Inland Revenue Amendment Act: Key changes explained

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Colombo, June 25 (Daily Mirror) - The Inland Revenue (Amendment) Act No. 11 of 2026, which was certified on June 3, 2026, has introduced several significant changes to Sri Lanka’s tax framework. Here are some of the key amendments.

Q: Are profits from selling personal motor vehicles now taxable?

A: No. Gains made from the sale or transfer of motor vehicles will no longer be treated as "other income" for income tax purposes, provided the vehicle is not trading stock or a depreciable business asset eligible for capital allowances. Similarly, losses from such sales cannot be claimed as tax deductions. This change is effective from April 1, 2024.

Q: What are the new restrictions on large cash transactions?

A: Individuals or businesses making payments of Rs. 500,000 or more must use approved payment methods such as account-payee cheques, bank drafts, debit or credit cards, electronic bank transfers, or direct deposits into the recipient’s bank account.

If payments above this threshold are made in cash or through unapproved methods:

The expense cannot be claimed as a tax deduction.

The amount cannot be included in the cost of an asset for tax purposes.

The rule applies to single transactions, payments made within one day, or a series of related transactions.

Q: Are donations of assets to the Government or state universities taxable?

A: No. Transfers of assets to the Government of Sri Lanka or state universities as gifts or donations will not attract income tax. The consideration received is deemed equal to the net cost of the asset, preventing any taxable gain. This amendment took effect on June 3, 2026.

Q: Can unused tax deductions on donations be carried forward?

A: Yes. Donations made to the Government or government-established funds can now be carried forward to future years if the full deduction cannot be used in the current assessment year. This provision is effective from April 1, 2025.

Q: Will life insurance payouts be taxed?

A: Generally, no. Amounts received from life insurance policies due to the death of the insured, policy maturity, or policy surrender will be exempt from assessable income.

However, the exemption does not apply to amounts treated as employment income, business income, pensions, annuities, or similar payments. The amendment is effective from April 1, 2025.

Q: What changes have been introduced for unit trusts and mutual funds?

A: Unit trusts and mutual funds must provide investors with annual certificates detailing income earned, exemptions, and withholding taxes within five months of the end of the tax year.

Failure to issue these certificates will result in the fund being taxed as a company. These changes come into effect from April 1, 2025.

Q: Who qualifies as an approved charitable institution?

A: Organizations providing healthcare services in collaboration with government health or education institutions may qualify as approved charitable institutions. Donations to such organizations will be tax deductible, subject to Inland Revenue Act provisions.

Q: Have tax residency rules changed?

A: Yes. Several clarifications have been introduced:

Holders of Investor Category Residence Visas will not be considered Sri Lankan tax residents.

Individuals leaving Sri Lanka to work overseas for at least one year under a contract with an unrelated foreign employer will generally not be regarded as Sri Lankan tax residents during that period.

Foreign citizens working on Sri Lankan ships will only be taxed on income earned from that employment. These amendments are effective from April 1, 2025.

Q: What changes have been made to withholding tax (WHT)?

A: Several important changes have been introduced.

Interest Income Self-Declarations

Resident individuals with no taxable income can submit self-declarations to avoid withholding tax on interest income from bank deposits.

However, submitting false or misleading information can result in penalties of up to Rs. 200,000 and disqualification from filing future self-declarations.

Professional Services Tax

A 5% withholding tax will apply to payments exceeding Rs. 100,000 per month made to a wide range of professionals, including: Auditors, Personal trainers, Coaches, Artists, Actors, Singers, Photographers, Videographers, Dentists, Veterinarians, Social media specialists, Brand ambassadors, IT specialists, Translators, Writers, Consultants. The new rules took effect on June 3, 2026.

Q: Are there penalties for withholding tax non-compliance?

A: Yes. Withholding agents who fail to comply with reporting requirements can face penalties of up to Rs. 200,000 per year of assessment after receiving a warning notice.

In addition, withholding certificates must now be issued free of charge.

Q: What has changed regarding quarterly tax payments?

A: Taxpayers are no longer required to file a Statement of Estimated Tax (SET). Quarterly tax instalments will instead be calculated based on the tax liability of the immediately preceding year of assessment.

This change applies from the 2026/2027 assessment year.

Q: Who no longer needs to file tax returns?

A: Employees whose only income is employment income fully subject to Advance Personal Income Tax (APIT), and who do not have quarterly instalments or final tax payments due, will not be required to file tax returns.

The exemption also covers employees earning up to Rs. 5,000 in annual interest income. This provision takes effect from April 1, 2025.

Q: Are senior citizens given any special concessions?

A: Yes. Senior citizens will be allowed to submit tax returns either electronically or in written form from the 2025/2026 assessment year onward.

Q: What are the new Taxpayer Identification Number (TIN) requirements?

A: TINs will become mandatory for several activities, including: Opening bank accounts, obtaining approval for building plans, Registering vehicles, renewing vehicle licences, registering land titles, registering businesses, transferring shares in Sri Lankan companies, obtaining credit cards. All companies incorporated in Sri Lanka must register with the Inland Revenue Department within 30 days.

Q: Have capital gains tax rates changed?

A: Yes. Effective June 3, 2026, the revised capital gains tax rates are:

• Category Tax Rate
• Individuals 15%
• Partnerships 15%
• Trusts 30%
• Unit Trusts / Mutual Funds 30%
• Non-Governmental Organizations 30%

Q: Is there any new investment incentive?

A: Yes. A 100% Enhanced Capital Allowance (ECA) will be available for investments exceeding US$250,000 in depreciable assets used in a new business undertaking in Sri Lanka. This incentive takes effect from April 1, 2026.

Q: Will tax penalties and interest be waived?

A: Interest on late or underpaid taxes, including surcharge tax and debt repayment levies, will be waived up to the 2024/2025 assessment year, provided the principal tax amount is fully settled by December 2, 2026.

Q: What happens if taxpayers fail to comply with tax obligations?

A: Individuals who fail to file returns, register with the Inland Revenue Department, submit annual statements, or comply with requests from tax authorities may face legal action.

Upon conviction, offenders could be fined up to Rs. 400,000, imprisoned for up to six months, or both.

The Inland Revenue Department says the amendments are aimed at improving tax compliance, reducing tax evasion, encouraging digital transactions and strengthening Sri Lanka’s revenue collection system.