Discover employer and employee tax responsibilities in Sri Lanka
As an employer in Sri Lanka, you have the responsibility of withholding and remitting taxes on behalf of your employees.
Sri Lanka operates a PAYE system, which requires employers to deduct income tax from their employees' salaries at the point of payment. The deducted amount is then remitted to the Inland Revenue Department (IRD).
Your specific responsibilities under PAYE include:
It's important to note that employers are liable for the recovery and remittance of PAYE taxes. Failure to comply can result in personal liability for the unpaid taxes.
In addition to PAYE, employers also contribute towards social security schemes for their employees:
Employers may be required to make additional contributions depending on the industry and specific employee benefits offered.
By complying with these tax obligations, you ensure your employees' tax contributions are made and that you operate within Sri Lankan tax regulations.
In Sri Lanka, there are two main types of employee tax deductions: Pay-As-You-Earn (PAYE) Tax and Employees’ Provident Fund (EPF).
PAYE Tax is an income tax deducted directly from employees' salaries. The tax rates are progressive, meaning higher income earners pay higher percentages. This tax is applicable to all residents and non-residents earning income in Sri Lanka, although residents and non-residents may have different tax treatments. The tax is calculated using a progressive tax scale and is based on an employee's taxable income after certain deductions are accounted for.
The EPF is a mandatory contribution to a retirement savings scheme. Employees contribute 8% of their monthly gross salary. This is generally mandatory for all employees working in the private sector in Sri Lanka. There might be exceptions based on specific circumstances or social security agreements with other countries. The EPF is calculated as 8% of an employee's gross monthly salary.
In Sri Lanka, the standard VAT Rate is currently 18%, effective from January 1, 2024. This rate applies to most services. However, certain services are exempt from VAT. These include education services, healthcare services, specific financial services, transportation of passengers by public transport, and residential property rental.
Businesses and individuals providing taxable services in Sri Lanka exceeding a specified turnover threshold are required to register for VAT. The current annual turnover threshold for mandatory VAT registration is LKR 80 million (LKR 20 million per quarter). However, there's also a voluntary registration scheme for those below the threshold.
VAT returns must typically be filed monthly or quarterly, depending on specified criteria by the Inland Revenue Department (IRD). VAT payments must be made monthly, even if filing returns quarterly.
Exports of services are zero-rated under VAT in Sri Lanka. This means no VAT is charged on the export, and the exporter can claim a refund of input VAT incurred. Businesses can generally claim a credit for VAT paid on inputs (purchases) used for providing taxable services (this is known as input VAT).
The Sri Lankan government offers a range of tax incentives to attract investment and stimulate economic activity. These incentives include reduced corporate income tax rates, tax holidays, and various exemptions and deductions.
Corporate Income Tax Rate: The standard corporate income tax rate in Sri Lanka is 28%. However, several incentives offer reduced tax rates:
Tax Holidays: Businesses in certain sectors can be granted a complete tax holiday on profits for an initial period under the BOI scheme.
Exemptions and Deductions: Businesses may benefit from various exemptions and deductions, including:
The specific qualification criteria for each tax incentive program vary. However, some general factors considered include:
For BOI incentives, the application process involves submitting a detailed proposal outlining the business project, including investment amount, job creation potential, and export earnings (if applicable). Following approval, the BOI issues a Certificate of Registration, granting the business access to the relevant tax benefits.
For incentives outside the BOI scheme, the application process typically involves consulting with a tax advisor or the Inland Revenue Department (IRD) to determine eligibility and complete any necessary forms.
Tax incentives are subject to change. It's crucial to consult with a qualified tax advisor for the latest information and tailored advice for your specific business situation. Maintaining accurate records and documentation is essential for claiming tax benefits and complying with regulations.
We're here to help you on your global hiring journey.