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Taxation in Sri Lanka
 
 
 

General

The extent of the tax liability to Sri Lankans and non-nationals on profits and income depends on the residence status of the individual, company and body of persons in Sri Lanka.

Residents are taxed on worldwide income while non-residents are taxed on Sri Lankan source income only.

The maximum income tax rate in Sri Lanka is 35 per centum. Expatriate employees enjoy a concessionary rate of 15 per centum during their deemed non-residency period.

Administrative System

The Department of Inland Revenue is within the purview of the Ministry of Finance of the Government of Sri Lanka, which advises Government on tax policy formulations. The Department of Inland Revenue is composed of the Commissioner-General of Inland Revenue who is the head of the Department and number of Commissioners, Deputy Commissioners, Senior Assessors, Assessors and Tax officers.

Further, the Department of Inland Revenue is responsible for the efficient administration of the following:

Direct Taxation:

• Income Tax;
• Surcharge on Income Tax; and
• Save the Nation Contribution.

Other Forms of Taxation:

• Goods and Services Tax;
• Turnover Tax;
• National Security Levy; and
• Stamp Duty.

Apart from the Central Government, Provincial Councils are also authorized to collect Turnover Tax under the constitution. At present, there are eight Provinces in the country and each Province has its own Provincial Council.

Direct Taxation – Income Tax

Enforcement

The existing income tax in Sri Lanka is based on the Inland Revenue Act, No. 38 of 2000 applicable from the year of assessment commencing on 1st April 2000.

Basis of Liability

Income tax is an annual tax chargeable for every year of assessment of every person.

Resident Person: Liability is based on the profits and income wherever arising, i.e. his world income.

Non-Resident Person: Liability is based on the profits and income arising in or derived from Sri Lanka which includes the following:

• Profits and Income derived from services rendered in Sri Lanka; or
• Profits and Income from property in Sri Lanka; or
• Profits and Income from business transacted in Sri Lanka whether directly or through an
agent;
• Interest on certain loans payable to a non-resident;
• Certain royalties.

Year of Assessment

An year of assessment is a period of twelve months from the 1st of April of an year to the 31st of March of the immediately succeeding year.

Income tax is charged under the following categories:

• Individual;
• Company;
• Body of Persons.

Personal Taxation

Threshold for the tax free income of the resident individuals as well as the non-nationals who are deemed to be non-residents and earn an income which solely arose from services rendered in Sri Lanka is Rs.144,000 per annum.

Tax rates are applied to individual income on a progressive scale through a 4-band rate system ranging from 10-35%.

In case of a ‘partnership,’ partners’ income is liable under the individual category in general circumstances.

Income of spouses is taxed separately. The total statutory income of a child (below 18 years) of a resident individual is aggregated with that of his father if the marriage persists or with the parent who maintains him if the marriage ceases to subsist.

Gross dividend income is aggregated with advance company tax paid in respect of the dividend.

Company Taxation

Company income tax is made up of a tax on corporate income and tax on dividend is 15% of the gross dividends declared by the company. Generally, companies are liable to income tax on its taxable income at the rate of 35 per centum.

If a resident company pays dividend consisting of a qualifying distribution, it is required to pay advance company tax. A credit is given for this advance company tax paid, against the company’s final tax liability.

A 'Body of Persons'

Executors and receivers, trusts, charitable institutions, welfare societies, provident funds, clubs and associations and other bodies of persons are also subject to income tax. The tax rates vary with a 10 % rate applying to charitable institutions, welfare societies and provident funds, 20% to clubs and associations and 35%t to trusts and executors.

Resident or Non-resident

'Residence' in the case of an individual, is determined on the basis of the physical presence in the country during the year of assessment, and in the case of a company or a body of persons on the basis whether its principal or registered office is located in Sri Lanka or whether its control or management is exercised in Sri Lanka.

An individual who is physically present in Sri Lanka for 183 days or more during an year of assessment shall be deemed to be resident in Sri Lanka throughout that year of assessment.

Sources of Income

Income tax is charged on the profits and income arising from the following sources:

• trade, business, profession or vocation;
• employment;
• net annual value of land and improvement;
• dividends, interest or discounts;
• charges or annuities;
• rents, royalties or premiums;
• capital gains;
• any other sources not including profits of a casual and non-recurring nature.

Filing of Return

Every person who is chargeable with income tax for any year of assessment should furnish a return, on or before the 30th day of November immediately succeeding the end of that year of assessment.

Collection of Tax

Deduction of Tax at Source

(a) Pay-As-You-Earn (PAYE)

A PAYE scheme applies for specified employees on their employment income. Deduction of tax is made at source by the employer. Pay-As-You Earn taxes are calculated according to the tables provided by the revenue authorities.

(b) Withholding Tax

Residents: Every payer is required to deduct tax at the time any sum of money representing any dividend, (except quoted public companies and the companies which declare dividend out of exempt profits or dividend received) interest and specified fee (except the specified fee and interest payments made to the payees who were issued with a direction stating no need to deduct by the Department of Inland Revenue) is paid or credited. Where withholding tax is deducted, such tax is treated as a credit and eligible to be set off
against a person’s income tax liability.

Non-Residents: Dividends paid by companies to non-residents are subject to withholding tax at 15%.

Non- Citizens: Payments to foreign entertainers or artistes, who are non-citizens of Sri Lanka, are subject to
withholding tax at 15%.

Person or Partnership outside Sri Lanka: Payments to any person or partnership out of Sri Lanka as interest, rent, royalties or annuities attract a withholding tax at 20%.

Self Assessment

All taxpayers are required to pay their taxes by self-assessment for any year of assessment, in four installments on or before the 15th of August, 15th of November, 15th of February in that year of assessment and 15th of May in the next succeeding year of assessment.

However, if a person has paid quarterly installment of tax of any year of assessment, a sum which is not less than one-quarter of the income tax payable by him for the year immediately preceding that year of assessment, then he is not liable to pay any penalty in respect of those quarterly installments until 30th of September immediately succeeding the end of the year of assessment.

Taxation of Foreign Enterprises and Operations

Foreign Investments

The principal law applicable to foreign investments is Board of Investment Law No. 4 of 1978. Board of Investment of Sri Lanka is the major body, which approves foreign investments under Board of Investment law. The Board of Investment is structured to function as a central facilitation point for investors. Significantly, when an agreement is signed with the Board of Investment, the specific incentives granted to an eligible company remain valid for the life of the enterprise. The provision and the spirit of the agreement cannot be changed by successive governments.

Tax incentives

Tax Incentives for Board of Investment Approved Companies
Board of Investment has the power under the Board of Investment law to supersede the Inland Revenue Act and grant tax holidays, preferential tax rates, exemption from custom duty and foreign exchange controls in accordance with the investment criteria such as priority sectors, capital inflow, location, etc.

Expatriate Concessions
Expatriate employees will be deemed as non-residents for the first three years of employment in Sri Lanka. If employed in a Board of Investment company this period is extended to five years. Reduced rate of 15 per centum is applicable in this period.

Resident Guest Scheme
Non-citizens in Sri Lanka who come under this are deemed to be non-resident and excluded from liability to tax on profits and income arising outside Sri Lanka and income accruing from any account opened by such person in a commercial bank.

Taxation of Investment Income
Non-residents are not subject to tax on non Sri Lankan investment income.

Exemptions
Interest, annuity, ground rent and royalty received by a non- resident person from a person outside Sri Lanka are exempt from income tax. Dividend from a non-resident company is exempt in the hands of a non-resident person. Services rendered by a non-resident is exempt from income tax, if it doesn’t exceed Rs.144,000.

Reduced Rates
Certain interest income, royalties and employment income are taxed at reduced rates.

Transfer Pricing
Where a non-resident person and a resident person are closely connected and their affairs are so arranged that it produces to the resident person no profits or less than the ordinary profits which might be expected to arise from such business in the normal course of trading, their affairs may receive scrutiny by the revenue authorities. In such circumstances, the business done in pursuance of such connection by such non-resident person is deemed to be done in Sri Lanka and is assessable and chargeable with income tax in respect of any profits evaded by such arrangement, in the name of the resident person.

Double Tax Treaties

Double Tax Relief Agreements signed between Sri Lanka and other countries provide for reduced tax rates on dividends, interest and royalties. Recently completed agreements include special provisions to ensure that foreign investors receive the benefits arising from the various tax incentives. The countries having tax treaties with Sri Lanka are: Australia, Bangladesh, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, India, Indonesia, Italy, Japan, Kuwait, Malaysia, Mauritius, Nepal, Netherlands, Norway, Oman, Pakistan, Poland, Romania, Saudi Arabia, Singapore, South Kore, Sweden, Switzerland, Thailand, United Kingdom, UAE and the USA.

 

 
 

 



 


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