The Complete Guide to Advance Personal Income Tax

The Sri Lankan government replaced the previously applied Pay As You Earn (PAYE) tax with a revised tax policy known as the Advance Personal Income Tax (APIT) which came into effect from the year of assessment 2020/2021. This detailed guide is designed to help employers understand how APIT is calculated, their obligations, and the applicable tax tables they can refer to when deducting APIT.  

Table of contents   

1. What is APIT?
2. What payments are liable to APIT?
3. What payments are excluded or exempted from APIT? 
4. Additional relief available for Employment Income
5. How to apply tax tables?
6. How to pay the deducted tax? 
7. Certification for APIT
8. Filing a tax return
9. Penalties for evading tax payments
10. Next steps

What is APIT?

Advanced Personal Income Tax (APIT) is a type of tax that is deductible from the gains and profits payable to every employee from their employment.

Under APIT, employers can deduct APIT, from employees who are both residing in Sri Lanka and Sri Lankan citizens, provided that their consent is given for deduction. However, in the case of employees who are citizens, but are currently not residing in Sri Lanka, employers do not require consent before making the tax deduction. 

Alternatively, the employees can also pay this tax on a voluntary basis. 

What payments are liable to APIT?

According to the guidelines issued by IRD, APIT is applicable to the following types of payments. These pay

ments can either be in cash or other forms of value.

• Salary, wages, leave pay, overtime pay, fees, pensions, commissions, gratuities, bonuses, and other similar payments.
• Personal allowance, including any cost of living, subsistence, rent, entertainment or travel allowance.
• Payments providing discharge or reimbursement of expenses incurred by the employee or as associate of the employee.
• Payments for an individual’s agreement to conditions of employment.
• Payments for redundancy or loss or termination of employment.
• Retirement contribution made to a retirement fund on behalf of the employee and retirement payment received in respect of the employment.
• Payments or transfers to another person for the benefit of the employee or an associate person of the employee.
• The fair market value of benefits received or derived by virtue of the employment by the employee or an associate person of the employee.
• Other payments, including gifts, received in respect of the employment.
• The market value of shares, at the time allotted, under an employee share scheme, including shares allotted as a result of the exercise of an option or right to acquire the shares, excluding the employee’s contribution for such shares.

What payments are excluded or exempted from APIT?

Sri Lankan citizens who are either resident or a non-resident employee with an income lower than 3 million rupees annually, or does not meet a monthly income of LKR 250,000, will not be liable to pay APIT. If you have any employees that fall below this criteria, you do not have to deduct APIT from those employees.

In addition to this minimum criteria, the current APIT provisions also provide the following exclusions and exemptions for various types of income.

1. Exclusions

• Exempt amounts and final withholding payments.
• A discharge or reimbursement of expenses incurred by the individual on behalf of the employer.
• A discharge or reimbursement of an individual’s dental, medical or health insurance expenses where the benefit is available to all full-time employees on equal terms.
• Payments made to or benefits accruing to employees on a non-discriminatory basis that, by reason of their size, type and frequency, are unreasonable or administratively impracticable for the employer to account for, or to allocate to the individual.
• The value of a right or option to acquire shares at the time such shares are granted to an employee under an employee share scheme.
• Contributions made by an employer to an employee’s account with a pension, provident, gratuity or savings fund approved by the Commissioner-General.

2. Exemptions

• Compensation or gratuity paid in lieu of personal injuries or death.
• Pension received from the Sri Lankan Government or from a Department of the Government.
• Amounts paid on retirement from any Provident Fund approved by the Commissioner General Of Inland Revenue.
• Amounts paid on retirement from any Pension Fund or the Employees’ Trust Fund, representing investment income earned for any period commencing on or after 1 April 1987.
• Income derived by an individual entitled to privileges under the Diplomatic Immunities Law and other specified conventions.
• Benefits derived by a Government employee, from a road vehicle permit granted to such employee. 

How to apply tax tables?

The department of inland revenue has published 7 tax tables to help you determine the amount you should deduct from your employees.

Each tax table is designed to provide information on a specific type of payment or income. You may notice that the rate of tax varies based on the type of income, residency status and citizenship of the employee.

1. Refer to Tax Table 1 to calculate the APIT if,

• Payments qualify as profits from employment and exceeds LKR 250,000
• An employee is a resident and has provided consent through a primary declaration form
• An employee is a non-resident, but citizen of Sri Lanka

2. To deduct tax on lump-sum payments for both resident employees who have provided consent, and non-resident employees regardless of consent, you can use Tax Table 2.

3. Tax Table 3 is applicable for once-and-for-all payment (terminal benefits) irrespective of the consent of the employees subject to the ETF Guidelines provided by the IRD.
   
4. For any regular gains and profits or lump sum payments from employment of non-resident employees who are not Sri Lankan citizens, use Tax table 4.

5. Apply Tax table 5 when the monthly regular gains and profits are less than LKR 250,000 but cumulative gains and profits are higher than LKR 3 million due to higher payments in certain months.

6. When the employer or any other person settles the income tax liability without it being deducted from the employee or where reimbursement is made to the employee by employer for deductions, use Tax table 6

7. When there are gains and profits from employment of any employee who has not furnished the primary employment declaration, or in respect of any employee employed under more than one employer, apply Tax table 7  

If you want to find out the exact amount of tax you are required to deduct, you can use our APIT tax calculator.

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How to provide primary or secondary employment declaration?

The primary employment of an employee is the company or the employment to which the employee has provided a declaration of consent to deduct APIT. 

This can be done by submitting a completed primary employment declaration form—signed by both the employee and the employer, which may cover one year of assessment or more.

Although this declaration can be withdrawn at the end of each year, an employee shall not be entitled to have more than one primary employment at any given time.

If the employee also has a secondary employment, he or she is required to submit a completed secondary employment declaration form.

Certification of Income Tax Deductions

Employers must issue an APIT certificate to all employees including employees who have had zero tax deductions.

The certificate should: 

• Contain employee information
• Include tax deductions made during the year 

The employer must issue the certificate before the end of 30th day of April of the following assessment year. If the employee resigns, the employer must issue the certificate within 30 days from the date of resignation. 

All relevant documents including remittance and T-10 forms of all employees are required to be kept securely to be presented to the officers authorized by the Commissioner General—in case of an inspection. 

Filing a tax return

Although you, as an employer, followed the above steps in deducting, making the remittance to the government, and issued an APIT certificate, your employees are also required to file a tax return on their own. In order to do this, they must obtain a Taxpayer Identification No (TIN).

This process can be completed either by visiting the Inland Revenue Department or by using the e-service available through the Inland revenue department website.

As part of the relief measures announced post COVID, the government has also extended the date of submission for annual declaration of employers (PAYE) for the year of assessment 2019-20, to the 31st of December 2020. 

Penalties for evading tax payments

If you, as an employer, have failed to deduct tax payments from the employment income or remit them according to the government under the previously described processes, the following penalties and interests will be applied.

• A penalty equal to 20% of the due tax, if there is a failure to pay or remit, all or part of tax within 14 days of the due date

• An interest equal to 1.5% per month or part month on the amount of tax, if the tax is not paid by due date

Next steps

The objective of this article is to provide you with a comprehensive understanding of all the information and processes you need to follow in order to meet your obligation with regards to deductions of APIT as an employer.

If you need additional information or help with this process, get in touch today for a free personal consultation from one of our taxation experts.