Capital Gains Tax and its effects on Property in Sri Lanka

What is Capital Gains Tax?

Capital Gains Tax or CGT is a type of tax which is charged on the profit from a sale of property or an investment. This will, however take into account any costs that were incurred on buying, improving and selling such assets and reduce those values from the overall amount. Capital assets include any land, building, machinery and share. However according to the draft new Inland Revenue Act bill, the tax will only apply to Real Estate gains

When was this announced?

Sri Lankan government first unveiled plans to introduce a capital gains tax with the 2017 budget speech. It was proposed that 10% rate shall be applicable for transactions involving capital assets which include any immovable property.

However, Sri Lanka has a history with capital gains taxes which was notably set at 45% and then reduced to 25% in 1978 and finally abolished in 2002, coincidentally by the current premier, Hon. Ranil Wickramasinghe

 

 

When will this be in effect?

However, there is no date set forth for the tax to be implemented as the previously suggested deadline of 1st of April 2017 has passed without the tax being introduced. The new Revenue act bill has still not got parliament approval with some delays expected due to potential cases to be filed with the Supreme Court challenging some elements in the bill.

How will the tax be calculated?

Capital Gains tax will only be implemented on the profit that was made or the gain in the nomenclature as put forward. The tax shall not take into account the overall value of the property.

According to the minister at the time and many sources, any gains made on housing or property within a period of 10 years of acquiring such property will be subject to the application of the CGT.

Who will this apply to?

According to the sources available, the CGT will be applicable to both the foreigners and locals with the only two criteria being if the property has been purchased within the 10-year period and if a profit has been made on a subsequent sale.

Are there any exemptions applicable?

In many other countries, sale of a Residential houses are not subject to the tax and authoritative sources within the ministry indicate this might be an exemption that will be granted in Sri Lanka as well. Also, CGT will not apply to persons who inherits a property and then proceeds to sell it.

In many other countries, first sales of a Residential houses are not subject to the tax. It can be expected that this would be followed in Sri Lanka as well, particularly given that this was an exemption that existed in the law that was repealed in 2002. Also, it is expected CGT will not apply to persons who inherit a property and then proceeds to sell it.

What is the reason for the tax to be implemented?

There has been many a reason put forward to support the inclusion of a CGT, chief among which is that the government’s spending on infrastructure has massively helped raise the prices of real estate property and thus it is suitable for the government to also benefit off of such transactions.

This is also a part of reforms suggested by the International Monetary Fund (IMF) which has advised the administration on raising its tax revenue ratio to the GDP. The government expects to raise Rs. 5 Billion from the imposition of the CGT an equivalent of 0.27% governments expected tax revenue for the year 2017.

How many other taxes will also be applicable?

Currently, only other tax that will be applicable on the property is a stamp duty of 4%, which is charged on registering a deed ownership.

Effect of the tax on Sri Lankan property market

Industry opinion over the CGT implementation has been divided. While some see it as a necessary step, many have voiced concerns over the unclear nature of the implementation. The lack of clarity in issues such as if the CGT will be enacted with the power to retrospectively charge the tax has been a concern for many stakeholders.

According to Reuters, since the Prime Minister’s announcement of the CGT implementation it is estimated that foreign investors have sold over Rs. 5 Billion worth of assets.

Another key contention of stakeholders has been the lockout effect of capital being invested in less productive assets as investors will seek to avoid paying the CGT by holding the property for more than 10 years.

 

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