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.
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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.
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:
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.
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.
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.
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
|Taxable Income||Rate||Tax on Taxable income equal to the lowest of the range|
|First Rs.3 million||6%||180,000|
|Second Rs. 3 million||12%||360,000|
|On the balance||18%||–|
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.
|Estimated Assessable Income||8,750,000|
|Less – Relief|
|Expenditure Relief||(275,000+600,000+500,000 = 1,375,000 limits to 1,200,000)||(1,200,000)|
|Donations to Cancer Hospital||(restricted to 75,000)||(75,000)|
|Estimated Taxable Income||4,475,000|
|Estimated Tax Liability||3,000,000 x 6% = 180,000|
|1,475,000 x 12% = 177,000||357,000|
|Estimated Tax Payable (A)||357,000|
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.
|Special gains per company||Rates|
|Small and medium enterprises (SME)||14%|
|Company predominantly conducting an agro processing||14%|
|Company predominantly providing construction services||14%|
|Company predominantly providing healthcare services||14%|
|On gains and profits from Manufacturing||18%|
|Income from a business consisting of betting and gaming, liquor and tobacco||40%|
|Company predominantly providing educational services||14%|
|Company predominantly engaged in promoting of tourism||14%|
|Taxable income of a company (Large scale companies)||24%|
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.
Gains and profits earned or derived by any person from any of the following are exempted from being subject to tax:
Any amount derived by:
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.
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.
|Installment||Time Period||Day of payment|
|1st Installment||April 2020 to June 2020||On or before the 15th of August 2020|
|2nd Installment||July 2020 to September 2020||On or before the 15th of November 2020|
|3rd Installment||October 2020 to December 2020||On or before the 15th of February 2021|
|4th Installment||January 2021 to March 2021||On or before the 15th of May 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:
Please note that if you are an individual or a sole proprietorship, this requirement is not applicable to you.
Once you register as a taxpayer you have two options when paying your income taxes.
When you are making the online payment through your bank, you can follow the below steps.
*The applicable tax type code for companies is ‘02’ and ‘05’ for individual Income tax
Once you make the final payment of taxes, you are required to provide your tax returns by the following dates.
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:
Through the Inland revenue department website:
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.
Penalty for late filing of return of income is equal to the greater of –
If there is a delay or non payment in your payment, you will be responsible for the penalties mentioned below;
Self estimated basis
Audited income tax
If you have made an error in submitting a tax return, you can submit a revised statement by following the below steps.
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.
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.