Everything you need to know about Income Tax in Sri Lanka

Income tax is one of the main sources of revenue for any government around the world. In Sri Lanka, income tax makes up around 23% of the total revenue collection, according to the 2019 annual report published by the Central Bank of Sri Lanka.

Due to the complexity of the income tax regulations and the frequency of changes, you may find it challenging to calculate income tax, know the process to file an income tax return or to stay up to date on the income tax rates and exemptions. Whether you are an individual income tax payer or a company, this article will provide a comprehensive guide to Income Tax in Sri Lanka in 2020.

Table of Contents

1. What is an Income Tax? 
2. Income Tax Rate for Individuals
3. Income Tax Qualifying Payments and Reliefs for Individuals 
4. Income Tax Rate for Companies
5. Income Tax Qualifying Payments And Exemptions for Companies
6. When Should You Pay Your Income Tax?
7. How to Pay Your Income Tax?
8. Filing Your Tax Returns
9. Penalties for Evading And Making False Tax Returns
10. How to Provide a Revised Tax Statement?
11. How to Appeal for Late Filing of Income Tax Returns?
12. Need Help?

What is an Income Tax? 

Income Tax, introduced in 1932, is governed by the Inland Revenue Department with the authority to charge, levy and collect income tax on individuals, partnerships, sole-proprietorships or companies.

Governments use income tax as a way to collect earnings from your business or personal profits, which is used to cover various government costs, including infrastructure development and public services such as health and education.

Income Tax Rate for Individuals

Depending on how much you earn, the total income tax you pay varies. This is categorized under different tiers, known as ‘Tax Slabs’. If your monthly earnings surpass 250,000 LKR, or 3,000,000 LKR annually, you are liable to pay income tax. 

The following sources of income will be considered as part of your taxable income:

• Employment Income
• Business Income
• Investment Income
• Other Income

Income Tax Qualifying Payments and Reliefs for Individuals 

According to the present tax regulations, certain types of payments qualify for deductions.

For the below qualifying payments, an individual can deduct whichever is the lowest out of either  ⅓ of the taxable income for that year of assessment, or Rs. 75,000.

1. Donations to Approved Charity, 
2. Donations to Government or other specified institutions, 
3. Profits remitted to President’s Fund

Tax Reliefs

• Personal Relief

Individuals are eligible for a personal relief of Rs. 3,000,000 annually. However, this will not apply to individuals when they are acting as a trustee, executor or a liquidator. The relief may be deducted from the assessable income of an individual except to the extent that the assessable income comprises gains from the realisation of investment assets.

• Rent Relief

Individuals who are residents are entitled to deduct 25% of the total rental income from an investment asset for the year of assessment unless it is intended to be claimed for any actual expenditures incurred by the taxpayer for the repair, maintenance, and depreciation of the investment asset.

• Expenditure Relief

Under this proposed relief resident individuals are entitled to deduct the following expenditures up to a total sum of Rs. 1,200,000, incurred during a year of assessment.

(a) health expenditure including contributions to medical insurance;

(b) educational expenditure incurred locally, by such individual or on behalf of his children;

(c) interest paid on housing loans;

(d) contributions made to an approved pension scheme;

(e) expenditure incurred for purchase of equity or security

Below is an example which shows you how to calculate your tax obligation under income tax.

Mr. Mevan is COO of company ABC. His expected income for the year of assessment 2020/2021 is as follows;  Employment income Rs. 7,500,000 (He has not given his consent to deduct APIT)  Interest income Rs, 250,000 (He has not given the consent to deduct AIT).  He runs his own digital media agency and earns a business income (after deducting the allowable expenses) of  Rs 1,000,000. Employment income includes the estimated cash and non-cash benefits. He wishes to expend Rs. 275,000 for health expenses and insurance, Rs. 600,000 for purchase of shares and Rs. 500,000 for school fees of his children. Also he wishes to donate Rs. 100,000 to Cancer Hospital.

 Income Tax Rate for Companies

The income tax rates applicable to a company is different to the rates charged on individuals. Tax rates for individuals start at 6% and the highest rate set at 18%, whereas for companies the lowest rate starts at 14% and the maximum being as high as 40% for certain industries. 

The amount of tax payable by a company changes based on the industry and the revenue generated. Small and Medium Enterprises (annual gross turnover is less than 500 million rupees) are liable to a lower tax rate than large scale companies.

Income Tax Qualifying Payments And Exemptions for Companies

For the below qualifying payments, a company can deduct whichever is the lowest out of either  20% aggregate taxable income for that year of assessment, or Rs. 500,000.

1. Donations to Approved Charity, 
2. Donations to Government or other specified institutions, 
3. Profits remitted to President’s Fund

Gains and profits earned or derived by any person from any of the following are exempted from being subject to tax:

• the sale of produce of an undertaking for agro farming of such person without subjecting such produce to any process of production or manufacture, with effect from April 1, 2019

• providing information technology and enabled services as may be prescribed
• any service rendered in or outside Sri Lanka to any person to be utilized outside Sri Lanka, where the payment for such services is received in foreign currency and remitted through a bank to Sri Lanka
• any foreign source [other than gains and profits referred to in item (iii)] where such gains and profits earned or derived in foreign currency and remitted through a bank to Sri Lanka

Any amount derived by:

• any non-resident person from laboratory services or standards certification services
• any religious institution which is registered with the Ministry in charge of the subject of religious affairs, by way of grants or donations

As you read through the above exemptions you may notice companies earning in foreign currency revenue are mostly exempt from paying income tax. This is to incentivize companies to bring in more foreign currency to Sri Lanka.

When Should You Pay Your Income Tax?

In Sri Lanka, you are responsible (self assessment basis) for calculating how much Income tax you are liable to pay. These are payable in quarterly installments in advance

Shown below are the dates for the SET payment basis for Financial Year 2020/2021.

In the case of companies or partnerships, after making the quarterly payments, you are required to conduct an audit at the end of the financial year. This audit should be conducted by an independent and certified auditor. This helps assess if you have estimated and met your tax obligations correctly.

Following the audit, you should make the final payment by the below dates:

• 2020/21 Assessment Year – 30th September 2021 
• 2019/20 Assessment Year – 30th September 2020

Please note that if you are an individual or a sole proprietorship, this requirement is not applicable to you.

How to Pay Your Income Tax?

Once you register as a taxpayer you have two options when paying your income taxes. 

1. Manually

1. Use the paying in slip received with return form
2. Fill in the form manually
3. Make payments at the bank

        2.    Online

1. Login to e-services
2. Fill in payment details 
3. Get payment voucher number
4. Make payment online through either Bank of Ceylon or Peoples Bank e-payment services

When you are making the online payment through your bank, you can follow the below steps.

1. Log-in to the e-banking facility and select the Fund Transfer option.
2. Enter the “2026529” as the beneficiary account number
3. Beneficiary name should be added as  “Commissioner General of Inland Revenue” or “CGIR” 
4. Set the beneficiary bank to  “Bank of Ceylon, Taprobane Branch” 
5. Enter your Payment Reference Code (PRC) without any space in the Reference Cage/Field in the interface of online fund transfer. (PRC Format TIN 9 Digits + Tax Type Code 2 digits + Payment Period Code 5 Digits)

*The applicable tax type code for companies is ‘02’ and ‘05’ for individual Income tax

Filing Your Tax Returns

Once you make the final payment of taxes, you are required to provide your tax returns by the following dates.

• The tax filing for 2019/20 should be made by the 30th November 2020
• The tax filing for 2020/21 should be made by the 30th November 2021

Make sure to provide your return of income with highest authenticity to avoid exposing yourself to pay penalties or legal action. 

You can either file your tax returns to the department directly or through http://www.ird.gov.lk.

Here is a step by step process on how to file your tax return:

Through the department:

1. Receive return form via post. (You can use the following form to file your Statement of Estimated Income Tax Payable (SET) for the Year of Assessment 2020/2021)
2. Manually fill return form
3. Attach supporting documents
4. Submit return to Taxpayer Services Unit at the Inland Revenue Department

Through the Inland revenue department website:

1. Log in to e-services of the website
2. Fill the return forms
3. Upload the supporting documents

Penalties For Evading And Making False Tax Returns

If you do end up having complications with the tax regulations either due to non-payment of taxes or providing inaccurate information keep in mind there will be penalties. The applicable penalty differs based on the seriousness of the offence and is imposed by the Commissioner General of Inland Revenue Department.

1. Penalties for late filing and incorrect tax returns

Penalty for late filing of return of income is equal to the greater of –

• 5% of the amount of the tax owing, plus a further 1% of the amount of tax owing for each month or part of a month during which the failure to file continues:

and

• Rs.50, 000/- plus a further Rs.10, 000 for each month or part of a month during which the failure to file continues (Maximum penalty shall be limited to Rs.400, 000)

2. Penalties for delay or non payment
   

If there is a delay or non payment in your payment, you will be responsible for the penalties mentioned below; 

Self estimated basis

1. Penalty for non payment or late payment – 10% of the tax amount due if not paid within 14 days from the due date
2. Interest in the event of default – 1.5% interest of the tax amount due months or part of the month will be applied on default of the installment or part payment
   

Audited income tax

3. 20% payment on tax if not paid within 14 days
4. 1.5% interest of the tax amount due months or part of the month will be applied on default of the installment or part payment

3. Penalties for understating amount of payable tax

• If the understated amount is less than Rs. 10 million or 25% of the total tax liability a penalty of 25%
• If the understated amount is more than Rs. 10 million, the penalty would be 75%
  

How to Provide a Revised Tax Statement?

If you have made an error in submitting a tax return, you can submit a revised statement by following the below steps.

1. Take a copy of the previously submitted tax return
2. Attach the revised return
3. Submit to the Inland Revenue Department directly or through http://www.ird.gov.lk.

How to Appeal for Late Filing of Income Tax Returns?

If you have a valid reason to file a late return, you can draft a letter of appeal explaining the grounds of the late submission to the Commissioner General of Inland Revenue Department.

Need Help?

Even though this guide covers everything that you need to know about income taxes, you may still have doubts or need clarifications about how it may affect your exact situation. 

Contact us to schedule a free personal tax consultation with one of our taxation experts.