Starting and running a business in Sri Lanka can be incredibly rewarding—but it also comes with responsibilities, especially when it comes to tax compliance. Whether you're a new entrepreneur or managing an established company, understanding your tax obligations is critical for staying legally compliant and building a sustainable business.
In this blog, we’ll explore five essential types of taxes that individuals and businesses must pay in Sri Lanka. Understanding these taxes will help you avoid penalties, maintain credibility, and ensure long-term success.
1. Income Tax
Income tax is one of the most important taxes to understand, as it applies to both individuals and businesses. In Sri Lanka, income tax is imposed on:
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Personal income
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Business profits
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Investment income
If you're operating as a sole proprietor, a partnership, or a limited liability company, you are required to file an income tax return and pay tax on your net profit. The applicable tax rate depends on the type of taxpayer and the level of income.
Failing to declare your income properly can lead to severe penalties, including fines and interest on unpaid taxes. Regular filing and accurate bookkeeping can keep your business safe and on the right track.
2. Value Added Tax (VAT)
Value Added Tax (VAT) is a consumption-based tax imposed on the sale of goods and services. It also applies to goods imported into the country. In Sri Lanka, VAT is applicable to businesses that exceed a certain annual turnover threshold. Who Is Liable to Register for VAT ? VAT is chargeable on the following types of businesses:
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Manufacturers
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Importers
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Service providers
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Suppliers under tender agreements
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Wholesale and retail traders
If your business is registered for VAT, you must charge VAT on eligible sales, collect it from customers, and remit it to the Inland Revenue Department (IRD). Failure to comply with VAT regulations can result in fines, audits, and reputational damage.
VAT compliance shows your customers and partners that your business is operating legally and transparently.
3. Withholding Tax (WHT)
Withholding Tax (WHT) is a tax that is deducted at the time of making specific payments such as:
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Interest payments
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Dividends
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Rent
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Service fees
If your business is making such payments to individuals or other businesses, you may be required to deduct WHT and pay it to the IRD on behalf of the recipient. This tax mechanism helps the government collect taxes efficiently and ensures that tax is paid even before income is received by the payee.
Proper WHT compliance demonstrates your responsibility as a taxpayer and reduces the risk of future disputes with tax authorities.
4. Social Security Contribution Levy (SSCL)
Introduced to support social security and welfare programs, the Social Security Contribution Levy (SSCL) is imposed on:
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Importers
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Manufacturers
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Service providers
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Wholesale and retail businesses
If your business falls under any of these categories, you are liable to pay SSCL on your turnover. Even if you are not paying other types of taxes, if your business activity falls under these categories, you still have to register for and pay SSCL.
5. Advance Personal Income Tax (APIT)
Advance Personal Income Tax (APIT) is a pay-as-you-earn system, where employers are responsible for deducting tax from their employees’ monthly salaries and paying it to the IRD. As an employer, you are legally obligated to:
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Calculate the correct APIT based on your employee’s earnings
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Deduct it before salary disbursement
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Remit it on time to the Inland Revenue Department
APIT ensures that employees’ tax liabilities are settled in advance, reducing their burden at year-end and ensuring steady government revenue collection.
Why Paying Taxes on Time Matters
Staying up to date with tax payments is not just about avoiding fines—it’s about building trust and credibility. Here’s why it matters:
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Legal Compliance: Avoid legal issues, audits, and penalties.
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Business Credibility: Gain trust from investors, banks, and partners.
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Smoother Growth: Tax compliance supports expansion, funding, and investment.
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Reputation: Be seen as a responsible and ethical business.
Get Help From the Experts
At Talentspark Consulting, we understand that navigating the tax system can be overwhelming—especially for new business owners. Our team is here to help you:
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Understand which taxes apply to your business
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Register with the Inland Revenue Department
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File returns accurately and on time
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Avoid penalties and stay compliant
Contact us today to get expert support tailored to your business needs.
Final Thoughts
Being a successful entrepreneur in Sri Lanka requires more than just passion—it requires responsibility. Understanding and complying with key tax obligations such as Income Tax, VAT, WHT, SSCL, and APIT will protect your business from legal troubles and help it grow with confidence.
Stay informed. Stay compliant. And let your business thrive the right way.
