for small businesses and SMEs.
• An 8 percent increase in tariff for other users except for the first 90 units.
• The Economic Service Charge will be simplified within a four band rate structure

Other tariffs
• Reduce the Nation Building Tax from 3 percent to 2 percent.
• Remove the Provincial Turnover Tax
• Abolish the Social Responsibility Levy, Rural Infrastructure Development Levy and Debit Tax to simplify taxation.

Others
• Introduce a new legislation within first 100 days of 2011, towards countering anti competitive practices in shipping and trade.
• Exempt government agencies from Construction Guarantee Fund Levy to reduce the cost of public investments
• Exempt Ceylon Electricity Board, Ceylon Petroleum Corporation, National Water Supply and Drainage Board and Sri Lanka Ports Authority

from income taxes for a period of five years. However, they will be required to pay one fourth of their profit as deemed dividend to the Government.

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