REVISIT OF ECONOMIC SERVICE CHARGE (ESC) REGIME

Very soon, ESC pushes businesses to consider adding it to its product’s pricing

Economic Service Charge (ESC) was introduced with an intention to recover some tax in lieu of Income Tax from those entities that were exempted from income tax, and those who were declaring losses in the accounts. Even though it is a turnover based tax, the intent was to collect some amount of tax from those who do not pay income tax.

Later, ESC was made liable even for the entities those liable for income tax. Accordingly, exclusion of liability applied for profit-making, and tax exempted businesses was removed. Therefore, by now every business which has a quarterly turnover of Rs 12.5mn for any quarter (previously it was Rs. 50 million per quarter), should pay ESC.

Previously, already paid ESC can be set off against the income tax liability for the relevant year and, the excess can be set off against the liability of 4 consecutive years, whereas now the excess is limited to set off against two years.

Thus, the amount of ESC which cannot set-off against income tax liability within two years becomes a cost for the business. Therefore, ESC is now becoming an indirect tax pushing businesses to consider it adding to its product’s pricing.

What is ESC?
It is a term used for Economic Service Charge. ESC is a country-specific tax to Sri Lanka based on the turnover of your business.

Why did the Inland Revenue Department introduce economic ESC?
ESC was introduced with an intention to recover some tax in lieu of Income Tax from those entities that were exempted from income tax, and those who were declaring losses in the accounts.

Who will be liable for ESC?
Every person or partnership who/which is carrying on or carrying out a trade, business, profession or  vocation, whether such person or partnership is liable to pay income tax or not, is required to pay ESC.

Should every person pay ESC?
It is not. A person/company/partnership earns more than Rs 12.5mn per quarter is liable to pay ESC. This  threshold is effective from 1st April 2017

Should your business register for ESC?
Yes, every business should register for ESC if its turnover is more than Rs 12.5 per quarter.

Is your business exempted for ESC?
If your business falls in the category of cooperative Societies, aviation and shipping companies, local  Government bodies, Government Departments, any distributor, any dealer in the lottery, any Unit Trust  or Mutual fund and Lak Sathosa is not liable for ESC.

What is the ESC rate?
The rate for ESC is 0.5%