The Withholding tax was introduced in Sri Lanka as a tax charge on interest payments in 1986. In recent times, withholding tax has been the subject of many changes, including periods where it was completely removed and then re-introduced.
Due to the complexity and the frequency of changes it may be challenging to understand what is considered as WHT, how it is calculated, what are the applicable WHT rates, and stay up to date with the latest developments. This article is designed to help you easily understand your responsibilities regarding WHT and the steps you need to take in accordance with the present tax regulations.
A Withholding tax is a type of income tax that is charged from an individual based on their income level. The person or the entity, who is in charge of paying the withholding tax is called a ‘withholding agent’.
It is the responsibility of the withholding agent to retain the payable amount under WHT from any type of payments, that are described as per IRD notice, and credit the retained amount to the government.
According to the Department of Inland Revenue, WHT will be charged for the following types of payments, which have a source in Sri Lanka, and paid to non-resident persons, subjecting to some exemptions.
|Type of payment||WHT rate|
|Payments to non-resident person with respect to land, sea, air transport or telecommunication service in terms of section 85(2) and Extraordinary Gazette Notification No. 2064/51 dated April 01, 2018||2%|
|Sale price payable to the seller of any gem sold at an auction conducted by the National Gem & Jewellery Authority||2.5%|
|Service fee payments to a resident individual who is not an employee of the payer (if aggregate payment exceeds Rs. 100,000 per calendar month) -(a) for teaching, lecturing, examining, invigilating or supervising an examination;(b) as a commission or brokerage to a resident insurance, sales or canvassing agent; or(c) for services provided by such individual in the capacity of independent service provider such as doctor, engineer, accountant, lawyer, software developer, researcher, academic or any individual service provider as may be prescribed by regulationement payment or other similar payments payable to any non-resident person||5% on full payment|
|Interest or discount paid||5%|
|Rent (defined in Section 195 of the IRA) payments to a resident person (if aggregate amount exceeds Rs. 100,000 per calendar month)||10% on full payment|
|Amounts pays as winnings from a lottery, reward, betting or gambling||14%|
|Charge, natural resource payment (defined in Section 195 of the IRA) or premium||14%|
|Royalty (defined in Section 195 of the IRA)||14%|
|Rent payments to a non-resident person||14%|
|Service fee or an insurance premium payments to a non-resident person||14%|
WHT will be applicable to both resident and non residents. However, WHT will not be applicable when,
When calculating WHT, you can follow the below guidelines.
The withholding agent must deduct the taxes at the time an amount is paid, credited, re-invested, accumulated, capitalized or made available to a person.
The agent must pay the collected WHT amount to the Commissioner General of Inland Revenue within 15 days after the end of each calendar month. Each of these time periods are identified with a period code as below. This will change for every payment period. You can get the latest period code on our socials here.
|Quarter||Payment Period From||Payment Period To||Period Code||Due Date||Installment No.|
The payments must be paid out to the Commissioner General of Inland Revenue (CGIR), – (*Peoples Bank Account No: 014-1002-6-9026620) by using the paying slip issued by the IRD.
(Payment Slip – www.ird.gov.lk)
For the ‘Tax Type Code’ field, you can use the relevant code from below.
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Every withholding agent is required to issue a certificate of deduction to each person in the specified format. This certificate shall cover a calendar month and must be served within 30 days of the end of the month.
The certificate needs to comply with the formats as belows.
Any type of declaration, statement or a certification which is provided to a bank or any other financial institution is considered as a statement which is made to a tax official.
Under the sections 179, 180, and 181 of the Inland Revenue Act, penalties are imposed for the following offences.
According to section 180, if a taxpayer underpays taxes as a result of incorrect statement or omission either intentionally or due to negligence, the following penalties will apply.
Under section 181, if there is a difference between the actual tax liability and the provided statement of the tax liability as a result of a false statement to a tax official the person who provided the statement shall be liable for a penalty.
The penalty will be the amount that has been underestimated or overestimated as a result of the false statement, and which exceeds 50,000 LKR.
However, no penalty will be imposed in cases where the person who made the statement is unknown, or could not reasonably be expected to know that the information was misleading or false.
Every withholding agent is required to register under the Commissioner General of Inland Revenue, no later than 30 days prior to deducting the WHT.
The registration as a withholding agent, can be done either manually or electronically. There is no difference between the outcome of either of these, and it is completely up to you to choose a method that you prefer.
Step 1 – You must obtain a Tax Identification Number (TIN number) from any of these government agencies.
– Primary Registration Unit (Located at the 2nd Floor of the Department of Inland Revenue)
– Relevant regional office (You can find the relevant information from this list)
– Taxpayer Service Unit (TPSU) of the Department of Inland Revenue
Step 2 – Once you obtain a TIN, you must complete the registration form with all the necessary documentation (available at any of the above mentioned locations and from the IRD website)
Step 3 – Present all the documentations to the Tax Type Registration Unit of the Department of Inland Revenue. Alternatively, you can also send the documentation on postal service to the TPSU.
Step 4 – Provided you meet all the requirements, you will receive the tax certificate by mail or you can collect it in person at Inland Revenue Department offices.
The process to register online changes based on the type of registration you require.
Source – ird.gov.lk
This article provides a detailed guide on everything you need to know about withholding tax, including how to register, how to calculate, deduct and pay withholding tax according to the present regulations.
If however, you need further information or guidance, get in touch with us for a free personal consultation.
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