Sri LankaTax Obligations Detailed

Sri Lankan employers face various tax obligations for themselves and their employees.

Corporate Income Tax

• Standard Rate: 30% of net profit. The tax rate can vary based on the industry and revenue generated.

Value Added Tax (VAT)

• Standard Rate: 8%. There are proposals to increase this rate, so it is advisable to stay updated on potential changes.

Advance Personal Income Tax (APIT)

• APIT replaced the Pay As You Earn (PAYE) tax system.
• Threshold: LKR 100,000 per month or LKR 1.2 million annually. Employees earning above this threshold are subject to APIT.
• Employer Responsibility: Employers deduct APIT from employee salaries and remit it to the Inland Revenue Department (IRD) with each salary payment. The employer must obtain consent from each employee before deducting APIT.
• Tax Rates and Brackets: Progressive tax rates apply based on income brackets, starting from 6% and potentially up to 30%. Refer to the latest APIT tax tables for accurate calculations.
• Exemptions and Reliefs: Certain income types are exempt or eligible for reliefs.

Withholding Tax (WHT)

• WHT applies to various payments, including interest, dividends, rent, and payments to non-residents.
• Rates: Vary based on the nature of the payment and recipient's residency status. Refer to current regulations for applicable rates.
• 2025 Adjustment: The WHT rate on interest and discounts increases from 5% to 10% beginning April 1, 2025.

Other Employer Obligations

• Social Security Contribution Levy (SSCL): 2.5% rate effective January 1, 2024
• Employee Provident Fund (EPF): Although employee contributions are deducted from salaries, the employer also makes contributions.
• Employer's Trust Fund (ETF): 3% of employee earnings, paid by the employer.
• Payroll Reporting and Compliance: Employers must register with tax authorities, file accurate payroll returns, and ensure timely tax payments.

Non-Resident Employees

• Concessional Tax Rate: A reduced tax rate of 15% applies to employment income for the first three years for non-resident employees. This rate may continue for an additional two years if employment continues. Other income earned in Sri Lanka is taxed at normal rates.

Note: Tax regulations are subject to change. Always refer to official government sources and publications from the IRD for the latest information.

Sri Lanka's employee tax system, known as Advance Personal Income Tax (APIT), applies to employment income above a certain threshold.

Advance Personal Income Tax (APIT)

APIT is deducted at the source by employers and remitted to the Inland Revenue Department. As of December 18, 2024, the tax-free allowance is set to increase from LKR 100,000 to LKR 150,000 monthly, effective April 1, 2025. Simultaneously, the lowest tax bracket (6%) will apply to annual income up to LKR 1,000,000, also effective April 1, 2025. Currently (before April 1, 2025), the 6% bracket applies to the first LKR 500,000 of taxable annual income.

Employer Responsibilities

Employers are responsible for deducting the correct APIT amount each month based on the employee's earnings and the prevailing tax rates. This deducted amount must be remitted to the Inland Revenue Department by the 15th of the following month. Employers also have yearly filing requirements. Specifically, the annual PAYE (which has been replaced by APIT) return is due on April 30th of the following assessment year.

Other Tax Implications for Employers

Besides APIT, other taxes relevant to employers in Sri Lanka include corporate taxes, withholding taxes, and contributions to social security. Corporate tax rates are subject to change; for example, rates for specific sectors like betting, gaming, tobacco, and liquor are set to increase from 40% to 45% starting April 1, 2025. Withholding tax on interest and discounts is also scheduled to rise from 5% to 10% from the same date. Furthermore, employers generally contribute approximately 30% of the employee's salary toward social security and other benefits.

Important Considerations for 2025 and Beyond

Changes to the tax regulations occur regularly, as seen with the amendments to APIT, corporate taxes, and withholding tax effective April 1, 2025. It's essential to stay updated on the latest regulations and utilize available resources like tax calculators and advisors to ensure accurate compliance.

In Sri Lanka, Value Added Tax (VAT) is a consumption tax applied to most goods and services.

VAT Rates

• Standard Rate: 18% (effective from January 1, 2024)
• Digital Services by Non-Residents: 18% (effective from April 1, 2025)
• Zero Rate (0%): Applies to exports and certain tourism services.

VAT Registration Thresholds

As of January 1, 2024:

• General Goods and Services: Annual turnover exceeding Rs. 60 million, or quarterly turnover exceeding Rs. 15 million.
• Financial Services: Annual turnover exceeding Rs. 12 million, or quarterly turnover exceeding Rs. 3 million.

Voluntary registration is available regardless of turnover. Registration is mandatory for importers and exporters regardless of turnover.

Filing and Payment

• VAT returns and payments are due monthly.

VAT Exemptions (Effective January 1, 2024)

Several goods and services are exempt, including:

• Wheat and wheat flour
• Infant milk powder
• Pharmaceutical products and drugs (with conditions)
• Ayurvedic preparations (with conditions)

Other exemptions exist for specific sectors like education, healthcare, and certain government services. A detailed list can be found on the Inland Revenue Department website.

Sri Lanka offers a range of tax incentives for individuals and businesses as of February 5, 2025. Please note that tax laws are subject to change, and this information is current as of today's date. Always consult with a tax advisor for the latest regulations.

Personal Income Tax

• Tax-Free Allowance: The tax-free allowance has been increased to LKR 150,000 per month.
• Revised Tax Slabs: The tax slab for the 6% rate has been expanded to cover annual income up to LKR 1,000,000.
• Withholding Tax on Interest: The withholding tax on interest income has increased to 10%, but individuals earning less than LKR 150,000 monthly can apply for an exemption.

Business and Corporate Taxes

• Export Services: The exemption on income from exported services has been removed, and a 15% tax applies from April 1, 2025.
• Increased Rates for Specific Industries: Taxes on betting, gaming, tobacco, and liquor industries have increased to 45%.
• VAT on Digital Services: An 18% VAT applies to digital services consumed in Sri Lanka from April 1, 2025.

Investment Incentives

• Foreign Currency Holdings: Interest income from foreign currency accounts and special deposit accounts is exempt from tax. Foreign-source income remitted to Sri Lanka in foreign currency is also exempt.
• Sovereign Bonds: Interest, discounts, and gains on sovereign bonds (local or foreign currency) are exempt for non-residents. Interest on loans granted by non-residents to residents or the government is also exempt.
• Dividends: Dividends paid to non-residents are tax-free.
• Real Estate Investment Trusts (REITs): Tax concessions are available for gains from Sri Lanka REITs.
• Renewable Energy Projects: Seven-year tax exemption for renewable energy projects is available.
• Recycled Construction Materials: Businesses selling recycled construction materials may qualify for a five-year tax exemption.
• Agro Farming: Income from agro farming is exempt for five years.
• Colombo Stock Exchange Listing: Companies listed on the Colombo Stock Exchange before December 31, 2021, may have their aggregate income tax halved.

General Tax Information

Sri Lanka's tax system aims to balance revenue generation with encouraging economic activity. Tax incentives play a significant role in attracting investment, promoting specific sectors, and providing relief to taxpayers. The government regularly reviews and updates tax policies, so staying informed about the latest changes is crucial.