Dec Thu 2020

Team Simplebooks

A guide to PAYE Tax including PAYE Tax tables and how to calculate PAYE Tax in Sri Lanka

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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.

What is PAYE tax in Sri Lanka?

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.

What are the PAYE tax tables, and when to apply them?

There are two types of tax tables that are relevant when calculating the PAYE tax of an employee. 

  • PAYE Tax Table 01 (to calculate tax based on cumulative gains and profits)
  • PAYE Tax Table 02 (to calculate tax on tax rates)

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. 

  • For this table, gains and profits from employment include regular monthly profits from employment (Cash or Non-Cash Benefits) and any lump-sum payments. 
  • PAYE Tax Table 01 should be used only in the case of payments that were received from January 01, 2020 to March 31, 2020. 
Cumulative Gains and Profits from the Employment (Rs.)Tax
0 – 750,000Nil
750,001 – 1,500,000 6% of Cumulative Income from employment less Rs. 45,000/-
1,500,001 – 2,250,00012% of Cumulative Income from employment less Rs. 135,000/-
2,250,001 – and above18% of Cumulative Income from employment less Rs 270,000/-
(PAYE tax table 01)

How to calculate PAYE Tax for cumulative gains and profits?

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.

Example 01 

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 February640,000
Gross payments for the period1,600,000

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)

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How to calculate PAYE Tax when there is a tax on the tax rate?

A Tax on Tax can happen due to two reasons.

  • When an employer or any other person has paid the income tax on behalf of the employee, without it getting deducted from their salary
  • When reimbursement is paid to the employee by the employer for the deducted amount of income Tax from the employee’s salary.

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 – 121,50013.64%
121,501 – and above21.95%
(PAYE Tax Table 02)

What are the other responsibilities of employers?

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,

  1. Recovery and/or remittance of taxes. Employers who fail to do so would be held personally liable to pay such an amount – Section 124 (1)
  1. Keeping the documents relating to every payment made to employees in safe custody. Whenever officers authorized by the Commissioner-General call for an inspection, such records should be made available to them – Section 119
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How to pay the deducted PAYE tax amounts?

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. 

How to file PAYE returns?

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.

Next Steps

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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