Proposed Tax Reforms Summary - Part 2
Income Tax

Proposed Tax Reforms Summary - Part 2 Income Tax

The Press Release dated 31.05.2022 was issued by the Media Division of Prime Minister’s Office setting out several proposals revising the Income Tax regime. A summary of salient features of such proposals is set out below:

• Personal

Current Proposed Effective Date
1. Changes in Tax Rates
Taxable Income %
First LKR 1.2 Mn 4
First LKR 1.2 Mn 8
First LKR 1.2 Mn 12
First LKR 1.2 Mn 16
First LKR 1.2 Mn 20
First LKR 1.2 Mn 24
First LKR 1.2 Mn 28
On the balance 32
Taxable Income %
First LKR 3 Mn 6
First LKR 3 Mn 12
On the balance 18
2. Changes in Personal Relief
LKR 3 Mn LKR 1.8 Mn 01.10.2022

• Corporate

Current Proposed Effective Date
1. Changes in Tax Rates
Standard rate – 24%

Concessionary rate for certain industries – 14%
Standard rate – 30%

Concessionary rate for certain industries – 15%
Manufacturing (at 18%), liquor, tobacco, betting and gaming (at 40%) remain unchanged.
2. Removal of Exemptions and Concessions
Dividends paid by a resident company to non-resident persons are exempt. Dividends paid by a resident company to non-resident persons are proposed to be liable. 01.04.2023

Currently in effect
• Sale of construction material recycled in a selected separate site established in Sri Lanka to recycle the materials which were already used in the construction industry – 10 years;

• Business commenced on or after 01.04.2021 by an individual after completion of vocational education under TVET – 5 years;

• Manufacturing boats or ships in Sri Lanka by a resident and received or derived any gains and profits from the supply of such boats or ships- 7 years;

• Construction and Installation of communication towers and related appliances as specified, or providing technical services for such construction, by a resident -5 year

• letting bonded warehouses or warehouses related to the offshore business in Colombo and Hambanthota ports, if invested after 01.04.2021
Presumed to be with effect from 01.04.2023 as the removal does not apply to projects commenced prior to 31.03.2023
An additional deduction for a year of assessment (Y/A), equal to 100% of the total amount of marketing and communication expenses deductible during 03 Y/As commencing from 01.04.2021, subject to meeting specified conditions. Removal of additional deduction on Marketing and Communication expenses. 01.04.2023
3. Revision of Definition
Multi-national company means a company that is part of a group of associated companies, with business establishments in two or more countries. To be revised, for clarity. 01.04.2023

• Withholding Tax

Current Proposed Effective Date
On Employment Income
Deduction is on a consent basis for Sri Lankan Citizen Resident employees and mandatory for all other employees, if the earnings are above LKR 3 Mn per Y/A (i.e., LKR 250,000/= per month), under the Advance Personal Income Tax (APIT) Scheme. Deduction is to be made compulsory for all employees, whose earnings exceed LKR 1.8 Mn per Y/A. 01.10.2022
On Investment Returns and Other Payments
Deduction of income tax from payments made to local residents is on consent basis, except for payment such as; amounts received as winnings from a lottery, reward, betting. Deduction is to be made compulsory for all taxpayers.

Tax deducted from interests to individual tax payers and dividends to be treated as final payments.
Changes in Rates

• Residents -
Based on income tax rate declared in the consent provided.

• Non-Residents –
Interest or discount paid - 5% All other payments- 14%

• Interest – 5%
• Dividend – 14%
• Rent – 10% on rent exceeding LKR 100,000 per month
• All other payments – 14%

(would be subject to rates provided in the Double Taxation Avoidance Treaties)
On Service Fees
Same as above. 5% on service payments exceeding LKR 100,000/- per month to individuals 01.10.2022
Relief – Interest Income
No such relief A relief on interest income of LKR 1.5 Mn for senior citizens. 01.10.2022