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Tax incentives and economic development By P.
Guruge * Sale of gold,
gems * Construction
and sale The profits
and income of any person from the construction and sale of any house
with a floor area not exceeding 2000 s.f. will be exempted up to
75 % of such profits, if the project has been approved by the Commissioner
of National Housing. This exemption
has no time limit and every house constructed and sold will qualify
for the exemption. (Section 20 of the Inland Revenue Act No. 38
of 2000) New tax holidays
- after 1.4.2002 .The concessionary tax rate regime explained earlier
will continue to operate even after 1.4.2002. However most of the
tax exemptions other than sale of gold gems or jewellery, construction
and sale of houses, export of handicrafts (up to 31. 3.2004) and
specified infrastructure projects (up to 31.3.2003) will not be
applicable to any business commenced on or after 1.4.2002. Therefore the
following exemptions will be important for such business- * A five year
tax holiday will be available from the year of making profits or
any year not later than two years from the commencement of commercial
operations whichever is earlier to a company engaged in any of the
following undertakings on or after 1.4.2002. Agriculture
(Plantation of any crop and rearing of fish). Agro processing
(processing of any agricultural, farming or fishing produce). Industrial
and machine tool manufacturing and electronic products. Export of non-traditional
products. Information
Technology and allied services Any designated
project - The Regulations relating to such projects have been published
in the Gazette (Extra Ordinary) No. 1 272/5 of 21.1.2003. The following
activities will be qualified as designated projects: Manufacture
of ceramics, glassware or other mineral based products, rubber based
products and light or heavy engineering industrial products. Provision
of refrigerated transport or cold room storage services. Export
Production Village Products. Management of any offshore company
or maintaining a back office in relation to any activity in a foreign
country. Any other project with an investment exceeding Rs. 250
million (as amended). For the purposes of this exemption the export
of non-traditional products means export of any such goods including
deemed exports not less than 80% the total value of production for
any year of assessment. A further period
of two years after the tax holiday period will be taxed at 10% Thereafter,
if qualified for 15% such rate will be applicable. Otherwise the
rate will be 20%. (Section 21A
and subsequent amendments to the Inland Revenue Act No. 38 of 2000). * Infrastructure
projects carried on by a company on or after 1.4.2002 development
of any airport, sea-port, highway or railway, any industrial park
warehouse or store or provision of any sanitation facility or solid
waste management system, power generation, transmission or distribution,
or any water services or Urban housing or town centre development
will be entitled to a tax holiday as follows - (as amended). Rs. 1000 mln
-6 years The exemption
period will be calculated from the year in which the undertaking
commences to make profits or any year not later than two years from
the commencement of commercial operations which ever is earlier.
The tax rate applicable after the tax holiday period will be 15%
(Section 21 B and subsequent amendments to the Inland Revenue Act
No. 38 of 2000) * A five-year
tax holiday will be available to small scale infrastructure undertakings
carried on by a company on or after 1.4.2002 with an investment
not less than Rs. 10 mln but not exceeding Rs. 50 mln in the areas
of power generation, tourism and recreation, warehousing and cold
storage, garbage collection or disposal, construction of houses
or construction of hospitals from the year in which the undertaking
commences to make profits or any year not later than two years from
the commencement of commercial operations which ever is earlier. A further period
of two years after the tax holiday period will be taxed at 10%.
Thereafter the rate will be 20%. * Acquisition
of under performing or non-performing industries or other activities
and making such activities economically viable by 31.3.2004 by any
company will qualify for a 3-year tax holiday on the full profits
of such acquiring company. The period of exemption will be calculated
from the year in which the acquired enterprise commences to make
profits on any year not later than two years from the commencement
of commercial operations by such enterprise which ever is earlier.
For this purpose a proposal should be submitted to the Minister
of Finance which should include the provisions for the settlement
of statutory liabilities of such acquired undertaking. The tax rate
applicable after the tax holiday period will be 20% unless such
company qualifies for 15%. * Expansion
of industrial undertakings by companies - (A) Undertakings
engaged in non-traditional exports if expanded such projects with
an investment not less than Rs. 10 mln on or before 31.3.2004 will
qualify for a two year tax holiday on the entire profits of the
undertaking. If such company
is already enjoying a tax holiday this additional tax holiday will
commence after the expiry of such tax holiday. (B) Undertakings
engaged in other products (other than non-traditional products for
export) if expanded with an investment not less than Rs. 10 mln
on or before 31.3.2004 will qualify for a two year tax holiday on
the profits attributable to such expansion. A five year tax holiday
will be available to companies engaged in research and development
activities on or after 1.4.2003 with a minimum investment of Rs.
2 mln from the year of profit making or any year not later than
two years from the commercial operations which ever is earlier.
For the purposes of this exemption such research and development work should be in the specific fields. Normal ordinary research work will not quality. After the tax holiday period a concessionary rate of 15% will be applicable. All these new tax holidays require no specific approval to obtain the tax holiday. Therefore it is very important to ascertain the correct requirements from the relevant authorities before the commencement of any project with the intention of enjoying a tax holiday.
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