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regulated provident fund, when withdrawn, is exempt from tax.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:
(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.
-------------------------------------------------------------------------------------------------
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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