The much-awaited budget speech for 2017 delivered on many fronts, particularly revenue measures and tax administrative reforms, with an aim to improve overall business sentiment. The shift that was seen with most new revenue proposals was that they are now targeted at improving the direct tax contribution towards revenue. Unlike in 2016, some of the key revenue proposals have a greater chance of being implemented, such as the corporate tax revisions and the revisions of withholding tax.


There was some repetition from the 2016 budget, in particular on proposals that were not implemented. For example, the proposal for creating a new small and medium-sized enterprises (SME) board on the Colombo Stock Exchange (CSE), development of real estate investment trusts, establishment of an export-import bank and the listing of non-strategic stakes owned by the government were all from the previous year’s budget. Though they are repetitions, there is a message of consistency in terms of taking it forward into 2017.

The 2017 budget is not expected to impact overall business sentiment on a macro level, although certain industries will be affected. There are many factors driving investment forward, such as the 100% capital allowance granted on fixed investment in fixed assets (of no less than $3m, with no less than 250 employees) in the Uva and Eastern provinces, with this increasing to 200% if the above investment is made in the Northern Province. There were other concessions provided to exporters while landmark investments of over $100m will be provided with special incentive packages and tax concessions.

This budget is a step in the right direction in terms of Prime Minister Ranil Wickremesinghe statement on the medium-term vision for the economy. There were several steps taken to improve Sri Lanka’s ranking in doing business indicators such as a proposal to keep open the Registrar of Companies for operations all seven days of the week and work on reducing the time it takes to register a business from 10 days to four days. There was also a proposal to establish a national business registry and an office for the trade prosecutor to improve rankings.

Tax revenue is expected to grow 27.2% in 2017, compared to expected revenue in 2016. This will be realistic if most of the revenue proposals are implemented and there is a positive impact from the full implementation of the Revenue Administration Management Information System. Public investment is also expected to increase to 5.2% of GDP, up from an expected 4.1% of GDP in 2016. Expenditure on health care and education is set to expand while there is a key focus on developing many industries such as commercial agriculture, irrigation and Mahaweli River development, and the plantation sector. Initiatives include a 50% interest subsidy loan for farmers, farmer organisations and agro-processing establishments; LKR1bn ($6.8m) for the Yan Oya reservoir project; and LKR75m ($511,000) to develop an automated commodity exchange, among other things. The 2017 budget has also given more prominence to public-private partnerships (PPPs) in projects such as a new Bio Technology Innovation Park and Dairy Development Zone. Overall, the budget is more business friendly; however, proper implementation of proposals will still be key.


The 2017 budget has made the tourism a priority and includes the following key polices:

• 0.5% tourism development levy to be imposed on businesses with annual revenue less than LKR12m ($81,800);

• A common technology platform for booking;

• Interest subsidy to encourage hotels that have been in operation for more than 10 years to refurbish their premises; and

• Custom duty waiver for equipment including surf boards, quad bikes, leisure boats and jet skis.

The 0.5% tourism development levy has been proposed for relatively smaller hotel chains, which contrasts with the prior year’s proposal to remove this levy. However, this tax, together with the proposal to create a common technology platform for accommodation bookings, may be motivated by a desire to create a more level playing field between formal hotel establishments and informal establishments which currently enjoy a tax advantage. However, the extent of the impact of this policy will depend on successful implementation of an online system, which could prove to be counterproductive if not implemented in a systematic manner.

The government has identified Eastern Province and Central Province as growth areas for tourism, with a particular focus on improving connectivity to these regions via domestic air travel and highways. This would be a welcome development for tourist establishments that operate in these areas as their performance has been impacted by the lack of connectivity, resulting in lower occupancy levels. In addition to private tourism establishments, the budget proposals reiterated the government’s commitment to list on the CSE strategic enterprises such as Hyatt, Grand Oriental Hotel and Water’s Edge as an equity infusion and management expertise from the private sector may improve the competitive environment.


The 2016 budget includes a number of construction projects and incentives, which include the following key policies:

• Landmark construction projects that are worth more than $100m will receive special incentive packages and specific tax concessions;

• 75% waiver under the Ports and Airport Levy for the import of high-tech automated machinery and equipment;

• Removal of the import cess, 25% of which is applicable on pre-fabricated structures;

• Removal of the exemption from the Nation Building Tax (NBT) on the sale of apartments; and

• A stipend of LKR10,000 ($68.19) per month for three months to assist the private sector in setting up vocational training programmes. The construction industry has been identified as a key growth area with a significant capacity for job creation. It is further aligned with the ambitious Megapolis project, which is geared towards changing Colombo’s skyline. Ravi Karunanayake, then-minister of finance and current minister of foreign affairs, revealed that LKR7.5bn ($51.1m) has been allocated for this project. As such, the proposals put forth in the 2017 budget are in line with encouraging further construction activities, as well as in reducing cost inflation by removing the import cess on construction materials, which is in line with the policy of the 2016 budget. The construction industry has also been identified as a sector that has a need for skilled workers, with a workforce requirement of around 60,000. This has been a key inhibitor of future growth and has resulted in higher wage increases for construction workers in both the formal and informal sector. As such, the 2017 budget proposed initiatives such as scholarship schemes and incentives for the private sector to set up training programmes.


The auto and vehicle segment has received some attention under the 2017 budget and benefits from the following key policies:

• Proposal to restrict the loan-to-value (LTV) ratio to 25% for three wheelers, 50% for motor cars and vans, and 90% for commercial vehicles;

• Proposal to reduce excise duties on electric cars with motor power of less than 100 KW;

• Proposal to extend engines based on capacity;

• Proposal to introduce a carbon tax for all carbon fuel-run motor vehicles; and

• Proposed incentive to encourage export of motor vehicles that are more than five years old. Worsening traffic congestion in Colombo’s suburbs has been an area of concern for the government. As such, a general increase in vehicle duties was implemented in the 2016 budget. The proposed policies are consistent with previous plans to reduce the number of motor vehicles on the road to ease congestion and the side effects associated with vehicle emissions. There is also a general attempt to make the vehicle population greener through schemes that encourage the replacement of three wheelers with safer and more eco-friendly electric cars via concessionary loan schemes. Furthermore, the policy to encourage school vans to upgrade to 32-seater buses is an attempt to encourage a more efficient transportation system.


The plantation segment is a key economic driver in Sri Lanka, particularly tea leaf production. The 2017 budget includes the following:

• Abolish the 1% import and export control fee on the CIF price of tea;

• The maximum acreage that can be held by any stand-alone company, without being allowed to consolidate, will be 2023 ha;

• Encourage import of CTC tea for the purpose of re-exportation after value addition; and

• Increase the import cess for rubber to LKR15 ($0.10) per kg to encourage the export of local value-added products. As would be expected, the tea industry receives the most attention within the plantations sector, given the significant challenges that are currently plaguing the industry. While the segment has been divided with regard to how best to proceed following a quagmire of falling volumes and increasing costs, recently proposed policies seem to indicate that the government’s stance is to promote value addition and move up the value chain. Furthermore, there is a lack of clarity with regard to the proposal to limit the size of the cultivatable land of a standalone company to 2023 ha, and if this is applicable to large plantations that are held by conglomerates.

Apart from tea, a general policy of encouraging value addition for plantation crops has been followed with respect to other traditional crops such as rubber and coconut. While the proposals itself are positive, the impact it may have on improving the prospects of the industry may be limited if they are not generally acceptable within the industry, as well as if external pressures have a more significant impact.


The 2017 budget includes the following key polices on the telecoms sector:

• Telecommunications levy on internet services will be increased to 25%, on par with levies for other telecoms services;

• All mobile telephone operators will be given six months to update their infrastructure to provide at least 3G coverage; any operator that fails to do so will be liable for a surcharge of LKR100m ($682,000) per district and all metro areas are required to convert to 4G by June 30, 2018;

• The annual spectrum charge will be increased by 25% starting from January 1, 2017;

• SIM activation levy of LKR200 ($1.36) will be imposed;

• The services provided by the external gateway operators to local operators will be exempted from value-added tax (VAT) and NBT; and

• Proposal to form a company under a PPP which will own their own telecoms towers in order to reduce operation costs through synergies that will arise from asset sharing. The telecoms sector is expected to play an important role in the country’s digitalisation process. These services will be especially important in transforming the education industry in the country. However, following from the 2016 budget, the government has increased levies and charges on the sector including those for internet and mobile services. The pressure on mobile telephone operators is further heightened, with the mandatory requirement of infrastructure improvement to provide advanced connectivity.

Tobacco & Alcohol

The 2017 budget also includes a number of key policies for the tobacco and alcohol segments, which are as follows:

• Income tax rate applicable to liquor and tobacco will remain at 40%;

• An excise duty will be introduced on imported non-potable alcohol at LKR25 ($0.17) per litre;

• An excise duty will be imposed on raw materials used for manufacturing of ethanol, including molasses at LKR20 ($0.14) per litre, coconut toddy at LKR10 ($0.07) per litre, maize LKR20 ($0.14) per kg, rice LKR20 ($0.14) per kg and LKR20 ($0.14) per kg for any other.

• An annual licence fee will be imposed on importers of beedi leaves at LKR5m ($34,100);

• The fool proof sticker system announced in 2016 will be introduced with a view to control illicit liquor circulation and leakages;

• An Excise (Special Provisions) Duty will be introduced on imports of beer cans at a rate of LKR10 ($0.07) per can of 325 ml or less and LKR15 ($0.10) per can of more than 325 ml; and

• The present wastage and evaporation allowances for liquor production will be revised downwards to 0.10% for wastage and 0.05% for evaporation. Following the example of most previous budgets, a multitude of duties and fees have been imposed on the tobacco and alcohol industry, as well as tighter quality standards such as the fool proof sticker system, tightening bottom lines. A specific note should be made of the request by the government to the Ceylon Tobacco Company to donate LKR500m ($3.4m) to the Presidential Fund to be utilised by the Presidential Task Force for anti-smoking campaigns.

Banking & Finance

The 2017 budgets includes several new provisions for the banking, financial services and insurance sectors, including:

• Voluntary consolidation, especially for smaller private banks, in line with Basel III requirements;

• Guidance on lending portfolio composition;

• Increase the minimum capital of licensed commercial banks to LKR20bn ($136.4m), licensed specialised banks (LSBs) to LKR7.5bn ($51.1m) in line with the proposed consolidation;

• Introduce necessary amendments to the Banking Act in line with modern-day requirements;

• Change to LTV ratios for motor vehicles;

• Proposal to introduce amendments expanding the applicability of the Debt Recovery (Special) Provisions Act No. 2 of 1990 to all LSBs and licensed finance companies to improve debt recovery; and

• Set up the Financial Asset Management Agency to restructure distressed finance companies. As the consolidation of banks is voluntary in nature, it would be positive for the sector in terms of balancing competition in the sector and enabling smaller banks to meet the regulatory capital requirements. Providing specific directions on the composition of the lending portfolio of banks is consistent with the policy followed in the prior budget while the specific allocations have been revised. There has been an increase for the SME sector from 5% as directed in 2016 to 10%, and new directions have been included to lend at least 10% for exports and tourism. The agriculture lending minimum of at least 10% of a portfolio is the same as directions for 2016.

The LTV ratio is currently 70% for the purchase or utilisation of motor vehicles by banks and financial institutions supervised by the Central Bank of Sri Lanka. The 2017 budget proposes specifies rates per motor vehicle category as: 25% for three wheelers; 50% for motor cars and vans; and 90% for commercial vehicles such as lorries and heavy vehicles. The volume of leasing facilities granted to the first two categories will be negatively affected if this proposal is enacted as they account for a major portion of leasing at financial institutions. The focus seems to be on restructuring and strengthening the sector by providing specific directions.

There are no major proposals that affect the insurance industry. However, a proposal to provide insurance coverage for all school-age children in Sri Lanka will be significant given the number of individuals who would be covered by the scheme.


The 2017 budget includes the following key policies for the logistics sector:

• Encouraging entrepôt operations;

• Multi-country consolidated containers with zero domestic cargo will be considered a trans-shipment container and the relevant terminal handling charges will not be levied on such containers;

• Conduct a feasibility study for a domestic airport in the Badulla district and simultaneously explore the process of linking the Badulla district to the Southern Expressway; and

• Install a container-scanning system at ports and airports to ensure effectiveness and efficiency of the container- and baggage-clearing process. The logistics sector was highlighted as having a lacklustre performance, despite the many efforts made to turn Sri Lanka into a commercial hub. However, the proposals of the 2017 budget are consistent with the previous year’s budget’s attempts to liberalise the sector. This budget attempts to open up more opportunities for companies within the sector, establish further operations within the country and cut down on the clearance times for containers, which could possibly lead to positive financial effects.


The 2017 budget prioritises education and includes the following key policies:

• LKR2bn ($13.6m) in additional allocations to provide basic facilities in schools;

• Proposed establishment of a regulatory body for international schools to ensure quality;

• LKR5bn ($34.1m) to be allocated to provide Wi-Fi and IT services for 100,000 graduates entering state universities;

• Encouraging the private sector to take part in developing the digital infrastructure of schools;

• Proposal to introduce a loan scheme for up to LKR800,000 ($5450) per student for students who are not attending a state university for the entire course of their studies; and

• Vocational training for students who can be employed in the private sector. The policy direction in general encourages and has been targeted at improving both the quantity of education, in terms of giving a wider group of students’ access to higher education, and the quality of education through better regulatory oversight of secondary and tertiary institutes.


The 2017 budget also includes the following key policies for the agriculture segment:

• Relaxes maximum retail price on whole chicken, while maintaining the LKR420 ($2.86) per kg price where 40% of the supply to market should be whole chicken;

• Encourage local and foreign investments in the sugar industry in the Moneragala and Batticaloa districts with capital allowances;

• Policies to encourage the local dairy industry and assist farmers;

• Proposal to continue the policy of selling 400 grams of milk powder at the same controlled price of LKR295 ($2.01); and

• Proposal to allocate LKR500m ($3.4m) to promote aquaculture industry zones in Hambantota, Mannar and Batticaloa. The government’s policies towards agriculture have been one of encouraging export-oriented segments and promoting domestic industries. As such, policies that support greater levels of investment have been directed towards sectors such as sugar and dairy. It is also encouraging to note that there is an attempt to be less restrictive with respect to the poultry segment, which has in the past been inhibited by restrictions on its maximum retail price in the face of escalating costs. The more relaxed stance proposed in the 2017 budget is encouraging as it indicates that the government is more flexible in terms of balancing the needs of different stakeholders.


Given the abundance of aquatic resources in Sri Lanka, as well as the export potential of sub-segments such as ornamental fish, the 2017 budget proposals were primarily aimed at creating an enabling environment for the sector to flourish. As such, the budget has allocated significant monies towards building capacity such as cold storage facilities, fisheries harbours and anchorages.

Income Taxation

The following is a brief review of Sri Lankan taxation regulation, as well as rates for both individuals and companies. There will be three tax rate structures for the assessment year 2017/18:

• 40% on profits and income from betting and gaming, liquor and tobacco;

• 14% on profits and income of SMEs with an annual turnover of up to LKR50m ($341,000), export of goods or services, agriculture and education; and

• 28% standard rate on profits and income in all other sectors, other than those mentioned above. In 2017 individuals’ employment income are subject to a tax-free threshold of LKR1.2m ($8180). There are also no qualifying payment allowance. The rate structure is progressive and is as follows:

• 4% on first LKR600,000 ($4090);

• 8% on LKR1.2m ($8180);

• 12% on LKR1.8m ($12,300);

• 16% on LKR2.4m ($16,400);

• 20% on LKR3m ($20,500); and

• 24% on the balance. There are also some categories of employment income that are subject to removal of tax exemptions. Effective from April 1, 2017 the following employment benefits will be taxed:

• Providing a transport facility, such as providing a vehicle or in lieu of such a vehicle a payment of LKR50,000 ($341) for a calendar month; and

• Any special payment made to special categories of public services. Currently, the above-mentioned benefits are not taxable as employee benefits. In the assessment year 2017/18 the following rates apply in instances where an individual has taken a second job:

• 10% on income of LKR1-50,000 ($0.01-341); and

• 20% on income that exceeds LKR50,000 ($341). For the assessment year 2017/18 for income other than employment income the rate structure is progressive and is as follows:

• 4% on first LKR600,000 ($4090);

• 8% on LKR1.2m ($8180);

• 12% on LKR1.8m ($12,300);

• 16% on LKR2.4m ($16,400);

• 20% on LKR3m ($20,500); and

• 24% on the balance.

Withholding Tax

The following is a review of Sri Lanka’s withholding tax rates:

• 5% on individuals and charitable institutions on deposit made;

• 10% for companies;

• 8% for bodies of people;

• A 5% rate will be reintroduced for specified fees exceeding LKR50,000 ($341) per month, effective from April 1, 2017; and

• 14% on dividend and Treasury bonds. Notional tax credits on interest income on Treasury bills, bonds and corporate debt securities will be removed and they will be liable to a interest net income withholding tax, effective from April 1,2017.

For the assessment year 2017/18 rates of depreciation allowance are as follows:

• 20% for plant machinery or equipment;

• 5% for building;

• 20% for furniture and/or vehicles;

• 25% for IT equipment; and

• 100% for locally produced software.

Tax Benefits

There are currently several tax incentives for investments. Rates for capital allowances are set according to the investments location for investment in fixed assets of no less than $3m and with no less than 250 employees. Rates are:

• 100% in any location outside of the Northern Province; and

• 200% for projects in the Northern Province.

Tax Credit

In addition to the 100% capital allowances, a tax credit of 5% for investments will be allowed up to the maximum tax payable, if the investment is at least $5m in any trade or business. Specific concessions have also been announced regarding several types of investment:

• At least $100m, with a minimum of 500 employees; and

• At least $500m in any trade or business.

Export Concession

The Sri Lankan tax framework includes a number of concessions to exporters. Where the export profits earned in a foreign currency increased by 15% or more in 2016/17 compared to 2015/16, a rebate of 75% of the income tax attributable to the excess profit of 2016/17 will be granted to exporters. However, certain exemptions have been removed from the tax code. Starting in April 1, 2017 the following exemptions will be removed:

• Dividends to be identified;

• Interest income to be identified;

• Profits from investment in listed securities and other financial instruments;

• Exemption of up to LKR5000 ($34.10) per month on interest on savings accounts; and

• Exemption of interest on deposits made by senior citizens, which is now limited to LKR1.5m ($10,200) per annum.

Capital Gains Tax

There is a new proposal to introduce a capital gains tax, charging a flat rate of 10% on gains earned on the disposal of immovable properties at the time of realisation of such gains. It should be noted that this tax is only a proposal for 2017, and nothing has yet been enacted.


The government has made several changes to the VAT system under the 2017 budget. While the capital gain tax has been introduced, the prevailing Simplified VAT Scheme will be terminated in 2017. There are also a number of new exemptions added to the country’s VAT system. They include the following:

• Import and supply of plants, machinery and accessories for renewable energy generation under specific harmonised system (HS) code numbers;

• Import and supply of certain electrical goods identified under specific HS code numbers;

• Import and supply of magazines, journals or periodicals other than newspapers, identified under specific HS code numbers;

• Import and supply of medical machinery and medical equipment identified under HS code No.


• Other centrifuges, including centrifugal dryers, and filtering or purifying machinery or apparatus for liquids or gases;

• Imports of machines such as transplanters, hand weeders, etc., which are used in agriculture;

• International telecoms services provided to local operators by external gateway operators; and

• Supply of geriatric health care services and child care services; VAT exemptions withdrawn in 2017 include:

• Import and supply of gold coins, precious metals and precious stones with specific HS code numbers;

• Import or supply of jewellery;

• Locally manufactured milk powder.

Vat Refund

A new VAT refund mechanism has been introduced in 2017 for goods purchased by foreigners who stay less than 30 days in Sri Lanka. The VAT refund mechanism can be obtained at the point of departure from Sri Lanka. In order to enhance the efficiency of the VAT refund process, post-refunds audits, upon obtaining bank guarantees, are now required. In addition, the government is seeking to digitalise VAT functions and services. There is a plan in place to introduced smart e-invoice devices to be used at the point of sale by the VAT-registered entity in order to simplify and implement the process. This will make the VAT collection process much more simple and efficient. It should be noted that these are only proposed for 2017 and are not yet enacted.