Tax experts warn 20% ‘immunity’ rule could undermine IRD scrutiny

• 20% tax increase rule criticised as creating ‘immunity’ and weakening IRD oversight
• CGT to rise from 10 to 15%, with limited window to benefit from lower rate
• Expanded withholding tax, stricter compliance rules under amendments

By Shannine Daniel

Suresh Perera	Rifka Ziyard

The proposed amendments to the Inland Revenue Act have sparked debate among tax experts, particularly over a provision that could limit the ability of authorities to scrutinise tax returns.

Under the new framework, taxpayers who increase their tax payments by at least 20 percent compared to the previous year, and submit an affidavit declaring no fraud, deviation or willful default, would have their returns accepted without further inquiry by the Inland Revenue Department (IRD).

While the measure is positioned as a way to encourage voluntary compliance, KPMG Sri Lanka Tax and Regulatory Head Suresh Perera raised strong concerns about its potential implications. He described the provision as effectively granting a form of “immunity” to taxpayers willing to meet the 20 per cent threshold.
“If somebody may argue that you have to file an affidavit saying there is no fraud, deviation, or willful default, how can the IRD find out if there is fraud, deviation or willful default, when the Inland Revenue officers’ hands are tied with regard to verifying information from the taxpayer,” Perera said, speaking at a webinar on recent amendments to the Income Tax, Valued Added Tax (VAT) and the Social Security Contribution Levy (SSCL) hosted by KPMG Sri Lanka.

He warned that the burden placed on Inland Revenue officers would be impractical, as proving fraud or willful default without access to adequate information would be challenging. He said this could inadvertently encourage tax evasion rather than compliance. 

Perera further argued that higher-income individuals or entities might exploit the rule by increasing payments by 20 percent to avoid deeper scrutiny, adding that this is not a good idea.

Alongside this measure, the amendments will also introduce a notable increase in capital gains tax (CGT). According to KPMG Sri Lanka Tax and Regulatory Principal Rifka Ziyard, the rate for individuals and partnerships is set to rise from 10 percent to 15 percent once the law is enacted.

“The effective date of this is the date of enactment. If individual capital gain transactions are still being carried out, they will go under the rate of ten per cent until this is passed into law,” Ziyard explained, noting a narrow window to finalise disposals at a lower tax cost.

The revised framework maintains a distinction between taxpayer categories, with trusts, unit trusts and mutual funds continuing to face a higher 30 percent CGT rate. 

Additional changes aim to streamline compliance, including the removal of Statements of Estimated Tax and expanded withholding tax rules covering more professionals, such as consultants, with penalties for non-compliance.

Ziyard stressed that procedural compliance remains critical, urging taxpayers to respond promptly to IRD notices to avoid legal consequences under the strengthened enforcement framework.