The highlights of revisions to tax proposals presented in the National Budget 2025 for the current year, which may be implemented after formal amendment to the relevant legislation, primarily the Inland Revenue Act No. 24 of 2017, as amended (“IRA”).
| Subject | Current Position | Proposed Amendment |
|---|---|---|
| Changes to Tax Rates and Exemptions/Reliefs | ||
| Increase in Capital Gains Tax (CGT) Rates | The tax rate on capital gains derived by; Individuals and Partnerships – 10%Other entities (such as trust, NGO, unit trusts/ mutual funds and charitable institutions) – 10% | Individuals and Partnerships – 15%Other entities – 30%. |
| Exemptions | Payments derived by a non-resident person for aircraft, software licenses, or related services from the Sri Lanka Air Force are subject to income tax and the tax is collected in the form of withholding tax. | Payments derived by a non-resident person for aircraft, software licenses, or related services from the Sri Lanka Air Force are subject to income tax and the tax is collected in the form of withholding tax. |
| Exclusions from Withholding Tax (WHT) on Interest | Senior Citizens Interest income paid by financial institutions to senior citizens is subject to WHT at the rate of 5%, unless specifically exempted. Resident senior citizens can claim a refund of WHT by registering for the refund process using a specific form and submitting a quarterly “Application for Refund Claim.” Others Interest income paid by financial institutions is subject to WHT at the rate of 5%, unless specifically exempted. | Senior Citizens Withholding tax on interest paid to a senior citizen by a financial institution is not deducted if their total assessable income for the Y/A is less than LKR 1.8 million. To qualify, the individual must provide a declaration to the financial institution confirming income. Others Individuals with total assessable income below LKR 1.8 million will be eligible to receive a refund of WHT deducted on interest, under the same refund scheme currently available to senior citizens. |
| Tax neutrality for transfer of assets | The transfer of assets to the Sri Lankan Government or to a university established under the Universities Act No. 16 of 1978 are subject to general tax rules on capital gains. This may result in a taxable gain, which will be taxed accordingly. | A transfer of assets to the Sri Lankan Government or to a university established under the Universities Act No. 16 of 1978, will not trigger tax consequences and will be considered tax-neutral. This is an extension of the existing tax rules governing the transfer of land and buildings in Sri Lanka by individuals to their associates or assets as gifts to charitable institutions. |
| Reporting Obligations and Computation of Income Tax Liability | ||
| Removal of the requirement to submit the Statement of Estimated Tax payable (SET) Form | A person who is an instalment payer for a year of assessment (Y/A) must submit a SE.T by the date for payment of the first tax instalment (i.e., 15 August of each year). | The requirement to submit the SET for a Y/A is to be removed with effect from the Y/A 2025/2026 (from 01 April 2025 to 31 March 2026). Accordingly, a taxpayer is not required to submit the SET along with the first tax installment payment for the Y/A 2025/2026 (i.e. on or before 15 August 2025). |
| Changes to Mode of Filing Returns | Taxpayers are required to file their income tax returns electronically. | An exception has been made allowing ‘Senior citizens’ to submit income tax returns manually starting from the Y/A 2024/2025 (i.e., the current year). |
| Revision of the basis for calculating quarterly income tax payments | A taxpayer is required to calculate and pay income tax instalments for a Y/A based on estimated income tax liability for that year (current year basis). | A taxpayer is required to calculate quarterly income tax payments for a given year based on the income tax liability for the previous year (immediately preceding Y/A). |
| Chargeability of Income Tax – Individuals | ||
| Revisions to the Residency Rule | An individual is considered a resident of Sri Lanka for a Y/A on meeting any of the following criteria: An Individual is resident in Sri Lanka.An Individual is present in Sri Lanka for a total of 183 days or more within any 12-month period during the year.An individual being an employee or official of the Sri Lankan government, and a spouse is posted abroad during the year.An individual is employed on a Sri Lankan ship, as defined by the Merchant Shipping Act, during the period of his/her employment. | A holder of the ‘Golden Paradise’ Resident Visa – deemed to be a non-resident of Sri Lanka; Employees of Sri Lanka-flagged vessels –An individual who is considered a tax resident of Sri Lanka solely because of employed on a Sri Lanka-flagged vessel – deemed a resident of Sri Lanka for the duration of their employment on the vessel.A foreign citizen who is considered a resident of Sri Lanka due to employment on a Sri Lanka-flagged vessel will not be taxed as a resident on income earned outside Sri Lanka, except for income earned from their employment on the vessel. The proposal seeks to limit the taxation to income sourced from Sri Lanka for non-citizens employed on these vessels, thereby excluding foreign income from taxation. |
| Others | ||
| Expansion of Double Taxation Avoidance Agreements (DTAs) | Sri Lanka currently has entered into DTAs with 44 countries. | It is proposed to expand the DTA network, prioritizing countries with significant trade and investment potential. |
| Waiver of Interest on Outstanding Taxes | Interest on any tax due under the Surcharge Tax Act No. 14 of 2022 and the IRA is calculated monthly at a rate of 1.5%. | The Commissioner General of Inland Revenue (CGIR) to be authorized to waive interest charges imposed under the IRA and the Surcharge Tax Act No. 14 of 2022, if the tax liability is for the Y/A 2022/2023 or any previous year and the full tax amount is paid within 06 months of the statutory amendment. |
| Imputed Rental Income Tax | N/A | The Imputed Rental Income Tax, agreed upon by the previous administration, not to be implemented this year. |
The Budget also acknowledged the key revenue measures announced in Parliament in December 2024- the subject areas being increase of tax-free threshold for personal income tax, further adjustments to the second personal income tax slab, the imposition of corporate income tax on export of services and increase in the corporate tax on cigarettes/liquor and gaming.
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For further information, please contact:
Inshira Hanifa, Partner, D.L & F & De Saram
inshira@desaram.com
