Budget Analysis 2022

1 Budget Analysis 2022 Towards a ResurgenceTax Proposals | November 2021125 Years in Sri LankaTable of ContentsEconomic Impact06 Other Proposals19 Key Tax ProposalsDirect Taxes11 About KPMG Sri Lanka22 Key Tax ProposalsIndirect Taxes13 Key Tax ProposalsAdministrative Provisions17 KPMG32A Sir Mohamed MacanMarkarMwP O Box 186 Colombo 00300 Sri LankaTel 94 (11) 5426 426 Fax 94 (11) 2445 872E-mail the clients of KPMG Sri LankaThe Budget proposals for 2022 were presented in Parliament today by the Hon. Minister of Finance, Basil Rajapakse. Whilst the Minister noted the challenges before the nation, the proposals focused on improving the overall infrastructure of the country, while providing relief to vulnerable communities in keeping with the Vistas of Prosperity and Splendour , the policy framework of the publication has been compiled on a high-level review of the proposals in the limited time available to us.

2 We may also emphasize that these proposals need to be enacted by Parliament for legal information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the dateit is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular 2021 Chartered Accountants 2021 KPMG, a Sri Lankan Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved3 Foreword 2021 KPMG, a Sri Lankan Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee.

3 All rights reserved4 Budget 2022 at a GlanceNew Taxes and LeviesSurchargeTaxat25%onpersonswithtaxa bleincomeexceedingRs. 2 of taxes as a Special Goods and Services TaxA Special Goods and Services Tax to be introduced on telecommunication, motor vehicles, cigarettes, liquor, betting and gaming in lieu of various taxes and levies imposed under different Acts and administered by different Government of the Agriculture SectorAn allocation of Rs. 39 Billion for the promotion of usage of non - toxic weedicides and organic fertilizers with an allocation of Rs 22 Billion for the introduction of new to Teachers salariesAnallocationofRs. 139 Billiontobeallocatedtorevisesalariesofte achersandprincipals. 2021 KPMG, a Sri Lankan Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee.

4 All rights reserved5 Budget 2022 at a Glance(Cont.)Increase of VAT and Excise DutyVAT rate on supply of Financial Services to be increased to 18% Increase of Excise duty on cigarettes and liquor Infrastructure Development An allocation of Rs 49 Billion for the Water for All programme with the aim of providing uninterrupted clean drinkable water allocation of Rs 68 Billion for the VariSaubhagya programme with the aim of developing the irrigation allocation of Rs 280 Billion for the National Road Development Development Allocations to be made for the Gama SamagaPilisandara programmefor uplifting the standard of living and development of rural Welfare and Relief ProgrammesAn allocation of Rs. 31 Billion for the Home Economy Security Programmewith the aim of providing relief to pregnant mothers and economically challenged families, and to establish a mini supermarket network.

5 2021 KPMG, a Sri Lankan Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved6 Economic ImpactKey Tax ProposalsDirect TaxesKey Tax ProposalsIndirect TaxesOther ProposalsAbout KPMGSri LankaKey Tax ProposalsAdministrative ProvisionsEconomic Impact 2021 KPMG, a Sri Lankan Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved7 Economic ImpactKey Tax ProposalsDirect TaxesKey Tax ProposalsIndirect TaxesOther ProposalsAbout KPMGSri LankaKey Tax ProposalsAdministrative ProvisionsReal sector (1/2) Sri lanka s real GDP contracted by YoY in 2020, primarily on account of the COVID 19 pandemic impact on the global and local economy, which was further exacerbated by adverse weather conditions at the beginning of the year.

6 Accordingly, the country recorded a nominal GDP of USD Bn in 2020 and remained a lower middle-income country with a GDP per capita of USD 3,682 during the same period. However, with the gradual recovery of the economy, strengthened by vaccine rollouts, Sri lanka recorded an economic growth of YoY during the 1H2021. Looking forward, the Central Bank of Sri lanka (CBSL) expects the economy to grow by in 2021 while the World Bank and the International Monetary Fund (IMF) expects a more conservative growth of and respectively, on account of a resumption in domestic trade, consumption and manufacturing buoyed by the local vaccine roll-out. GDP The Agriculture sector contracted YoY while the Services and Industry sectors, contracted by YoY and YoY respectively in 2020. However, the economy witnessed a v-shapedrecovery in all sectors in 3Q2020 with the gradual resumption of economic activities post lifting of lockdowns.

7 Tourism, Sri lanka s third largest generator of foreign exchange, suffered a significant setback in 2020 with only 507,704 tourist arrivals in the few months the country s borders were open. The dismal performance in 2020 followed the Easter attacks in 2019, which caused tourist arrivals to drop to Mn during the year from the Mn arrivals recorded in 2018. Unemployment rose steadily in 2020 and reached a high of in 3Q2020. The negative impact of the pandemic continued onto 2021 with unemployment reaching in the 1Q2021. Sectoral Distribution of GDP 42 57 65 68 74 79 81 82 87 88 84 81 BnGross domestic productNominal GDP - USD Bn (LHS)Real GDP growth % (RHS) - Q1 Quarterly Real GDP Growth by Sector (%)AgricultureIndustriesServicesSource: Central Bank of Sri lanka Source: Central Bank of Sri lanka 2021 KPMG, a Sri Lankan Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee.

8 All rights reserved8 Economic ImpactKey Tax ProposalsDirect TaxesKey Tax ProposalsIndirect TaxesOther ProposalsAbout KPMGSri LankaKey Tax ProposalsAdministrative ProvisionsReal sector (2/2) Inflation as measured by the National Consumer Price Index (NCPI) reached YoY (measured as a 12-month moving average) in 2020, notwithstanding lower. consumption and import restrictions on selected consumer and non-consumer goods. Notably, food inflation rose to YoY in 2020 due to the restrictions on select food imports and disruptions to domestic supply chains. Supply shortages exacerbated by import restrictions continued onto 2021 as witnessed by the NCPI and CCPI rising sharply from January 2021 to September 2021 at and on a monthly average inflation level, respectively. Inflation In order to stimulate the economy from the fall out of the COVID 19 pandemic, the CBSL lowered key policy rates five times in 2020, resulting in the standing deposit facility rate and the standing lending facility rate to fall by 250bps during the year.

9 The Statutory Reserve Ratio (SRR) was also reduced on this background. Accordingly, the Average Weighted Prime Lending Rate (AWPLR) declined from in January 2020 to in December 2020. However, commercial lending rates have picked up in 2021 as indicated by AWPLR as of October 2021. The CBSL granted debt moratoriums and introduced credit guarantee schemes for affected industries during the pandemic which continue to be in place in 2021. Interest Rates RatesAWPLR (Monthly)Standing Lending Facility RateStanding Deposit Facility RateSource: Central Bank of Sri lanka Source: Central Bank of Sri lanka 2021 KPMG, a Sri Lankan Partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved9 Economic ImpactKey Tax ProposalsDirect TaxesKey Tax ProposalsIndirect TaxesOther ProposalsAbout KPMGSri LankaKey Tax ProposalsAdministrative ProvisionsFiscal sector Sri lanka s Budget deficit widened from of GDP in 2019 to of GDP (amounting to LKR 1, Bn) in 2020, on account of the economic slowdown, high relief expenditure and post-Presidential Election 2019 tax cuts.

10 The post election tax cuts notably caused tax revenues to decline from of GDP in 2019 to of GDP (amounting to LKR 1, Bn) in 2020, which was further impacted by a decline in the import related tax collection that was challenged by import restrictions during the year. The impact of the tax cuts and the pandemic continued onto 1Q2021, resulting in a Budget deficit of LKR Bn that notably exceeded 1Q2021 revenue of LKR Bn during the year. Fiscal Balances Total debt service payments for 2020 amounted to USD Bn, of which USD Bn was principal repayments and the balance USD Bn was interest payments. On this note, the country s debt-to-GDP ratio stood at at the end of 2020. As at end-April 2021, the GoSL soutstanding foreign debt was USD Bn with International Sovereign Bonds (ISBs) accounting for of the foreign currency debt stock (USD Bn).