Colombo GMT+6
EY Street address:
Mail address: 201 De Saram Place P.O. Box 101 Colombo 10 Colombo 10 Sri Lanka Sri Lanka
Executive contacts
Duminda Hulangamuwa
Sulaiman Nishtar
+94 (11) 267-8007, +94 (11) 557-8101
Fax: +94 (11) 557-8180 Email: duminda.hulangamuwa@lk.ey.com
+94 (11) 557-8103 Fax: +94 (11) 557-8180 Email: sulaiman.nishtar@lk.ey.com
Roshini Fernando +94 (11) 557-8141
Fax: +94 (11) 557-8180 Email: roshini.fernando@lk.ey.com
This chapter is based on the Inland Revenue Act No. 24 of 2017 (effec tive from 1 April 2018), which was subsequently amended by the Inland Revenue (Amendment) Act No. 10 of 2021. The respective amend ments take effect as specified, either from 1 April 2018, 1 April 2019, 1 April 2020 or 1 April 2021.
As of 1 Jan 2021, the exchange rate was LKR203 = USD1.
A. Income tax
Who is liable. An individual is liable to income tax on the taxable income for the year of assessment and any final withholding pay ment during the year of assessment. Taxable income equals the total of the individual’s assessable income from employment, business, investment and other sources for that year of assessment after deducting applicable reliefs.
The assessable income of a resident individual for a year of assess ment from any such main source referred to above is the income (gains and profits) from such source, wherever the source arises.
The assessable income of a nonresident individual for a year of assessment from any such main source is the income to the extent that it arises in or is derived from a source in Sri Lanka.
An individual is considered a tax resident individual for a year of assessment if he or she meets any of the following criteria:
• He or she resides (lives) in Sri Lanka.
• He or she is present in Sri Lanka for a period or periods aggre gating 183 days or more in a 12-month period that commences or ends during the year.
• He or she is an employee or an official of the Government of Sri Lanka, and his or her spouse is posted abroad during the year (both the individual and the spouse are considered resi dent).
• He or she is an individual employed on a Sri Lanka ship accord ing to the meaning in the Merchant Shipping Act, for the period during which the individual is so employed.
Income subject to tax. The taxation of various types of income is described below.
Employment income. For the purposes of the taxation of employ ment income, employment includes past, present or prospective employment.
Income from employment includes any wages, salary, allowance, directors’ fees, leave pay, pension, shares of a company received through a share option scheme (see below) or similar compensation, as well as the value of any benefits given to an employee (or to his or her spouse, child or parent), directly or indirectly, in money or in kind. An allowance means any form of allowance paid in the course of employment and includes travel and entertainment allowances. Benefits include taxes borne by the employer on behalf of the employee, the personal use of a company-provided automobile and the value of housing facilities provided by the employer.
In addition, the value of the benefit to the employee from the allotment or the grant of the shares (that is, the exercise of the option and transfer of ownership of the shares to the employee) is also taxable as employment income. Regarding certain bene fits, the Commissioner General of Inland Revenue specifies a fair market value thereof for tax purposes. In appropriate situa tions, such values can be used.
However, certain benefits are not taxable. They include the fol lowing:
• The reimbursement or payment of dental, medical or health insurance expenses by the employer if the benefit is available to all full-time employees in the same grade of service on equal terms
• The payment or reimbursement of expenses incurred by the individual on behalf of the employer
• The value of a right or an option to acquire shares at the time of granting such shares under an employee share option scheme (liability arises only at the time of allotment of shares)
Subject to any conditions specified by the Commissioner General of Inland Revenue, contributions made by an employer to an employee’s account with a pension, provident or savings fund approved by the Commissioner General of Inland Revenue is exempt from income tax.
Amounts received from a provident fund approved by the Commissioner General of Inland Revenue as terminal benefits from employment are exempt from income tax.
Amounts received from a pension fund, gratuity fund or the Employees Trust Fund that represents income from investments made by such funds after 1 April 1987 are exempt from income tax.
The employment income of government-sector employees is tax able, except for the following:
• Pensions or retirement benefits
• Benefits received or derived from a road vehicle permit issued to that employee
Compensation derived by diplomatic representatives and offi cials employed by international agencies, such as the United Nations and specialized agencies of the United Nations, are exempt from tax.
Business income. For the purposes of business income, business includes a past, present or prospective business.
A person’s income from business consists of the gains and profits from conducting business. Such income from business also includes service fees, amounts received in consideration for accepting a restriction on the capacity to conduct business, gifts received, and any amounts derived that are effectively connected with the business and that would otherwise be included in that person’s income from investment. The Inland Revenue Act specifies the amounts that fall within business income and those that do not fall within such income.
In calculating a person’s income from business, only the expens es specified are deductible. The Inland Revenue Act includes a general provision as a residual rule. Under this provision, expens es that are incurred during the relevant year in the production of income from the business can be deducted, except for specifi cally disallowed expenses.
Effective from 1 January 2020, partnerships are taxed on taxable income exceeding LKR1 million at a rate of 6%. If the taxable income includes gains on the realization of investment assets, such gains are taxable at a rate of 10%.
Investment income A person’s income from investment consists of the person’s gains and profits from investments.
Gains and profits from investments include the following:
• Dividends, interest, discounts, charges, annuities, natural resource payments, rents, premiums and royalties
• Gains from the realization of investment assets (see next paragraph)
• Amounts derived as consideration for accepting a restriction on the capacity to conduct the investment
• Gifts received with respect to investments
• Winnings from lotteries, betting and gambling
• Other amounts required to be included
A gain from the realization of investments equals the amount by which the sum of the consideration received for the asset or lia bility exceeds the cost of the asset or liability at the time of realization. The realization of an asset occurs when asset is sold, exchanged, transferred, distributed or canceled, or a similar event occurs. A loss incurred on the realization of an asset cannot be set off against a gain from realization of an asset.
Other income Other income is income from any other sources, not including profits of a casual or nonrecurring nature.
Exemptions. Items that are exempt from income tax are described below.
Capital sums paid as compensation or a gratuity with respect to personal injuries suffered by the person or from the death of another person are exempt from tax.
Effective from 1 January 2020, any foreign-source income derived in foreign currency remitted to Sri Lanka through a bank is exempt from income tax.
Income from any service rendered in or outside Sri Lanka to a person that is to be utilized outside Sri Lanka is exempt from income tax if the payment is made in foreign currency through a bank to Sri Lanka.
Income of a nonresident person from income derived by providing laboratory services or standards certification services is exempt from income tax.
Interest or a discount received or realization of any gain by a nonresident person (other than a Sri Lankan permanent establishment) from investment in sovereign bonds denominated in local or foreign currency issued on or on behalf of the Government of Sri Lanka is exempt from tax, effective from 1 April 2018.
Interest income of a person from sovereign bonds denominated in foreign currency, including Sri Lanka Development Bonds, issued by or on behalf of the Government of Sri Lanka is exempt from income tax, effective from 1 April 2018.
Interest accruing or derived by a person from foreign currency in a foreign-currency account opened by him or her or on his or her behalf in a commercial bank or any specialized bank with the approval of the Central Bank of Sri Lanka is exempt from income tax.
Interest paid to persons outside Sri Lanka on loans granted by such persons to persons in Sri Lanka or to the Government of Sri Lanka is exempt from income tax.
Dividends received by a person out of another dividend received by a resident company is exempt from income tax.
Dividends received by a nonresident person from a resident com pany is exempt from income tax.
Dividends paid by resident companies that have entered into agreements with the Board Of Investment (BOI) of Sri Lanka and that are engaged in specified businesses, such as entrepôt trade, providing front-end services to clients abroad, headquarters operations of leading buyers for management of financial supply chain and billing operations and logistic services, such as bonded warehouse or multi-country consolidation in Sri Lanka, are exempt from income tax.
Dividends from shares invested in a nonresident company that are derived by a person who has a substantial participation in the nonresident company are exempt from income tax.
Gains from the realization of an investment asset that do not exceed LKR50,000 are exempt from tax if the total realization for the year of assessment does not exceed LKR600,000 and if cer tain other specified conditions are satisfied.
A gain from the realization of an individual’s principal place of residence is exempt from tax if it had been owned by the individual continuously for the three years before the gain was
realized and if it had been lived in by the individual for at least two of those three years.
Gains on the realization of shares quoted in any official list pub lished by the Securities and Exchange Commission of Sri Lanka are exempt from tax.
The following items of other income are exempt from tax:
• A prize received as an award made by the President of Sri Lanka or by the government in recognition of the creation of an invention or any research undertaken by that person
• Amount received from the President’s Fund or the National Defence Fund
• Winnings from a lottery if the gross amount does not exceed LKR500,000
• Amount derived from the sale of gems on which withholding tax has been deducted
• Income from sale of produce of an undertaking for agrofarming without subjecting such produce to any process of production (effective from 1 April 2019)
• Income from providing information technology and enabled services as may be prescribed
• Foreign-source income if the gains or profits are earned or derived in foreign currency and remitted through a bank in Sri Lanka
Qualifying payments and other reliefs. For all resident individuals (including employees) and for nonresident individuals who are Sri Lanka citizens, a personal relief of LKR3 million is granted each year of assessment with respect to taxable income, other than from gains from the realization of investment assets.
A deduction for a donation made in money to an approved chari table institution may be claimed, subject to a maximum of 1/3 of the individual’s taxable income or LKR75,000, whichever is less.
A donation made in money or otherwise to the government of Sri Lanka, a local authority, funds established by the government of Sri Lanka or by a local authority and other specified institutions, is deductible in full in determining taxable income.
An amount equal to 25% of total rental income is granted as relief for repairs, maintenance and depreciation relating to an investment asset if no deduction is claimed for actual expenses incurred with respect to such items.
The following reliefs are available, totaling up to a maximum of LKR1,200,000:
• Health expenditure, including contributions to medical insur ance policies
• Education expenses incurred locally for the individual or on behalf of his or her children
• Interest paid on housing loans
• Contributions made by an employee to a local pension scheme (other than for a scheme under the employer)
• Expenditure incurred for the purchase of quoted shares or quoted financial instruments or treasury bills
Withholding tax. Effective from 1 January 2020, Pay-As-YouEarn (PAYE) tax was replaced by Advance Personal Income Tax (APIT), which is deductible (as withholding tax) in a manner similar to prior PAYE, but only with the consent of the respective employee. Any employee who does not consent to the deduction of APIT has to pay tax on the employment income on a selfassessment basis.
Consent of the respective employees is not required to deduct APIT if the payments are made to nonresident employees or if the payments are terminal benefits.
Because the threshold of the personal tax allowance is LKR3 million, the deduction of APIT applies only to resident or citizen employees whose monthly remuneration exceeds LKR250,000 per month.
An employee whose monthly remuneration exceeds LKR250,000 must open an income tax file at the Inland Revenue Department and file the annual income tax return.
An employee should furnish a Primary Employment Declaration to the employer, indicating that the employment is his or her primary employment. An employee who has not furnished such a declaration or who has more than one employment will be sub ject to withholding tax under APIT (if consent has been granted by the employee) under secondary employment at the rates specified by the Inland Revenue Department.
Withholding tax on all payments to resident persons has been abolished, effective from 1 January 2020. As a result, resident recipients of all types of income should pay income tax on such income on a self-assessment basis.
Any payments made to nonresident persons that have a source in Sri Lanka are liable to withholding tax. The applicable withhold ing tax rates for such payments, subject to the provisions of rel evant double tax treaties, are the following:
Type of payment
Withholding tax rate (%)
Dividends Exempt Interest (excluding exempt interest) 5
On payments for land, sea, air transport or telecommunication services 2 On other payments (excluding specific payments) 14
The rates of income tax that apply to resident individuals for a year of assessment commencing on or after 1 April 2020 are set forth in the following table.
Taxable income Tax rate Tax due Cumulative tax due LKR % LKR LKR
First 3,000,000 6 180,000 180,000 Next 3,000,000 12 360,000 540,000 Above 6,000,000 18
Gains from the realization of investment assets included in an individual’s taxable income are taxed a rate of 10%.
The following special tax rates apply to terminal benefits, such as amounts received as commutation of pension, retiring gratuity and compensation for loss of office under a scheme uniformly applicable to all employees:
• Up to LKR10 million: 0%
• Next LKR10 million: 6%
• Above LKR20 million: 12%
The rate for compensation for loss of office payments not approved by the Commissioner General of Inland Revenue is 18%.
Relief for losses. In calculating the income from business, the unrelieved losses for the year from any other business can be deducted. Unrelieved losses can be carried forward for six years to be set off against income from business.
B. Other taxes
Economic Service Charge. The Economic Service Charge (ESC) was abolished, effective from 1 January 2020.
Nation Building Tax. The Nation Building Tax (NBT) is abolished, effective from 1 December 2019.
Value-added tax. The standard rate for value-added tax (VAT) is 8%, effective from 1 December 2019. A 0% rate applies to exports of goods and services. Certain goods and services are exempt from VAT. The turnover threshold applicable to registra tion for VAT is LKR300 million per year or LKR75 million per quarter.
However, persons who wish to voluntarily register for VAT (an existing person or a new person) is given the option to register or reregister for VAT.
Stamp duty. Stamp duty is imposed on the following instruments:
• Specified instruments executed, drawn or presented in Sri Lanka
• Specified instruments executed outside Sri Lanka with respect to property in Sri Lanka and presented in Sri Lanka
It does not apply to the following:
• Letters of credit that are subject to Ports and Airport Develop ment Levy
• Specified instruments exempted by gazette notifications
• Share certificates
• Credit card usage (locally; for foreign purchases, the rate is 2.5%)
The stamp duty on the transfer of immovable property continues to apply.
C. Social security
Sri Lanka’s social security contribution rates rarely change. Most employees are covered by the Employees’ Provident Fund (EPF) Act of 1958. The act requires employees to contribute 8% of total earnings and employers to contribute 12% of employees’ earn ings.
In addition, employers must contribute an amount equal to 3% of each employee’s total earnings to the Employees’ Trust Fund (ETF). This contribution is not deducted from the employee’s earnings.
When employment ends, in addition to receipt under the above, a gratuity is payable to employees under the Payment of Gratuity Act of 1983, which equals to half of one month’s salary for each year of service. To qualify, an employee must have worked for the employer for more than five years.
ETF benefits, and gratuity benefits paid under a uniform scheme, that exceed the exemption limit of LKR5 million (if the period of contributions exceeds 20 years) or LKR2 million (in other cases) are taxed at a maximum rate of 10%. However, gratuity payments for retirement in excess of a certain amount are taxed at normal tax rates. This amount is equal to the greater of LKR1,800,000 or the average salary for the last three years of employment, multiplied by the number of years of service.
D. Tax filing and payment procedures
The income tax year in Sri Lanka is from 1 April to 31 March.
Income tax returns must be filed on or before 30 November fol lowing the end of the year of assessment.
Tax is withheld from employees under the Advanced Payment of Income Tax (APIT) scheme with the consent of the employees. Consent for deduction is not required for payments to nonresi dent employees or for terminal benefit payments. For further details, see Withholding tax in Section A.
Employees whose monthly remuneration exceeds LKR250,000 are required to file an income tax return.
Income tax is payable in advance under a self-assessment system based on a Statement of Estimated Tax (SET) submitted in advance. Accordingly, quarterly payments are required to be paid as per such set. They are payable in four quarterly installments, which are due one and a half months after the end of each quarter. A tax return must be filed by 30 November following the tax year. Penalties are levied on late or insufficient payments.
E. Double tax relief and tax treaties
Sri Lanka has entered into double tax treaties with the following jurisdictions.
Australia Italy Poland Bahrain Japan Qatar Bangladesh Jordan* Romania Belarus Korea (North) Russian Belgium Korea (South) Federation Canada Kuwait Saudi Arabia*
China Mainland Luxembourg Seychelles
Czech Republic Malaysia Singapore
Denmark Mauritius Sweden
Finland Nepal Switzerland
France Netherlands Thailand
Germany Norway
United Arab
Hong Kong SAR* Oman* Emirates
India Pakistan United Kingdom
Indonesia Palestinian United States
Iran Authority Vietnam
* These treaties cover international air transport only.
Sri Lanka is also a party to the South Asian Association for Regional Cooperation (SARC) multilateral treaty.
In general, these treaties provide for the elimination of double taxation of income when Sri Lankan income tax and income tax of a foreign treaty country is due on the same income.
If remuneration is received by a resident of a foreign state for employment exercised in Sri Lanka, the remuneration is taxable only in the foreign state if, in general, all of the following condi tions are satisfied:
• The recipient is in Sri Lanka for a period not exceeding 183 days in the relevant fiscal year.
• The remuneration is paid by a nonresident employer.
• The remuneration is not borne by a permanent establishment or a fixed base maintained by the employer in Sri Lanka.