Sweeping changes to personal and corporate income tax

• Tax-free threshold brought down to Rs.1.2mn per annum from Rs.3.0mn
• Top personal income tax rate at 36% 
• Standard corporate income tax rate raised to 30% 
• Concessionary corporate tax rates removed 
• 5% withholding tax slapped on a slew of service and professional incomes

Sri Lanka this week gazetted key income tax changes proposed in May, giving effect to a host of personal and corporate income tax hikes while removing concessions and exemptions, with a view to raise government revenues to fix the budget under an International Monetary Fund (IMF)-backed economic rescue programme.

Accordingly, the tax-free threshold applicable on an individual income has been brought down to Rs.100,000 a month or Rs.1.2 million a year, from an earlier Rs.3.0 million, making every resident or non-resident Sri Lankan liable for personal income on taxable income in excess of Rs.100,000 a month, effective from April 1, 2023.

The taxable income, i.e., anything earned above the tax-free threshold of Rs.1.2 million, will then be taxed under six income slabs of Rs.500,000 each up to the fifth slab, which makes the taxable income to a cumulative Rs.2.5 million. The starting tax rate of 6 percent applicable on the first slab will incrementally go up at each slab at 6 percent, until the fifth slab is taxed at 30 percent. 

Any excess income above Rs.2.5 million will then be taxed at 36 percent, which is the highest rate. Further, the current applicable expenditure relief of Rs.1.2 million, which is available for resident individuals, will not be applicable effective from October 1, 2022. The expenditure relief for the six months ended on September 30, 2022 will be Rs.600,000.  Meanwhile, introducing changes to the corporate income tax, the standard tax rate was raised to 30 percent, effective from October 1, 2022, with concessionary rates that are currently at 14 percent and 18 percent being rescinded from the same date.  In the run up to these changes in tax rates, the exporters and free trade zone manufacturers balked at subjecting them under the standard tax rate after remaining under the concessionary categories, while the ICT sector also expressed its displeasure over the absence of preferential treatment.  Meanwhile, the higher 40 percent rate would continue on gains and profits from what is termed as ‘sin industries’, such as betting and gaming and liquor and tobacco. 

Further, the capital gains tax applicable on realisation of investment assets by companies have also been subjected to the 30 percent tax, up from 10 percent, effective from October 1.  

The changes to the tax law also introduced mandatory Advance Income Tax (AIT) on payments of rent, which equal or exceed Rs.100,000 per month at 10 percent, interest or discount at 5 percent, paid dividends at 15 percent and all other payments at 14 percent. 

Meanwhile, the Withholding Tax (WHT) at the rate of 14 percent was introduced on payment of service fee or an insurance premium with a source in Sri Lanka to a non-resident while a 5 percent WHT was introduced on a slew of payments exceeding Rs.100,000 a month to a resident individual.  

As a result, 5 percent of the income will be withheld as WHT from those who earn service fees by engaging in teaching, lecturing, examining, invigilating or supervising an examination and service fee as a commission or brokerage to a resident insurance, sales or canvassing agent.

Further, the same 5 percent WHT will be applicable for services provided by individuals in the capacity of independent service providers such as doctor, engineer, accountant, lawyer, software developer, researcher, academic or any individual service provider as may be prescribed by regulation.