Income Tax Administration Sri Lanka

We all need to pay taxes. But, when do we start? If this is the first time you’re paying taxes, or if you’re unsure about the process, we’ve compiled a step by step article. There’s no need to worry. We’ll guide you through the process.

Do I have to pay taxes?

By law, if you are an individual (If you have other sources of  income  apart from employment income)or you have your own business, you will have to file an income tax return every year. This is used to identify whether you owe any taxes, or require any refund on taxes.However, a resident individual who only has income from employment that is subject to PAYE will not be required to file a return for that year of assessment (section 94(1)(a)(ii).

What do I need to do to?

Once you are eligible for income tax, you are required to provide a return of income on or before 30th November following the end of that year of assessment.

You have to be careful during this process, because incorrect tax returns will lead to greater penalties and a double on your tax! Remember to include the following information in your income return;

  • All sources of income
  • Computation of taxable income and tax liability
  • Exempt profits and income
  • Value of the assets and liabilities (Applicable for Individuals)

How much do I need to pay?

Individual tax

  • Personal relief for residents/non-resident citizens of Sri Lanka is Rs. 500,000/- (not available for gains from the realization of investment asset).
  • Additional relief (maximum) of Rs.700,000 is available on employment income (maximum tax rate applicable for employment income is 24%).

Individual Taxable income Rates

First Rs. 600,000/- 4%
Next Rs. 600,000/- 8%
Next Rs. 600,000/- 12%
Next Rs. 600,000/- 16%
Next Rs. 600,000/- 20%
On Balance 24%

Gains from realization of investment assets shall be taxed at the rate of 10%.

Company tax

The rate of tax for a company is significantly higher. Resident company  Income Tax Rates are as follows,

(a)Taxable income Rate

(a) in the case of an Small and Medium Enterprises (Special Rate) – 14%;
(b) in the case of a company predominantly conducting a business of  exporting goods and services – 14%;
(c) in the case of a company predominantly conducting an agricultural  business – 14%;
(d) in the case of a company with income from a business consisting of  betting and gaming, liquor and tobacco (excluding such income which is merely incidental to another business) – 40%;
(e) in the case of a company predominantly providing educational services  – 14%;
(f) in the case of a company predominantly engaged in an undertaking for  the promotion of tourism- 14%;
(g) in the case of a company predominantly providing information  technology services-14%.

(h)Taxable income of a company (Other than companies taxed at special rates) – 28%

“Predominantly” means 80% or more calculated based on gross income

“Small and Medium Enterprise” means a person who satisfies the following conditions:—
(a) the person who conducts business solely in Sri Lanka other than an  individual who is engaged in providing                  professional services individually or in partnership being an individual who is professionally qualified;
(b) the person does not have an associate that is an entity; and
(c) the person’s annual gross turnover is less than Rs. 500,000,000;

(b) Dividend Tax

A tax of 14% of the gross dividends distributed out of profits to any shareholder

What if I fail to Submit Tax return?

If you fail to submit a return, the Commissioner General has the power to impose Penalty

Penalty for late filing of return of income is equal to the greater of –

5% of the amount of the tax owing, plus a further 1% of the amount of tax owning for each month or part of a month during which the failure to file continues:

and

Rs.50, 000/- plus a further Rs.10, 000 for each month or part of a month during which the failure to file continues (Maximum penalty shall be limited to Rs.400, 000)

What is the penalty for making false misleading statements in a return?

Penalty for making false misleading statement is equal to the greater of Rs. 50,000 or the amount by which would have the tax payable reduced or refund increased, if it were determined based on such statement.

How do I appeal for incorrect returns?

If you had a valid reason for making an incorrect return, you can make an appeal against the penalty to the Commissioner General against the assessment. You have 30 days to object. Draft a letter explaining the grounds of appeal, to the Commissioner General If you’re appealing for not providing a income tax return, the return should be attached with the letter.

What if I couldn’t submit an appeal on time?

If you were unable to submit an appeal within the time duration, you can request an extension. This should be your last resort, as the Commissioner General will only extend the deadline in the case of;

  • Absence from Sri Lanka
  • Sickness
  • Other reasonable cause

What are the other tax returns i have to file ?

Statement of Estimated Income Tax Payable for the Year of Assessment 2019/2020(SET)

As per  Sections 90, 91 and 92 of the IR Act, every person who is liable to pay income tax, is required to submit a SET Form for the year of assessment 2019/2020 on or before the 15th August, 2019. Furthermore, the estimated tax should be paid in four installments.

When should I Pay Income Taxes?

Income Tax is payable on self-assessment basis, a person who is an “installment payer” shall pay tax by quarterly installments.

Installment Payment Date
1st Installment On or before the 15th day of the month of August, of that year of assessment
2nd Installment On or before the 15th day of the month of November, of that year of assessment
3rd Installment On or before the 15th day of the month of February, of that year of assessment
4th Installment On or before the 15th day of the month of May, of the next succeeding year of assessment
Final Installment On or before the date that is after six months end, of that year of assessment

What is the Penalty for Late Payments?

A person who fails to pay shall be liable for following penalty ,

a). 10% of the tax amount due, and

b). Further, 1.5% interest of the tax amount due months or part of the month.

Need help?

If you still have questions about income tax and the process behind it, we’ll be happy to clear your doubts. Feel free to contact a member of our team, and we’ll get back to you shortly.