The Inland Revenue (Amendment) Bill published on 24 February 2026 sets out proposed amendments to the Inland Revenue Act No. 24 of 2017 (the “IRA”). Salient features of the Bill are as follows:
1. Increase in the Capital Gains Tax (“CGT”) Rate
- CGT rate applicable to Individuals and Partnerships is to be increased from 10% to 15%
- CGT rate applicable to Trusts, Unit Trusts, Mutual Funds and NGOs is to be increased from 10% to 30%.
* Effective from enactment of the Amendment Act.
2. Definition of term “reserve” in relation to thin capitalization rules
The IRA provides for thin capitalisation rules, which impose a maximum limit on the interest expense deductible for a year of assessment (“Y/A”). The allowable deduction is determined in accordance with the following formula:
Deductible financial cost = (financial cost of the year/ value of financial instruments on which the financial cost incurred during the year) x 4 x total of the issued share capital and reserves of the company as at the end of the year.
The definition of the term “reserve” is to be broadened to include “negative retained earnings, accumulated losses or deficits in reserves”, with effect from 01 April 2025.
3. Introduction of New Tax-Neutral Events in relation to Disposals
Gifting or donating an asset to the GoSL or any local university formed under the statute is to be treated as a no-gain or loss event (i.e., deemed to be disposed of at net cost), with effect from enactment of the Amendment Act.
4. Exclusion of Gains from Sale of Motor Vehicles
The proposed amendment clarifies that the disposal of a vehicle by any person shall not be subject to income tax or capital gains tax, with effect from 01 April 2024.
5. Revisions to Income Tax Exemptions
- Limiting the scope of interest income exemptionAt present, the interest accruing to or derived by any person outside Sri Lanka on any loan granted to any person in Sri Lanka or to the GoSL by such person is exempt from income tax.With effect from 01 April 2025, the exemption is only proposed to be available if the loan amount is remitted to Sri Lanka in foreign currency through a bank, and the loan proceeds are used within Sri Lanka.
- New Exemption
On or after 01 April 2025, any amount derived by any non-resident person as any payment for aircraft, software licences or as for other related services from the Sri Lanka Air Force is exempt from income tax.
6. Revisions to Enhanced Capital Allowance (“ECA”)
- Introduction of New ECA, with a Reduced Investment ThresholdWith effect from 01 April 2026, a capital allowance equivalent to 100% of the investment made by a person in depreciable assets (excluding intangible assets) in respect of a new undertaking during a Y/A to be granted for that year, for a total investment in such depreciable assets used in the undertaking in any part of Sri Lanka between USD 250,000/- to USD 3 Mn.At present, the minimum investment to qualify for ECA is USD 3Mn.
- New Condition to be fulfilled for the existing ECA for BOI -Approved Companies
Eligibility to claim ECA by a BOI Approved Company for expansion of an existing undertaking will be subject to BOI approval of the expansion of such existing undertaking to be eligible for ECA, with effect from 01 April 2026. Currently, no such approval is required.
7. Changes to Tax Residency Rule – Individuals
- Individual employed on a Sri Lanka shipAt present, such individual is treated as a resident of Sri Lanka, during the period the individual is so employed and liable for income tax on his global income.It is proposed in relation to a non- Sri Lankan citizen, he is only liable to income tax on his income from the employment on such ship, with effect from 01 April 2025.
- Golden Paradise Residence Visa HolderWith effect from 01 April 2025, golden paradise visa holders are to be treated as non-residents.
- Individuals leaving Sri Lanka for foreign employmentWith effect from 01 April 2025, if an individual leaves Sri Lanka for employment under a contract of at least 01 year with an employer who is not associated with their immediate Sri Lankan employer, that individual will not be treated as a resident of Sri Lanka for tax purposes from the first day of the Y/A in which the individual leaves Sri Lanka and ending on the date of expiry of the contract.
8. Changes to Withholding Tax (“WHT”)/AIT Regime
- WHT on InterestPayment of interest by financial institution to a resident individual, for any Y/A commencing on or after 01 April 2025 on any deposit maintained by such individual in such financial institute is not liable for AIT, if the individual has no taxable income for the Y/A and provides a self-declaration to the financial institution as specified by the Commissioner-General of Inland Revenue (“CGIR”).The measure was previously implemented through a circular issued by the Department of Inland Revenue (“IRD”), pending the corresponding amendment to the IRA.
- Expanding the Scope on WHT on Independent Service Providers (“ISP”)At present, payment of service fee exceeding LKR 100,000/- per month with a source in Sri Lanka to a resident individual, who is not an employee of the payer is subject to WHT at 5%. ISPs are limited to doctor, engineer, accountant, lawyer, software developer, researcher, academic or any individual service provider as may be prescribed by regulation.The Bill proposes to include the ISPs – auditor, modeller, personal trainer, coach, valuer, artist, actor, dancer, singer, musician, event organizer, photographer, videographer, therapist, counsellor, beautician, cook, electrician, dentist, veterinarian, social media specialist, brand ambassador, sports person, specialist for information technology, advertising agent, advisor, translator, writer, debt collector or any individual, with effect from enactment of the Amendment Act.
- Fee for issuing WHT CertificatesNo fees to be charged in issuing WHT certificates, with effect from enactment of the Amendment Act.
9. Changes to Tax Payment Calculations
At present, tax installment payments are calculated on estimate of tax payable for the current Y/A. The proposed amendment provides for calculation of instalment payment either based on the estimate for the current Y/A or the immediately preceding Y/A, with effect from 01 April 2026.
If the person has no taxable income for the previous Y/A or expects lower taxable income in the current Y/A, the estimated tax payable for the current Y/A can be used.
10. Changes to Deductions
- Cash Transactions
At present, any payment (in aggregate) amounting to LKR 500,000 or more in a single day, for a single transaction, or for a series of transactions relating to one event made in cash does not qualify for a tax deduction and will not be included in the cost base of an asset. Hence, the payment is only deductible if it is made (a) by way of an account payee cheque, (b) account payee bank draft, (c) by the use of a credit card, debit card or (d) electronic payment system through a bank account.The Bill clarifies that depositing cash in the recipient’s bank account will also be permitted to be deducted, with effect from 08 May 2023.Exclusion to the aforementioned rule is to be extended to cover payment made to the GoSL or any Government institution. - Head Office ExpensesAt present, a non-resident person who carries on business through a Sri Lankan Permanent Enterprise is only permitted to deduct head office expense up to 10% of its assessable income.With effect from 01 April 2025, the actual head office expense or 10% of its assessable income, whichever is lesser is deductible as head office expense.
11. Changes to Qualifying Payments
For any Y/A commencing on or after 01 April 2025, donations made to GoSL or prescribed GoSL institution are permitted to carry forward and deduct in succeeding Y/As.
12. Revisions to Filing Requirements
- Statement of Estimated Tax Payable (“SET”)Effective from the Y/A 2026/2027 (commencing on 1 April 2026), persons will no longer be required to file a SET form.At present, SET form must be filed by all persons, with the first instalment payment (i.e., 15 August of each year).
- Return filing by entities within the Port CityPersons carrying on a Business of Strategic Importance (“BSI”) as approved under the provisions of the Colombo Port City Economic Commission Act, No. 11 of 2021 are required to submit to a return of income in the form and manner specified by the CGIR, with effect from enactment of the Amendment Act.
- Return filing by IndividualsIndividuals who exclusively earn (a) employment income which is subject to APIT and (b) interest income does not exceed LKR 5,000/- for a Y/A are no longer required to file a return of income, with effect from 01 April 2025.At present, individuals with employment income are exempted from filing tax returns.
- Return filing by Senior CitizensWith effect from the Y/A commencing on 01 April 2025, senior citizens are permitted to file tax returns either in writing or electronically through a computer system or mobile electronic device.At present, electronic filing is mandatory for all individuals for any Y/A commencing from Y/A 2023/2024.
13. Introduction of New Penalties – WHT
- Failure by withholding agent to comply with the procedure specified by the CGIR is liable to a penalty of a sum not exceeding LKR 200,000/- for a Y/A, with effect from enactment of the Amendment Act.
- Providing false or misleading particulars in the Self-declaration by an individual to claim exclusion from WHT on payment of interest/discount by any financial institution to such individual is liable to a penalty of a sum not exceeding LKR 200,000/-, with effect from enactment of the Amendment Act.
14. TIN
- A company incorporated or registered in Sri Lanka is required to register with the CGIR within 30 days from incorporation or registration, with effect from the enactment of the Amendment Act.
- With effect from 01 April 2026, persons are required to submit the TIN Certificate to relevant authorities/ persons, for the following purposes:
- to open any account at any financial institution
- to obtain approval for a building plan
- to register a motor vehicle
- to renew the licence of a motor vehicle
- to register a land or title to a land
- to register a business
- to transfer shares of a company incorporated in Sri Lanka, by the transferee and transferor
- to obtain a credit card
Please note that the proposed amendments will have legal effect only upon the same being duly enacted by Parliament and certified by the Speaker.
For further information, please contact:
Inshira Hanifa, Partner, D.L & F & De Saram
inshira@desaram.com
