Sri Lanka’s 2025 Tax Reforms: What You Need to Know

Sri Lanka’s tax landscape is undergoing significant changes with the government’s latest tax reforms, announced on December 18, 2024. These reforms aim to address fiscal challenges, increase government revenue, and ease social pressures. Whether you’re an individual taxpayer, a business owner, or part of a corporate entity, these changes are bound to impact you. Let’s break it down into actionable insights.

What Are the Latest Tax Reforms?

The government, as part of its commitment to fiscal consolidation under the IMF program, has announced a series of tax reforms. These include revisions to personal income tax, changes to corporate taxation, the introduction of VAT on digital services, and more. The reforms aim to increase government revenue while offering relief to middle-income families.

Key Highlights of the 2025 Tax Agenda

The 2025 tax reforms bring essential changes aimed at simplifying the tax system and making life easier for individuals and businesses. Whether you’re a middle-income earner or a business owner, these changes will likely impact your financial plans. Let’s dive into the details and explore how you can benefit.

1. Personal Income Tax Relief

Personal income tax reforms are here to ease the financial burden and put more money back in your pocket. These updates are especially helpful for middle-income earners managing everyday expenses. 

Starting April 1, 2025:

• Tax-Free Allowance Increase: The monthly allowance rises from LKR 100,000 to LKR 150,000.
• Revised Tax Slabs: The 6% tax rate now applies to income up to LKR 1,000,000 annually, doubling the previous limit.

The updated personal income tax schedule is outlined below.

These changes mean more savings for you. For instance, if you earn LKR 150,000 per month, you’ll enjoy a 100% reduction in taxes, giving you more to save or spend on what matters most.

Increase in Withholding Tax Rate on Interest

Withholding tax on interest is changing, but don’t worry—Individuals earning less than LKR 150,000 per month are being protected. These updates aim to simplify the system while making sure individuals with limited incomes aren’t unnecessarily impacted.

Starting April 1, 2025:

• Withholding Tax Increase: The withholding tax rate on interest and discounts will increase from 5% to 10%.
  • In simple terms, If you have a fixed deposit of Rs. 2 million with an interest rate of 6%, your annual interest income would be Rs. 120,000.
  • Under the current 5% WHT, you would receive Rs. 114,000, effectively lowering your interest rate to 5.7%
  • With the proposed 10% WHT, your interest income would drop to Rs. 108,000, reducing your effective rate to 5.4%.

• Who Qualifies for WHT Exemptions: Individuals whose total monthly income (from all sources) is less than LKR 150,000 and who fall below the 10% tax bracket can request exemptions from the Inland Revenue Department (IRD). This exemption does not apply solely to interest income but is based on the individual’s total income.

Individuals earning less than LKR 150,000 per month will not be unnecessarily burdened, ensuring that they retain a larger portion of their savings and investment income.

2. Corporate Tax Adjustments

Corporate tax reforms are here to align Sri Lanka’s policies with international practices. These changes target service exports, high-impact industries, and withholding tax rates, making the system fairer for everyone.

Starting April 1, 2025:

• Service Exports Taxed: Export services like IT, BPOs, and shipping will now be taxed at 15%.
• High-Impact Industries: Tax rates for industries like betting, gaming, tobacco, and liquor will increase from 40% to 45%.
• Withholding Tax Increase: The withholding tax (WHT) rate on interest and discounts will rise from 5% to 10%.

While these changes mean higher taxes for certain industries, they promote fairness and long-term sustainability. If you’re in one of these sectors, start planning ahead to better manage your finances and avoid any surprises

 3. VAT on Digital Services

Digital services are now part of Sri Lanka’s tax system, ensuring fairness in the growing digital economy. Meanwhile, exemptions for local dairy products and the continuation of the SVAT scheme provide welcome relief for households and exporters.

New 18% VAT: An 18% VAT will apply to digital services based on the consumer’s location.

Exemptions for Local Dairy Products: Starting April 1, 2025, locally produced liquid milk and yogurt will remain VAT-free, helping reduce costs and improve nutrition.

Simplified VAT (SVAT) Scheme: The SVAT scheme will continue, providing smoother cash flow for exporters and zero-rated suppliers.

Although the cost of digital services may increase slightly, local businesses gain fair competition, households save on dairy products, and exporters benefit from smoother financial operations.

4. Other Notable Changes

From higher stamp duties to relaxed vehicle import rules, these updates are geared toward improving trade and simplifying tax processes.

• Stamp Duty Increase: From January 1, 2025, stamp duty on lease agreements will increase from 1% to 2%.
• Vehicle Import Restrictions Lifted: By February 2025, all vehicle import restrictions will be phased out, including for public transport vehicles, goods transport vehicles, general vehicles, and private vehicles.

For vehicle buyers, this means more options and potentially better prices as supply increases. If you’re planning a purchase, now might be the perfect time to get ready.

Final Thoughts

Sri Lanka’s 2025 tax reforms are designed to simplify the system and ease financial pressures on individuals and businesses. From personal tax relief to VAT updates and vehicle import changes, these reforms bring opportunities to save and plan smarter. Staying informed will help you make the most of these updates.

If you’re unsure how to take full advantage of these reforms, our expert tax team is here to help. We’ll guide you through the changes, handle your tax filings, and ensure you maximize your benefits

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