Taxpayers face tighter compliance regime after passage of Inland Revenue Bill

• Tax expert Suresh Perera notes policymakers have been flexible to withdraw 3 clauses of bill in response to objections from stakeholders, before Supreme Court case
• Among clauses withdrawn at committee stage was a controversial “evidentiary lockout” provision

Sri Lanka’s taxpayers are facing a far tougher compliance regime after Parliament on Tuesday (19) passed the Inland Revenue Bill, with the committee stage amendments, cementing sweeping new powers that could criminalise the key tax administration failures and intensify the recovery action against the defaulters.
While several controversial provisions were withdrawn or softened, following stakeholder objections and Supreme Court scrutiny, the tax experts said the final law still marks a decisive shift towards stricter enforcement, with non-compliance now carrying potential fines, court proceedings and even imprisonment in certain cases.
KPMG Sri Lanka Head of Tax and Regulatory Suresh Perera said the passing of the bill reflects a significantly tougher compliance environment, where the failures to meet the statutory tax obligations could now trigger far stricter legal consequences for the taxpayers.
“Now the law has been passed and the taxpayers are obliged to be compliant with the law, failure of which would result in the legal consequences newly spelt out in the law,” Perera said.
At the centre of the reforms is Clause 34, which introduces a new Section 185A into the Inland Revenue framework, formalising criminal prosecution for the taxpayers who fail to meet five statutory obligations, including tax registration, filing annual returns, furnishing information requested by authorities and appearing for examinations when summoned by the Inland Revenue Department (IRD).
Under the provision, the taxpayers who fail to comply even after receiving a 30-day notice from the Commissioner General of Inland Revenue could face a fine of up to Rs.400,000, imprisonment for up to six months or both.
The Supreme Court upheld the clause, ruling that structural compliance is essential for an effective revenue system and noting that the law provides adequate warning and opportunity for the taxpayers to rectify the failures before the prosecution begins.
The bill also introduces a major shift in tax recovery through Clause 31(4), allowing the unpaid taxes to effectively be treated as court-imposed fines recoverable through the Magistrate’s Court proceedings. In cases where the taxpayers fail to show sufficient cause for non-payment, the debt could ultimately expose them to imprisonment under the criminal procedure laws.
However, following the Supreme Court’s intervention, amendments were introduced, preventing the IRD from initiating recovery proceedings while the administrative reviews or appeals before the Tax Appeals Commission remain pending.
Perera noted that the policymakers had shown some flexibility by withdrawing several contentious clauses before the Supreme Court hearing, including the proposed changes linked to thin capitalisation rules, life insurance taxation and evidentiary restrictions during the appeals.
Among the clauses withdrawn at committee stage was a controversial “evidentiary lockout” provision that would have permanently barred the taxpayers from submitting documents after strict IRD deadlines during the appeals or court proceedings.
The tax analysts said the legislation reflects the government’s broader push to tighten revenue administration as Sri Lanka continues fiscal reforms under the International Monetary Fund-backed programme, with the authorities under pressure to improve tax collection and compliance levels after years of weak enforcement.
The changes are also expected to significantly raise the stakes for businesses and individuals that have historically delayed registrations, filings or responses to the IRD notices, transforming what were previously viewed as administrative lapses into matters carrying potential criminal consequences. (SAA)