Foreign Investment Policy and Liberalization Prevailing Regulations

Foreign Investment Policy and Liberalization Prevailing Regulations

An explanation of Foreign investors approved by country funds, regional funds, corporate bodies and individuals.

Foreign equity investment in Sri Lankan companies was liberalised in terms of the Gazette order No.721/4 of 29th June 1992 made under the Exchange Control Act in terms of which restriction on investment was withdrawn except in activities categorised as “reserved”, “regulated” or “limited” and detailed in Annexure 1 attached hereto.

Permitted foreign investors were approved country funds, regional funds, corporate bodies and individuals.

* Further Liberalisation Proposals Presented in the Budget

(1) Increase in Foreign Equity Limitations in Certain Sectors.

The following further relaxation o foreign ownership has been suggested in cognisance of the perceived benefits that result therefrom which would include inter alia the improvement of the capital base, increase in foreign fund flows, providing a conduit for the development of Colombo as a regional centre for international services.

Note 1

Subject to standard regulatory requirements as may be prescribed in terms of the Banking and Insurance Statutes.


This increase is suggested in recognition of the possible benefits from foreign expertise, technology transfers and in accordance with the practice in emerging markets.

The enhanced equity stakes would be limited to companies, which have a credible international reputation and are regulated in the country of registration with a proven record of successful trading and good sales turnover. They would also be required to indicate willingness to transfer skills and technology conducive to enhancing customer oriented sevices.

(11) Foreign Investment in Unit Trusts

The prevailing Exchange Control regulations do not permit non residents to freely invest in Unit Trusts. (The 1992 relaxation was only in relation to shares in a company).

It is now proposed to permit investments in equity/growth Unit trusts provided the underlying trust deed does not permit more than 20% investment of Trust Funds in Government Securities.

It also merits mention that it would appear that the modality for routing of foreign investment into Unit Trusts should also be via a Share Investment External rupee Account as is the precondition in the case of equity investment in companies.


2.1 Rationalisation

2.1.1 Large Scale Development Projects

Incentives are presently granted to Companies which make a minimum investment of Rs. 500 mn in any large scale development project, irrespective of whether export oriented o not. Concessions granted include Tax Holidays which range from 10-2- years depending on the quantum of investment.


The concession in the form of a Tax Holiday is to be replaced with a 15% concessionary rate of tax, except for the following areas:

* Projects with a total investment of over Rs.3,500 mn, namely, “Flagship projects”

* Large scale export projects with a minimum investment of over Rs.500 mn.

2.1.2. Regional Industrialisation

Tax Holidays ( 5 years and 8 years) were granted to enterprises, which set up an expansion unit or relocated to “difficult” or “most difficult” zones. Such expansion or relocation should have commenced prior to 31st December 1999 in order to qualify for tax exemptions.


The grant of the above incentives to be restricted to enterprises locating within a designated Industrial Park of Investment Promotion Zone classified as :Preferred” or “Most Preferred”.

2.1.3. General Duty Concessions

Proposals :

* Negative List

Duty concessions would hitherto not be granted for items as may be included in the negative list under the Indo Lanka Free Trade Agreement as a means of providing a protection to local industry. Duty free import of such items would also be permitted only in cases where items cannot be manufactured in Sri Lanka to the required quality standard on a time bound basis.

* Project Implementation Period

Duty free import of project related articles by non export oriented companies to be withdrawn effective from 1st Aprill2001. This is to correct an anomaly between non export oriented companies approved prior to 1994 which were granted custom duty exemptions on project related capital goods for an indefinite period vis-a-vis post 1994 projects which were granted exemptions only untill the commencement of commercial operations.

* Duty Free Vehicles

BOI enterprises have been hitherto granted duty free import of vehicles for the purpose of replacement. This has been withdrawn with immediate effect and the facility would be afforded only once new projects are started in terms of BOI Investment Guidelines. Minimum Investment

A number of areas eligible for BOI concessions do not currently require a minimum investment as a pre qualification for concessions. In cognisance of the fact that a primary objective of the BOI is to obtain capital formation in priority sectors of the economy, appropriate minimum investment limits would be prescribed under all investment categories.

2.2 Enhancement of Concessions

2.2.1. Housing


The grant of similar incentives as currently available to housing projects, to projects undertaken in urban districts as a means of promoting 25 projects in such districts, subject to the availability criteria being met :

* Minimum 300 houses

* Construction completed within 3 years

A resume of the currently prevailing incentives introduced by the 1998 regulations is provided below :

(a) New Enterprises engaged in the construction of housing units for sale/lease :

Eligibility Criteria :

* Minimum of 100 units

* Minimum investment of Rs.100 mn.

* Maximum 3 locations

(b) Any enterprise engaged in the construction of housing units for sale/lease :

Eligibility Criteria :

* Minimum 100 housing units

* Minimum investment of Rs.50 mn.

* Maximum 3 locations


* Tax Holiday of 7 years (minimum investment Rs.50 mn) or 10 years (minimum investment Rs.100 mn) reckoned from the date the first sale/lease is effected.

* Dividends paid during period of tax holiday and within one year thereafter exempt from income tax.

* Import duty exemption on project related articles during project implementation period (restricted to 2 years).

* Supply, lease or rental of residential accomodation exempt from GST.

2.2.2. IT Training Institutes


The grant of special incentives to encourage the setting up of 50 IT Training Institutes in major population centres covering all districts in Sri Lanka over the next 2 years, under the following scheme :

Eligibility Criteria

* Minimum investment of Rs.1 million to procure computers, furniture and other training equipment.

* Facilities to train a minimum of 300 persons annually.

Concessions Granted

* Five year tax holiday

* Initial expenditure in setting up such as cost of training the trainers, renovating and refurbishing training premises and obtaining infrastructure connection to be met by BOI.

* Facilities to be linked to IT Parks at Malabe, Kesbewa and Pugoda, and assisted by Sri Lanka Institute for Information Technology.

2.2.3. Manufacture of Defence Related Products


Recommended the establishment of a separate industrial zone by the BOI with a view to attract investors undertaking supply of defence related non-combat products such as belts, boots, uniforms, tents etc, for use by the armed forces, police and prison. Export of at least 50% of production is also a requirement.

Although specific relief measures have not been mentioned, it would in probability take the form of tax holidays and duty free import of equipment

3. Fiscal Incentives / Concessions

We give below a synopsis of the various concessions and relief measures recommended.

3.1. Local Film Industry


With a view to promoting the national film industry the following have been suggested

* liberalising the import of foreign films subject to regulations

* monopoly of the National Film Corporation to be terminated and action to be initiated to convert the Corporation into a regulatory body

* the of the following fiscal incentives to facilitate film production subject to the eligibility criteria as prescribed below


* Full cost of production of a film to be afforded qualifying payment relief by way of a deduction from the assessable income of the film producer with no ceiling on the amount claimable.

* Any amount not claimed in the year of expenditure to be carried forward for claim within the following two years.

Eligibility Criteria

* Cost of production of the film including promotional expenses is between Rs. 5 and Rs. 100 million.

* Film production commences on or after 1st January 2000

3.2. Staff Training Expenditure


With a view to promoting professional and employee skills the following expenditure to be permitted as a deduction in the determination of income for taxation purposes.

* Cost technical training at any recognised institution ( including cost of travel)

* Similar costs (including cost of travel) incurred by professionals participating in seminars and workshops in their chosen field of expertise.

Deductibility would be afforded subject to satisfying the Commisioner General of Inland Revenue that such training or participation is essential for the enhancement of the performance of the trainee or professional.

3.3. Life & Health Insurance Premia


Qualifying payment relief to be permitted on premia paid on a life policy or a medical insurance policy subject to limitation on claim by reference to Rs.25,000/- or 1/3rd of assessable income whichever is lower. This relief is in addition to the current ceiling of Rs.25,000/- on qualifying payments applicable to individuals.

Effective date 1st April 2000.

3.4. Advanced Technology


Extension of duty concessions under the advanced Technology scheme to be continued for a further period of 2 years. The duty concession which is afforded is a duty waiver for a period of one year on the import of capital equipment from date of recommendation by the fiscal incentive committee providing the use of Advanced Technology is sustained and minimum investment of Rs.1 mn in the acquisition of capital equipment is made.

3.5. Venture Capital Companies


Venture Capital Companies gazetted in terms of Sec.22 DDD of inland Revenue Act would now be permitted to expand their scope of activity to investments of their choice particularly in the priority sector and software industry on the basis of opting out of the tax holiday for the unexpired period.

4. Withholding of Income Tax on Specified Fees Paid by Specified Persons

Statutory provisions providing for the withholding of Income Tax on payment of specified fees by specified persons, was introduced into tax legislation at section 113 (K) thereof, by virtue of the Inland Revenue Amending Act no. 63 of 1992 and legally enforceable on payments made on or after 1st January 1993. We give below a synopsis of the relevant legislative provisions applicable to this scheme :

(a) Rate of withholding :

3% – 1st January 1993 to 1st April 1997

5% – effective from 1st April 1997

(b) “Specified Fees”

“Fees for services rendered in carrying on a profession or vocation or other activities of an independent character and includes any commission or brokerage or any sums of a like nature (other than payment under a contract of employment)”.

In short, specified fees in relation to which the withholding requirement would apply are those paid on account of :

* Professional Services

* Vocational Services

* Commission and Brokerage

(c) The withholding requirement did not apply in relation to payments to an incorporated entity (Company) in view of the term “other activities of an independent character” being used to describe liable services.

(d) Fees for services rendered by a non-resident from outside Sri Lanka are not chargeable to Sri Lanka income tax. Hence, such payments could be excluded from the requirement to withhold this tax.

(e) The requirement to withhold the tax applies to “Specified Persons” defined to mean any person, partnership or body of persons which makes a payment of professional or vocational service fees, commission or brokerage in the following instances :

* the relevant payment exceeds Rs.30,000/-

* where the payment is less than Rs.30,000/- providing

– The payer has paid specified fees, aggregating to Rs. 250,000 in the previous Year of assessment, OR

– Payment to the same payee exceeds Rs.30,000/- in the previous Year of Assessment, OR

– Aggregate of the payment to the payee exceeds Rs.30,000/- in the relevant Year of assessment.


5. Expansion of this provision to cover all services and to include payments to corporate bodies as well.

It would be noted that legislation as it stands does not enforce the withholding requirement on payment of services to a company due to the definition of specified fees containing a rider that same should be in relation to activities of an independent character. It would appear that the definition ‘Specified Fees’ would now need to be amended so as to give legal effect to the budget proposal. Mention has not been made as to the effective date. In the absence of specific mention, it may be that the enhanced withholding is legally enforced with effect from 1st April 2000.

5.1. Proposals

The GST ACT No. 34 of 1996 together with the amendment thereto at present lists out thirty five types of supplies which have been exempted from the application of the GST Statute . With a view to ensuring smooth administration and to relieve difficulties experienced by certain sectors it has been proposed to grant exemption from GST to specified sectors. It was also indicated that in order to promote local production of certain industries the exemptions from GST currently applicable to the certain identified sectors are to be removed with a view to enabling the claim of credit for the input GST.

Additions to the list of Exemptions

* Burial and cremation services

* Artificial limbs

* Crutches

* Hearing aids

* Wheel chairs

* Crop and livestock insurance

* Agrahara Insurance

* Meals provided to empolyees at the place of work either free of charge or at a nominal rate

Withdrawal of Exempt Status

* Cement

* Timber

* All varieties of meat including poultry.

5.2. Administrative Rulings and Guidelines of Interest

We attach at Annexure II a synopsis of significant rulings secured by us from the Revenue Authorities on the interpretation and application of certan provisions under the GST Statute.

6. Tax Administration and Compliance

6.1. A Co-ordinated Enforcement Mechanism for Tax Collection

With a view to increasing revenue collection through better enforcement of tax laws, speedy collection of taxes, strengthening of revenue enforcement laws & prevention of abuse it has been proposed to set up a Revenue Protection Unit (RPU) comprising of fully dedicated officers representing the different tax collecting authorities.

The responsibilities of the RPU would be to ensure systematic collection of taxes and expedite resolution of disputes.

It has also been proposed that the Department of Inland Revenue would in future be more stringent in imposing penalties for non compliance with Statutory provisions, undertake enhanced audits and would enforce increased surveillance on low compliance sectors.

6.2. Introduction of a 3 month period for challenging the Validity of Assessments.

In terms of section 115(1) of Inland Revenue Act, if an Assessor is of the opinion that any person liable to income tax for any year of assessment has not paid such tax or has paid a lesser amount he may assess in writing the amount which in the judgement of the Assessor ought to have been paid by such person.

The validity of such an assessment could be contested under certain conditions which include:

* Where no intimation is given to the assessee prior to the issue of the notice of assessment giving the reasons for raising an assessment as statutorily required under section 115(3) of the Inland Revenue Act.

* Where the time bar on raising assessment as provided under section 115(5) has lapsed.

The Statute at present does not stipulate a time frame for contesting the validity of an assessment but prescribes a thirty-day time frame for the submission of a valid appeal against the amount of the assessment.

It has been proposed to introduce a three-month time bar from the date of notice of assessment within which the validity of an assessment on the grounds of non-compliance with Section 115(3) could be challenged.

6.3. Provision of reasons for not accepting Returns.

It has been proposed to bring in an amendment to tax legislation to empower an assessor to make a fresh assessment in cases where the validity of an assessment is being contested on the basis of inadequacy or incompleteness of the reasons given by the assessor

7. Free Trade Agreement Between Sri Lanka and India

A Gazette order to implement Sri Lanka’s commitments to the “Free Trade Agreement between Sri Lanka and India” entered into in December 1998 is to be published effective from 15th February 2000.

Intention of Agreement

* Promote movement of goods between the two countries free of custom duty and other non-tariff barriers.

* Protect national and economic interests by excluding products through a negative list of each country.

* Protect local industries, which are not ready to compete with imports on a duty free basis.

Pre conditions to qualify for concessions under agreement

Domestic value addition of 35% required.

The terms of agreement are as follows :

Note 1


50% Duty concession increased to 100% at end of 3 years.

Exception – Textile items 25% duty throughout.

Sri Lanka

900 items – 50% duty concession increased to 100% at end of 3 years

1300 items – duties to be reduced

Benefits to Sri Lanka Economy

o Inflow of Indian raw material o duty free basis will assist Sri Lankan industries to reduce cost and increase profitability.

Preferential access Sri Lankan exports including tea and garments in the Indian market will enable Sri Lanka to attract foreign investment, increase economic activity and generate employment.

8. Custom Tariff Reforms

* Salient features of proposals

– Reduction of existing tariff structure to two bands consisting of 25 per cent and 10 per cent rates only. (This measure is proposed in accordance with a recommendation made by the Presidential Trade and Tariff Commission to simplify the structure)

– Duty on cement unified at 10 per centum (previously cement imported in bulk was levied a 7.5% duty and bagged cement 10%)

– Exempt items such as maize to be brought under 5 per cent band to encourage local production.

– Duty on crude oil to be removed.

– 35 per cent special rate to be levied on strategic agricultural products such as Potatoes, Onions, Chillies, Rice, Dhal for protection of local production.

– Concessionary rate of 5 per centum to be gradually eliminated with the implementation of the Indo Lanka Free Trade Agreement.

Revised tariffs effective from the 15th February 2000.

9. Stamp Duty

(a) Proposals for Reduction in Stamp Duty Rates

Concessions for the Agricultural sector

(b) Change in Collection Procedure

As a means of preventing abuse 2% Stamp Duty on trade documents (Letter of Credit) will in future be collected at source i.e. point of import by customs authorities and not at the time an application is made for the letter of credit with banks

10. National Security Levy

The National security Levy as presently legislated is applicable to the turnover of a person arising from the following :

? Business of manufacturing any article

? Import of any article

? Business of insurance, banking of finance

? Business of providing telecommunication services

The budget proposal recommends the extension of the levy to include all service sectors excluding the following :

? Provision of electricity and water

? Health services

? Educational services

? Construction

? Transport

? Hotels

? Brokering

? Repair services

? Government Agencies and statutory bodies

Professionals and others liable to the Save the Nation Contribution

11. Exercise Tax

The automatic waiver presently available under Excise Special Ordinance whereby exemption from Excise Duty is available if Customs Duty waivers apply under Sec.19(A) of the Customs Ordinance is to be amended.

12. General

12.1. Removal of Television and Radio Licenses

Annual licensing of television and radio sets has been removed with effect from 1st January 2000.

12.2. Revision of Administrative fees charged by the Department of Immigration and Emigration

Fees charged on account of the following are to be revised to meet escalating cost and for improvement of service.

Foreign Investment Policy And Liberalisation

(a) Reserved Activities

Foreign Investment in the following business activities are entirely prohibited being areas reserved for Sri Lankans.

1. Money Lending

2. Pawn Brokering

3. Retail Trade with a capital Investment of less than US$ 1 million

4. Personal Services other than for export or for tourism

5. Coastal Fishing

(b) Regulated Activities

The following activities though not necessarily closed to foreign investment are regulated by specific statutes or organizations and consequently investment in these areas are subject to approval by the relevant statutory agency.

1. Banking

2. Finance

3. Investment Banking

4. Insurance

5. Trading Services on the Colombo Stock Exchange

6. Air Transportation

7. Coastal Shipping

8. Sensitive industries such as military hardware, dangerous drugs and currency

9. Energy and power

10. Lotteries

11. Large scale mechanized mining of gems

(c ) Limited Activities

Foreign investment to 40% of equity in the activities, as per list given below does not require any prior sanctions. Foreign investment in excess of this limit requires evaluation and approval by the Board of Investment on a case by case basis in consultation with the relevant authorities.

1. Export production of goods subject to international quotas

2. Growing and primary processing of tea, rubber, coconut, rice, cocoa, sugar and spices

3.Mining and primary processing of non-renewable natural resources

4. timber based industries using local timber

5. Fishing (deep sea fishing)

6. Construction of residential buildings

7. Supply of water

8. Mass transportation

9. Telecommunications

10. Mass communications

11. Education

12. Professional services

13. Freight forwarding

14. Travel agencies

15. Shipping agencies

Note :

(i) In accordance with the above the Board of Investment which is the Authority for promoting, facilitating and approving foreign investment does not enforce or stipulate a sanctioning process or limitation on foreign equity participation other than in those areas as listed under (a), (b) and (c) above.

(ii) It also merits mention that stipulations contained in Exchange Control Regulations made as a part of the scheme of liberalization of foreign investment provide inter alia that

* Payment for equity investments irrespective of whether on issue or transfer should be made out of a Share Investment External Rupees Account (SIERA) in a Commercial Bank Operating in Sri Lanka .

* Proceeds on sale of shares, dividends and commissions in respect of related transactions arising consequent to foreign eqity investments should be made pnly into or out of such Share Investment External Rupee Account (SIERA)