Sri Lanka Budget 2025: Key Highlights and Tax Implications

The 2025 budget, presented by President Anura Kumara Dissanayake on February 17, 2025, introduces several changes to taxation, revenue collection, public welfare, and infrastructure development. This article provides a breakdown of the budget’s key aspects and how they may impact individuals and businesses.

Table of Contents

Key Priorities of the Budget
Economic Growth and Fiscal Targets
Taxation and Revenue Measures
Income Tax Amendments
Investment and Business Support
Social Welfare and Salary Revisions
Legal and Governance Reforms
Digital Economy and Innovation
Infrastructure and Development
Import and Trade Policy Changes
Debt Management and IMF Agreement
Final Thoughts

Key Priorities of the Budget

The government aims to achieve these main goals:

• Encouraging Local Production: Supporting agriculture, manufacturing, and industries to reduce imports and increase exports.
• Investment and Business Growth: Encouraging local and foreign investment through tax incentives and policy reforms.
• Strengthening Social Security: Expanding welfare programs to support vulnerable communities, including the elderly, low-income households, and unemployed individuals.
• Debt Restructuring and Fiscal Management: Managing national debt effectively while ensuring minimal impact on public services.
• Green and Digital Economy: Investing in renewable energy and digital transformation to modernize the economy.
• Higher Corporate Taxes for Select Sectors: Corporate Income Tax (CIT) increase to 45% for gaming, liquor, and tobacco sectors.
• Enhanced Personal Tax Relief and AIT: Personal tax relief increases and doubling of Advanced Income Tax (AIT) to 10%.
• Resumption of Vehicle Imports with New Tax Structure: Resumption of vehicle imports with higher excise duties, 20% customs duty, 50% surcharge, 18% VAT, and unchanged SSCL and PAL exemptions.

Economic Growth and Fiscal Targets

The budget outlines specific economic targets to guide the nation’s progress:

• 5% Expected GDP Growth: The economy is projected to grow at 5% in 2025.
• 13.9% Tax Revenue to GDP: Total tax revenue is expected to contribute 13.9% of GDP.
• 2.3% Primary Surplus: The estimated primary surplus for 2025 is 2.3% of GDP.
• 6.7% Budget Deficit: The fiscal deficit is projected at 6.7% of GDP.
• 19 Billion USD in Export Revenue: Expected revenue from exports of goods and services.
• 4% of GDP for Capital Expenditure: Aimed at infrastructure and public investment.

Taxation and Revenue Measures

To create a more efficient and equitable tax system, several measures have been introduced:

• Capital Gains Tax (CGT): Increased to 15% for individuals and partnerships. 
• Corporate Income Tax (CIT): Companies engaged in gaming, liquor, and tobacco will face a 45% CIT rate (up from 40%) starting April 1, 2025.
• Personal Income Tax:
  • The tax-free threshold is Rs 1.8 million per year.
  • The first Rs 1 million is taxed at 6%, with higher amounts taxed at increasing rates up to 36%.
• VAT on Digital Services: Introduced at 18% for foreign digital service providers.
• Betting & Gaming Levy: Increased from 15% to 18%.
• Stamp Duty on Leases: Increased from 1% to 2%.
• Vehicle Import Taxes:
  • Excise Duty increased by 5.9%.
  • Luxury Tax: Tax-free threshold raised by Rs 1.5 million.
  • VAT on Vehicle Imports: Reintroduced at 18%.

Income Tax Amendments

The budget includes changes to simplify tax payments:

• Removal of Statement of Estimated Tax (SET): Effective from the Year of Assessment 2025/2026, taxpayers will no longer be required to file the Statement of Estimated Tax payable (SET). Instead, tax liabilities will be determined based on actual income earned during the year, streamlining the tax filing process.
• Tax Calculation Based on Previous Year: New provisions will allow the calculation of tax payable based on the income tax paid in the immediately preceding year.
• Exemption for Non-Resident Income: Income earned by non-resident individuals or entities from services such as aircraft operations, software licenses, or related services provided to the Sri Lanka Air Force will be exempt from taxation.
• Withholding Tax (WHT) Adjustments:
  • For Senior Citizens:
    • Exemption for those earning below Rs 1.8 million annually on interest income.
    • Manual filing option to claim exemptions.
  • For Other Individuals:
    • Refund eligibility for WHT deducted from interest income for those earning below Rs 1.8 million annually.
  • Guidelines to be issued by the Commissioner General of Inland Revenue for the declaration process.

Investment and Business Support

The budget emphasizes investment and business support to foster innovation and growth, particularly for SMEs.

• Development Bank for SMEs: Establishment of a new bank to support SME growth.
• R&D and Innovation:
  • Rs 1 billion was allocated to the Innovation Invention Fund.
  • Co-financing for specific research and development projects.
• Expansion of Free Trade Agreements (FTAs) and Double Tax Avoidance Agreements (DTAs).

Social Welfare and Salary Revisions

The budget places significant emphasis on enhancing social welfare and public sector remuneration:

• Senior Citizen Subsidy: Individuals above 60 years can get a 3% extra interest on one-year fixed deposits up to Rs. 1 million, ensuring financial stability.
• Public Sector Salary Increase: Basic salary increase of Rs 15,750 for public sector employees, with minimum annual increments revised to Rs 450.
• Private Sector Salary Increase: The minimum salary for private sector employees will rise from Rs. 21,000 to Rs. 27,000 on April 1, 2025, and further increase to Rs. 30,000 on January 1, 2026. 
• Revisions in Allowances and Overtime Regulations: Proposed revisions to optimize government expenditure.

Legal and Governance Reforms

Legal and governance reforms in the budget aim to enhance transparency, efficiency, and regulatory frameworks.

• New Laws and Acts: Introduction of new laws such as the Public Asset Management Act, Valuation Act, Public Procurement Law, and Micro Finance and Credit Regulatory Authority Act.
• Customs Reforms: A new Customs Law and simplified tariff structures to enhance transparency and ease of doing business.
• Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT): Strengthening of legal frameworks to ensure compliance with global standards.

Digital Economy and Innovation

The budget prioritizes digital transformation to modernize the economy and enhance digital infrastructure.

• Sri Lanka Unique Digital Identification (SL-UDI): A national digital ID system for all citizens.
• Expansion of the Digital Economy: Aims to grow to over USD 15 billion (12% of GDP) in the next five years.
• Digital Economy Authority: Establishment of an Apex Digital Economy Authority to oversee digital transformation.

Infrastructure and Development

A significant portion of the budget will go toward improving public services.

• Liberalization of Motor Vehicle (MV) Imports: Restrictions lifted after being in place since 2020.
• 4% of GDP for Capital Expenditure: Increased allocation for infrastructure.
• Port and Airport Expansions: Modernization efforts at Colombo Port and Bandaranaike International Airport.
• Tourism Development: Rs 500 million allocated for tourism infrastructure.

Import and Trade Policy Changes

The budget introduces important changes to import and trade policies.

• Liberalization of Motor Vehicle (MV) Imports: The import restrictions imposed since 2020 have been removed.
• Excise Duty on Vehicles: Increased by 5.9%, with additional duties on electric vehicles.
• Luxury Tax on Vehicles: Tax-free threshold increased by Rs 1.5 million.
• VAT on Vehicle Imports: Reinstated at 18%.
• Removal of Customs Duty Exemption: The exemption for Customs Duty on motor vehicles effective from 2014 has been removed from January 28, 2025, with a new 20% Customs Duty rate.
• Surcharge on Customs Duty: A 50% surcharge on the Customs Duty (i.e., 10%) will be applied from February 1, 2025, on motor vehicle imports.

Debt Management and IMF Agreement

Debt management and the continuation of IMF-backed reforms are key elements of the budget to ensure fiscal stability.

• Continuation of IMF-backed Reforms: Policies aligned with fiscal consolidation recommendations.
• Restructuring of Foreign Debt: Extending repayment terms and reducing debt burden.
• Monetary Policy Adjustments: Interest rate management to control inflation while ensuring growth.

Final Thoughts

The 2025 budget introduces various changes that will impact individuals and businesses differently. These initiatives can create opportunities for businesses to expand, generate employment, and improve the quality of life for many individuals. Staying informed and adapting to these changes can help businesses thrive and individuals make smarter financial decisions.