A new value-added tax (VAT) was introduced 1 August 2002 after two delays designed to replace both the VAT-like goods and services tax (GST), in effect since April 1998 and abolished 1 June 2002, as well as the National Security Levy. The new VAT has three rates: a standard 20% rate (up from the GST 12.5% rate) for most goods and services supplied in or imported into Sri Lanka; a 10% rate (up from 0%) on essentials like food, petroleum, public transport services, and health care; and a 0% rate on export-related services and on services consumed outside Sri Lanka and paid for with foreign exchange credited to a bank in Sri Lanka. In this low income country, the VAT is the most important source of government revenue. In 2003, the government has also introduced a new debits tax of 0.1% to be applied to all current account debits, a reflection of the pressure to maintain adequate foreign exchange reserves. Withdrawals up to about $200 a month are exempt from the debits tax. Exempt from the debits tax are the accounts of the government and international organizations, accounts at foreign currency banking units (operated by all commercial banks) and accounts maintained for stock exchange transactions, the share investment external rupee accounts (SIERAs) through which foreign purchases on Colombo Stock Exchange are directed. Individual income taxes are graduated, with rates of 0% up to about $2,500; 10% for income between $2,500 and $4,300; 20% for income between $4,300 and $6,000; and 30% on the balance. Noncitizens employed in enterprises licensed by the Board of Investment (BOI) are taxed at a flat concessional rate of 15%. There are two corporate income tax rates: a 20% rate for companies with taxable income below about $51,500 (i.e., R 5 million), and a 30% rate for those with taxable income above this limit (down from a previous top rate of 35%). Extensive tax holidays and concessional rates are offered to foreign investors and joint ventures that meet specified performances requirements. Income from unit trust funds in specified areas are taxed at a preferential 10% rate, while other unit trusts and mutual funds are taxed at 20%. Dividends are taxed at 10% and capital gains taxes have been abolished. As of 1 January 2003 the tax free limit on interest income was raised from R 73,000 to R 108,000 (about $1,100).
Other taxes include excise taxes on over 250 items, and local property taxes.