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Income Tax in Sri Lanka


Individual - Taxes on personal income

Resident individuals are subject to income tax on their worldwide income. Non-resident individuals are taxed only on their Sri Lanka-source income.

Personal income tax rates:

Tax rates for years of assessment 2016/17 and 2017/18 are as follows:

Taxable income (LKR*)
Tax rate (%)
Cumulative tax on the taxable income equal to the higher of the range (LKR)
Over
Not over
0
500,000
4
20,000
500,000
1,000,000
8
60,000
1,000,000
1,500,000
12
120,000
1,500,000
2,000,000
16
200,000
2,000,000
3,000,000
20
400,000
3,000,000
and above
24


Concessionary tax rates:

Concessionary tax rates apply to sums paid to an employee on cessation of employment by way of compensation, commuted pension, retirement gratuity, and contributions to the Employees Trust Fund. Accumulated employers' contribution to an approved or regulated provident fund, when withdrawn, is exempt from tax. Compensation up to LKR 2 million paid under a uniform scheme on voluntary retirement approved by the tax authorities or under a scheme of retrenchment approved by the labour authority is exempt from tax.

Withholding tax (WHT) rates

Income
Paid to persons in Sri Lanka (%)
Paid to persons outside Sri Lanka (%)
Dividends
10
10
Interest
2.5
20
Royalty and annuity
10
20
Management fees
5
20
Rents
-
20
Lottery prizes greater than LKR 5 million
10
10
Winnings from gambling/betting greater than LKR 500,000
10
10
Service
-
20
Fees for technical services (3)
-
20

Notes
1.      Lower treaty rate (generally 10%) applies with respect to countries with which Sri Lanka has entered into double taxation treaties.
2.   'Specified fees' means payments made in consideration of services rendered in the course of any business, profession, vocation, or other activities of an independent character and includes any commission or brokerage.
3.      The term 'technical service fees' is defined to mean payments of any kind received as consideration for managerial or technical or consultancy services, including provision of services of technical or other personnel other than employment or professional services performed through a fixed base.
4.      Not applicable to residents of treaty partner countries. Their liability to Sri Lanka income tax would be based on the 'Business Profits' Article in the relevant treaty.

Income determination

Employment income:

Employment income is computed on a gross basis and is comprised of all items of remuneration received in the course of employment; the value of any benefits to the employee and to the employee's spouse, child, or parent; and payments to third parties for the benefit of the employee, spouse, child, or parent. Also included in gross employment income are payments made upon termination of employment, such as retirement gratuities, monies accumulated to the credit of the employee in an unapproved provident fund, any sum paid from the funds in the Employees Trust Fund, and compensation for loss of employment, as well as the rental value of a residence provided rent free by the employer other than that provided to a public sector employee, and the benefit from use of an employer-provided automobile.
The rules for determining the statutory income from a trade, business, profession, or vocation are the same as those described for a company.

Capital gains:

Capital gains arising from change of ownership of shares are exempt from income tax.

Dividend, interest, annuity, and royalty income:

Dividends, interest, annuities, and royalties are computed on a gross basis without deductions. For applicable WHT rates, see Withholding tax rates in the Taxes on personal income section.
Interest or royalties payable to a non-resident are taxed at 20%, but this rate will be lower (generally 10%) if the taxpayer is a resident in a country with which a double tax treaty (DTT) is in force.

The law provides for the assessment of either interest accrued or interest received, with appropriate adjustments for either interest not received or accruals received in excess of the receipts assessed, as the case may be. Where income tax has been withheld on royalties, this tax is deductible from the overall income tax payable. However, with respect to interest withheld on bank deposits and treasury bills, the tax is the final tax to the individuals concerned. Where the shareholder is resident in a country with which Sri Lanka has a DTT, the tax withheld on interest or royalties is the final income tax due.

Rental income:

Rental income from land and improvements is computed on the gross rent received or receivable. Deductions are allowed for rates, and 25% of the balance for repairs, to the extent the owner bears the costs.

Exempt income:

Certain items of income are exempt in the hands of an individual. Some notable exemptions are as follows.
·       Government pensions.
·     Non-Sri Lanka-source income and official emoluments of certain residents, such as foreign diplomats and members of their staff who are citizens of the countries represented by these diplomats; experts, advisers, technicians, or officials who are brought to Sri Lanka by the government through the United Nations Organization (UNO) but are not paid by the government; foreign trainees sent to Sri Lanka under the aegis of the UNO or the Colombo Plan Organization; and officials of the UNO who are not citizens of Sri Lanka.
·        Official emoluments of resident Sri Lanka citizens employed by the UNO or any of its specialised agencies.
·       Travel warrants and passages granted to expatriates serving in Sri Lanka or to their spouses and children to enable them to travel between their home countries and Sri Lanka.
·    Travel, subsistence, and lodging allowances granted to employees for travel abroad in connection with their employment.
·     Emoluments and pensions earned in foreign currency and paid in Sri Lanka or remitted to residents or their spouses for employment services, past or present, that they have rendered outside Sri Lanka.
·     Emoluments of residents earned in foreign currency and remitted to Sri Lanka for professional or vocational services exercised outside Sri Lanka.
·        Capital sums paid as gratuities or compensation for death or injuries.
·        Income from scholarships, exhibitions, or bursaries enjoyed by students in educational establishments.
·     The profits and income earned in foreign currency and remitted to Sri Lanka through a bank from any service rendered in or outside Sri Lanka by a resident individual to any person or partnership outside Sri Lanka, except for commissions, discounts, or other similar receipts for any service rendered in Sri Lanka.
·      Any profit and income earned in foreign currency from outside Sri Lanka, by any resident individual who is a citizen of Sri Lanka, remitted to Sri Lanka through a bank.
·      Any sum paid at the time of retirement from a provident fund approved by the Commissioner General of Inland Revenue or from a regulated provident fund to an employee.
·        Rental value of one place of residence provided to an individual employed in a government institution, rent free or at a rent less than the rental value of such place.
·        Official emoluments arising in Sri Lanka to any non-citizen individual from participation in any international event conducted in Sri Lanka.

Tax administration:

Taxable period

A tax year is any period of 12 consecutive months commencing on 1 April of one calendar year and ending on 31 March of the following calendar year.

Tax returns

An individual is required to file a return of income in a prescribed format (with financial statements and supporting schedules, if applicable) on or before 30 November immediately following the end of the tax year.

Spouses are taxed separately on their individual incomes. The statutory income of a child (under 18 years of age, unmarried, not illegitimate), whether natural or legally adopted, is aggregated with the father's income if the marriage subsists. If the parents are living separately, either under a court decree or in circumstances that are likely to be permanent, the income is aggregated with the income of the parent who maintains the child.

Payment of tax

Under the pay-as-you-earn (PAYE) tax system, employers are required to deduct from the monthly emoluments of each employee income tax computed on the basis of statutory tables provided by the tax authority. In general, where employment is an individual's only source of income, the tax deducted by the employer and paid to the tax authority is the final income tax due from the employee. Individuals with income from other sources other than dividends and income from interest on which tax has been deducted are entitled to set off the annual income tax deducted by the employer from the overall income tax payable.
Under Sri Lanka's pay-and-file system, individuals other than employees are required to pay tax in instalments on or before 15 August, 15 November, 15 February of the tax year, and 15 May immediately following its end. If each instalment is not less than one-quarter of the income tax payable for the immediately preceding tax year, the balance of any income tax payable may be paid without incurring penalties on or before 30 September immediately following the end of the tax year.


Taxes on corporate income:

Resident companies and public corporations are liable for CIT on their worldwide taxable income. Non-resident companies are liable for CIT of their Sri Lanka-source taxable income.
CIT rates are based on the nature of the income and the institution earning the income, as follows:

Income/Institution
CIT rate (%)
2016/17
2017/18 (proposed)
Undertaking for manufacture of any product for export or for supply to an exporter for export, being a product having domestic value addition over 65% and a Sri Lanka brand name with patent rights received in Sri Lanka
10
14
Undertaking for operation and maintenance of facilities for storage, local development of software, or supply of labour
10
28
Agricultural undertakings referred to in Section 16 of the Act
10
14
Educational services
10
14
Undertaking (not being a holding company, subsidiary company, or any associate company of a group of companies) with an annual turnover not exceeding LKR 750 million, other than buying and selling activities
12
-
Undertaking (not being a holding company, subsidiary company, or any associate company of a group of companies) with an annual turnover not exceeding LKR 500 million, other than buying and selling activities
-
14
Unit trusts and mutual funds *
10
14
Unit trust management companies
10
14
Profits on poultry farming
10
-
Shipping agents approved by the Director of Merchant Shipping in respect of profits attributable to agency fees connected to transhipment activity and received in foreign currency
12
28
Companies engaged in non-traditional export (other than exempt), including deemed exporters and suppliers of specified services to garment exporters; performance of any service of ship repair, ship breaking, and refurbishment of marine cargo containers; and provision of computer software, programmes, systems, or recording of computer data paid for in foreign currency
12
14
Undertakings engaged in agriculture, manufacture of animal feed, promotion of tourism, or construction work carried on by a resident person
12
28
Venture capital companies
12
28
Petroleum exploration
12
28
Local manufacture of handloom products
12
28
Healthcare services
12
28
Joint venture between a grower cum manufacturer or a manufacturer of tea with a tea exporter for exporting Sri Lanka tea in value added form, on the manufacturing income attributable to the quantum of tea purchased
12
28
Profits from operating any mini hydropower project or other alternative energy source
12
28
Profits on supply of goods manufactured in Sri Lanka or provision of services to foreign ships for payment in foreign currency
12
28
Profits on sale of any product manufactured in Sri Lanka for payment in foreign currency through a foreign exchange earning account
12
28
Profits on export of organic tea in bulk
12
28
Undertaking for the manufacture of sugar
12
28
Sale of goods manufactured in Sri Lanka by an export-oriented Board of Investment (BOI) enterprise, up to the quantity approved by the BOI, to:

  •          any BOI enterprise enjoying tax holiday under Section 16C, 16D, or 17A of the Inland Revenue Act or the Strategic Development Projects Act that is permitted to import project-related goods or raw materials on a duty-free basis during the project implementation period, or
  •          any person eligible to import specific goods on a duty-free basis under any government authority.
(Treated as deemed export of the manufacturer.)
12
28
Profits and income of any company listing its shares on or after 1 April 2013 and issuing more than 20% of its shares to the general public for the tax year in which such shares are listed and for two years of assessment immediately succeeding that year of assessment
50% of the applicable rate
28
Research and development (R&D) activities
20
28
Branch of commercial bank dedicated to development banking
24
28
Banking and financial services, insurance industries, trading activities (including any primary preparation for the adapting for sale of any article)
28
28
Manufacture and sale, or import and sale, of liquor or tobacco products
40
40
Business of lottery, betting, or gaming activity
40
40
Profit and income from business, other than stated above
28
28
Other sources (e.g. dividends, interest income, royalties)
28
28

* Unit trusts and mutual funds are treated like resident companies for CIT purposes. Units of investment are treated like company shares, and returns to investors are treated like company dividends.


Dividend tax:

A dividend tax, which is currently at 10%, will be payable at 14% as per budget proposals on the gross dividends distributed by a resident company, other than such dividends distributed out of any dividend received from another resident company (and few other exceptions).

Deemed dividend tax:

A deemed dividend tax of 15% is payable by any resident company in any tax year if the said company has, in the preceding tax year, distributed dividends of less than 10% of the distributable profits (duly defined) for that preceding tax year.

The tax base for the 15% deemed dividend tax is the book profits of the company reduced by the aggregate of the CIT payable by that company for that tax year, the cost incurred by the company in that tax year in the acquisition of any land or any capital asset, and any notional profit computed on the basis of a revaluation of any capital asset included in such book profit and increased by the aggregate of the allowance for depreciation deducted in respect of any capital asset acquired in that tax year and any notional loss computed on the basis of a revaluation of any capital asset included in such book profit.

Special tax on public corporations:

In the case of a public corporation, where not less than 75% of the capital is provided by the government (other than via a loan), a tax of 25% of the balance profits, after deducting CIT payable, will be charged. However, where the total gross dividends distributed are not less than 25% of such balance, no special tax will be charged in the relevant years. Where the total gross dividends distributed are less than 25% of such balance, the tax chargeable will be the difference between such balance and the dividends distributed.

Remittance tax:

Where profits of a non-resident company are remitted in a tax year, a remittance tax of 10% of the remittances is payable.

Income determination:

Business accounting for CIT purposes should, unless otherwise specified by the tax statute, conform to Sri Lanka Accounting Standards.

Inventory valuation:

Inventories should be measured at the lower of cost and net realisable value.

Capital gains:

Capital gains are not taxed currently; however, as per the 2017 budget proposals, which have not yet been enacted into law by Parliament, capital gains from transfer of immovable properties will be chargeable to CIT at a flat rate of 10%.

Dividend income:

Resident company dividends paid on shares held by resident or non-resident persons are not assessable to the recipients if income tax is withheld on such dividends, the dividends are exempt from income tax, or the dividends are paid out of dividends received from resident companies.

Stock dividends:

Stock dividends (bonus shares) are not taxable in the hands of a shareholder at the time of issue; however, where such shares are capitalised out of company profits and there is a return of this capital to the shareholder within six years from the date of issue, the amount of capital returned to the extent of the paid-up value of the bonus shares is treated, by definition, as a dividend and is taxable in the hands of the shareholder. However, if the shareholder is a company, this dividend may not be assessable, as explained above.

Interest income:

Interest income forms part of the total statutory income, provided it is not exempt under the tax statute.

The interest income exempt from taxes includes interest accruing on money lying in a foreign currency account in any commercial bank; interest accruing to any person or partnership outside Sri Lanka in respect of any loan granted in a foreign currency by that person or partnership to the government of Sri Lanka, any public corporation, any government institution, any commercial bank, or any other undertaking if the loan is granted on or after 1 April 2012; or interest accruing to any person on moneys invested in government bonds denominated in a foreign currency.

Royalty income:

Royalty income is a separate source of income that forms part of the total statutory income, which is liable to income tax at the standard rate of 28%.

Foreign income:

Foreign income of a resident person forms part of the total statutory income, provided it is not exempt under the tax statute.

Corporate - Tax administration

Taxable period

A tax year is any period of 12 consecutive months reckoned from 1 April in any calendar year to 31 March of the following year.

Tax returns

CIT returns are due on 30 November, immediately following the end of the tax year.

Statement of accounts

Where any trade, business, profession, or vocation is being carried on or exercised by any quoted public company, any company that is a member of a group of companies of which at least one company is a quoted public company, or any other company having a turnover of not less than LKR 250 million or net profit of not less than LKR 100 million, such quoted company, member of the group, or such other company should furnish a statement of accounts in support of a return of income. Such statement of accounts is to be prepared by an approved accountant on the basis of an audit carried out by such approved accountant.

Payment of tax:

Sri Lanka has a pay-and-file system under which the CIT payable for each tax year is required to be paid in four instalments, on or before 15 August, 15 November, and 15 February of the tax year and 15 May immediately following the end of the tax year. If each instalment is not less than one-quarter of the CIT payable for the tax year immediately preceding, the balance of any CIT payable may be paid on or before 30 September immediately following the end of the tax year without incurring penalties.

Tax audit process:

The tax authority may select tax files for an audit on a random basis or if there is any specific information relating to a taxpayer that warrants investigation.

Statute of limitations:

No assessment of the income tax payable by any person:
a.      who has made a return of one's income on or before the 30th day of November of the tax year immediately succeeding that tax year shall be made after the expiry of a period of:

·        18 months in respect of any tax year commencing on or after 1 April 2013 and prior to 1 April 2017, and
·        nine months in respect of any tax year commencing on or after 1 April 2017 from the 30th day of November of the immediately succeeding tax year, or

b.      who has failed to make a return on or before such date as referred to in paragraph (a) shall be made after the expiry of a period of four years from the 30th day of November of the immediately succeeding tax year.
However, such limitation shall not apply where any fraud, evasion, or wilful default has been committed.




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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.


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This blog is Created by CA Anil Kumar Jain.