Changes to the Inland Revenue Act: An Overview

RIFKA ZIYARD

Introduction
On February 21, 2025, a Bill to amend the Inland Revenue Act No. 24 of 2017 was published. This Bill includes several significant tax proposals announced by the Hon. President in Parliament on December 18, 2024. While some proposals from the Budget Speech 2025, such as the revision of the Capital Gains Tax (CGT) rate, are not part of this Bill, the amendments introduced are poised to impact various aspects of income and corporate taxation in Sri Lanka.
Personal Income Tax Amendments
Revision of Personal Relief
The Personal Relief amount has been increased from Rs 1.2 million to Rs 1.8 million for each Y/A commencing on or after April 1, 2025. This relief can be deducted by both resident and nonresident citizens of Sri Lanka when calculating taxable income.
Income Tax Rate of 45%
Income received by resident or nonresident individuals from businesses involving betting and gaming, import and sale, or manufacture and sale of liquor or tobacco will be taxed at a rate of 45% starting April 1, 2025.
Tax Rate and Slab Changes
The tax slabs will be expanded to provide relief to middle income earners. The taxable income of resident or nonresident individuals will be taxed as follows for Y/A commencing from April 1, 2025:
Personal Relief up to Rs 1.8 million per annum
Next Rs. 1 million will be taxed at 6%.
Next Rs 500,000 will be taxed at 18%
Next Rs 500,000 will be taxed at 24%
Next Rs 500,000 will be taxed at 30%
Any balance will be taxed at 36%.
Accordingly taxable income more than Rs 4.3 million per Y/A would be taxed at 36%.
The following table provides a snapshot of the tax that will be subject to Advance Payment of Income Tax (APIT) for certain monthly employment income levels.
Monthly Income (Rs)
Proposed Tax (Rs) (p.m) – from 1/4/2025
Current Tax (Rs) (p.m)
Tax Saving
amount (Rs)
Tax Saving %
200,000
3,000
10,500
7,500
71.4%
300,000
18,500
35,000
16,500
47.1%
400,000
50,000
70,500
20,500
29%
500,000
86,000
106,500
20,500
19.2%
600,000
122,000
142,500
20,500
14.4%
700,000
158,000
178,500
20,500
11.5%
1,000,000
266,000
286,500
20,500
7.1%

As depicted, a tax saving of 20,500 per month is constant for all income levels above Rs 400,000 per month.
Foreign Service Income and Foreign Source Income Exemptions
Currently, an exemption is available on the gains and profits earned in foreign currency from any services rendered in or outside Sri Lanka, to any person to be utilized outside Sri Lanka provided such remittance is remitted to Sri Lanka through a bank. Further, an exemption is granted for gains and profits earned or derived from any foreign sourced income where such earnings are in foreign currency and is remitted via a bank to Sri Lanka. These two exemptions are expected to be removed from 1st April 2025, and Individuals will be taxed at a maximum rate of 15% on gains and profits earned from services rendered in or outside Sri Lanka, provided the payment is received in foreign currency and remitted through a bank to Sri Lanka. This also applies to gains and profits earned from any foreign source. All conditions required to meet for the exemption will have to be fulfilled to apply the 15% rate. If conditions not met, such gains and profits will be taxed at progressive rates up to a maximum of 36%.
An individual earning foreign service income and/or foreign source income is expected to pay the income tax on self-assessment basis following the quarterly instalments mechanism provided in the Income Tax Law.
Further, interest received on foreign deposits will continue to be exempt.
Income Tax Refunds
The Commissioner General of Inland Revenue (CGIR) is required to pay refunds within three months (prior to an audit) to resident individuals under specific conditions:
Resident Individual (other than a senior citizen): Refunds of less than Rs 60,000 for years of assessment (Y/A) prior to April 1, 2025, and less than Rs 180,000 for Y/A starting from April 1, 2025.
Resident Individual (senior citizen): Refunds of less than Rs 60,000 or Rs 15,000 per quarter for Y/A prior to April 1, 2025, and less than Rs 180,000 or Rs 45,000 per quarter for Y/A starting from April 1, 2025.

Corporate Income Tax (CIT) Amendments
Foreign Service Income and Foreign Source Income Exemptions
Similar to individual taxation, companies will be taxed at 15% on gains and profits earned from services rendered in or outside Sri Lanka, provided the payment is received in foreign currency and remitted through a bank to Sri Lanka. This also applies to gains and profits earned from any foreign source under similar conditions.
CIT Rate Increase
The corporate income tax rate for gains and profits from betting and gaming, as well as the manufacture and sale or import and sale of liquor or tobacco products (excluding exports), will be increased from 40% to 45% for any Y/A commencing from April 1, 2025.
General Income Tax Amendments (applies to all tax payers)
Advance Income Tax (AIT) on Interest or Discount Payments
Payments of interest or discount will be subject to an Advance Income Tax (AIT) deduction at source at the rate of 10% commencing from April 1, 2025. The current rate of 5% will apply until March 31, 2025.
Reduced Time Period for Claiming Refunds or Credits
For any Y/A commencing from April 1, 2024, taxpayers can claim refunds or credits only if the application is made within 30 months of the last date for filing a tax return for that Y/A, or within the time period specified by the CGIR if the refund or credit is initiated by the CGIR. As per the current a time period of 4 years from payment of tax was allowed as the time period to claim the refund. The Bill seeks to reduce the time period available to a taxpayer to claim a refund to 30 months from deadline to file the return for the respective Y/A.
Conclusion
The amendments to the Inland Revenue Act introduce several changes that will impact both individual and corporate taxpayers in Sri Lanka. These changes aim to streamline tax processes, increase tax rates for specific industries, and provide clarity on foreign income taxation. As the Bill progresses through the constitutional process, one could expect the Bill to be passed in to Law prior to 1st April 2025.
There are further tax proposals which were proposed in the Budget Speech 2025 which should be published in a Bill to amend the respective tax statutes. Certain income tax proposals which were provided in the Budget Speech 2025 are as follows.
Increase of Capital Gains Tax rate from 10 to 15% for individuals/partnerships.
Removal of requirement to file a Statement of Estimated Tax Payable (SET)
Quarterly instalment payment to be on prior year basis
Manual income tax return filing to be allowed for senior citizens
Self declaration mechanism to be introduced for senior citizens earning less than Rs 1.8 million per annum
Refund mechanism to be introduced for individuals other than senior citizens earning less than Rs 1.8 million per annum
Interest to be waived off by the CGIR subject to settlement of tax payable within 6 months

One could expect another Bill to amend the Inland Revenue Act would be published covering the above.

(writer is Rifka Ziyard, MBA, FCMA,CGMA,FCIT, B Com is the Principal Tax & Regulatory at KPMG)