The Pay As You Earn the Sri Lankan government removed (PAYE) tax in November 2019. However, this has been reintroduced as ‘Advance Personal Income Tax (APIT) with the proposed changes to the Inland Revenue Act No. 24 of 2017 with effect from January 1, 2020.
The Inland Revenue Department (IRD), in a circular, stated that the APIT could be taxed and deducted by the employer with the consent of an employee who earns more than Rs 250,000 a month or three million rupees for a year.
If you want to learn how to calculate and manage your APIT obligations, we have a complete Guide to Advance Personal Income Tax.
As an employer, you are responsible for deducting and paying income tax from the gains and profits from each employee’s employment when you make the payments to them. This guide includes everything you need to know on how to manage PAYE tax, including how to apply the PAYE tax tables correctly according to the provisions of the Inland Revenue Act No. 24 of 2017.
Pay As You Earn (PAYE) is a type of income tax that gets charged based on an employee’s employment income. According to the existing regulations, employees who earn more than Rs 250,000 a month are liable for PAYE tax.
The company, or in other words, the employer, is the person who is responsible for deducting the PAYE tax with the consent of the employee. Once it is deducted, they must pay the deduction to the Inland Revenue Department every time salaries get paid.
The amount of PAYE tax that gets deducted from every employee is included in their pay sheets. If you want to learn about what type of payments needs to be included in a paysheet and learn about payroll management, you can refer to our A-Z Guide on Salary Sheets, Salary Slips and Salary Slip Formats in Sri Lanka.
There are two types of tax tables that are relevant when calculating the PAYE tax of an employee.
PAYE Tax Table 01 is applied when deducting tax on cumulative gains and profits from any employee. However, the employee must have provided consent to the employer to deduct the tax.
|Cumulative Gains and Profits from the Employment (Rs.)||Tax|
|0 – 750,000||Nil|
|750,001 – 1,500,000||6% of Cumulative Income from employment less Rs. 45,000/-|
|1,500,001 – 2,250,000||12% of Cumulative Income from employment less Rs. 135,000/-|
|2,250,001 – and above||18% of Cumulative Income from employment less Rs 270,000/-|
When calculating the right amount of PAYE tax to be deducted from an employee, you can follow the below steps.
Step 1 – Calculate the gross salary from employment, as shown below. We have covered this topic in greater detail in our A-Z Guide on Salary Sheets, Salary Slips, and Salary Slip Formats in Sri Lanka.
Step 2 – Once you calculate the gross amount, you should find the correct type of tax table that needs to get applied. The tax payable for the relevant period should be calculated on the gross salary according to the appropriate PAYE tax tables.
Mr. Perera is an employee of a private limited company. The total of his last three months of regular profits from employment (including non-cash benefits) was 960,000. He also received a bonus payment of Rs. 640,000 in February 2020.
|PAYE tax computation period (January – March, 2020)|
|Gross regular employment income for the period||960,000|
|Bonus received in February||640,000|
|Gross payments for the period||1,600,000|
Now that you have calculated his gross payments for the period, you can apply the correct rate of tax according to the PAYE Tax Table 01.
As his gross payments for the period fall within the range of 1,500,001 – 2,250,000, we must apply the rate of 12% of Cumulative Income from employment and reduce Rs.135,000 from that amount.
After applying this rate, you can see Mr. Perera’s tax payable for the period is 57,000. (1,600,000 X 12%) – 135,000)
A Tax on Tax can happen due to two reasons.
In these cases, you have to follow the below steps to calculate the Tax on Tax rate.
Step 1 – Calculate the tax that needs to be deducted based on the process described previously using PAYE Tax Table 01.
Step 2 – Once you have calculated the total amount of tax due, apply the correct rate using the table below to find the Tax on Tax Rate.
|January to March Tax (Rs.)||Tax on Tax Rate|
|0 – 42,300||6.38%|
|42,301 – 121,500||13.64%|
|121,501 – and above||21.95%|
According to section 83 of the Inland Revenue Act No.24 of 2017, ‘Employers are required to deduct and pay income tax on employees’ employment income, with their consent at the time of payment of their salaries.’
Apart from that, there are two more essential responsibilities you have as an employer,
Have more questions? Talk to a taxation expert free of charge for assistance!
In line with Section 120 (a) of the Inland Revenue Act, the deducted PAYE tax during a particular month should be remitted to the Commissioner-General of Inland Revenue Department (IRD) on or before the 15th day of the following month.
Payments should be made to any branch of Bank of Ceylon, using specified remittance forms issued by the Inland Revenue Department. Employers should also keep a copy of the remittance form after making the payment.
If PAYE taxes are not paid by the due date – An interest equal to 1.5% per month or part month on the amount of tax will be charged.
In case an employer fails to pay all or part of the PAYE tax for a tax period within 14 days of the due date – A penalty equal to 20% of the due tax amount will be charged.
According to Section 120 (d) of the Inland Revenue Act, PAYE tax returns for a relevant assessment year must be submitted with the annual statement and schedules to the IRD by employers on or before the 30th of April every year.
To file the PAYE returns, you are required to also submit the following documents.
The instruction on how to complete these documents are given in the Inland Revenue Department’s INSTRUCTIONS TO COMPLETE THE ANNUAL STATEMENT OF EMPLOYER AND SCHEDULES document.
As we’ve stated at the beginning of this article, the Advanced Personal Income Tax has replaced the PAYE tax. To find more information about APIT, you can refer to our Guide to Advance Personal Income Tax.
If you need additional help or want to get in touch with an expert to discuss how we can help you, get in touch today with us.
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