The Sri Lankan Budget 2025, presented on February 17, 2025, introduced several important changes to the tax system. These changes will affect both individuals and businesses. In this blog, we will explain the key tax amendments in simple terms to help you understand how they may impact you.
1. Income Tax Changes
Removal of Estimated Tax Statement (SET) The requirement to file the Statement of Estimated Tax (SET) has been removed from 2025/2026 onwards. This means taxpayers will no longer need to estimate their tax payments in advance. Instead, they will only file their actual tax return after the year ends. This change aims to simplify tax procedures and reduce administrative burdens on individuals and businesses.
Tax Payment Based on Previous Year From 2025/2026, tax payments will be calculated based on the amount of tax paid in the previous year. This method makes tax estimation easier for individuals and businesses but also requires careful record-keeping to ensure compliance. Taxpayers should maintain accurate financial statements to avoid discrepancies.
Capital Gains Tax (CGT) Increase The tax on profits from selling properties or other assets has increased:
- For individuals and partnerships: 15%
- For companies and other entities: 30% This increase means that those earning profits from selling land, buildings, or shares will have to pay more tax. It is advisable to plan asset sales strategically to minimize the tax burden.
Withholding Tax (WHT) Relief for Senior Citizens
- Senior citizens earning less than Rs. 1.8 million per year will not have tax deducted from interest earned on their bank deposits.
- Other individuals earning below this limit can apply for a refund of any tax deducted from their interest income. This measure helps ease the financial strain on retirees and low-income individuals, ensuring they retain more of their earnings.
New Tax Residency Rules
- A holder of Golden Paradise Resident visa will be treated as a non-resident for income tax purposes;
- Any individual who is deemed to be a resident for income tax purpose only due to the reason of he is being employed in a Sri Lanka flagged vessel, will be treated as a resident in Sri Lanka during the period he is so employed; and
- Any individual who is a citizen or subject of any country other than Sri Lanka, but deemed to be a resident in Sri Lanka due to the reason of he is being employed in a Sri Lanka flagged vessel, will not be liable to income tax as a resident in respect of any income that has no source in Sri Lanka, other than his income from employment in such ship. These changes clarify tax obligations for expatriates and seafarers, making Sri Lanka a more attractive destination for foreign professionals and investors.
2. Value Added Tax (VAT) Changes
VAT on Digital Services Online services and digital platforms will now be required to collect VAT. This includes streaming services, e-commerce, and other digital businesses. This move aligns Sri Lanka with global trends in digital taxation and ensures that online companies contribute to tax revenues.
Removal of Simplified VAT (SVAT) The SVAT system will be removed, and a new risk-based VAT refund system will be introduced. A pilot project will be launched to test the new process. This means businesses must adapt to new VAT refund procedures, which could impact cash flow and financial planning.
Mandatory Use of POS Machines Businesses registered for VAT must start using Point of Sale (POS) machines to record transactions. This will help improve tax collection and transparency, reducing instances of tax evasion and underreporting.
3. Social Security Contribution Levy (SSCL) Updates
- Container terminal operators involved in international transport will now have to pay this tax.
- Machinery and equipment used for electricity generation will be exempt from SSCL if an agreement with the Ceylon Electricity Board (CEB) was signed before February 18, 2025. These updates ensure that key industries contribute fairly while supporting critical infrastructure projects.
4. Stamp Duty Increase
The tax on leases and hire agreements has doubled from 1% to 2%. This means leasing or hiring property will now cost more in stamp duty. Businesses and individuals entering into lease agreements should factor in these increased costs when planning their budgets.
5. Betting & Gaming Levy Changes
- The tax on revenue from betting and gaming businesses has increased from 15% to 18%.
- The entrance fee for casinos has increased from USD 50 to USD 100. These changes aim to increase government revenue from the gambling industry, particularly from high-income earners and tourists visiting casinos.
6. Changes in Tax Appeals and Compliance
- The appeal fee for tax disputes has increased to Rs. 15,000.
- To appeal a tax assessment, taxpayers must now deposit 25% of the disputed tax amount before the appeal is processed. This will make it more expensive for businesses and individuals to contest tax assessments, encouraging early resolution of tax disputes.
Final Thoughts
The 2025 Budget tax changes aim to increase government revenue and improve tax compliance. Businesses will need to adjust to new VAT rules and higher tax rates, while individuals can benefit from tax relief measures for low-income earners and senior citizens.
In addition, the government is focusing on digital tax collection, increasing transparency, and streamlining the tax system to make compliance easier. If you need guidance on how these changes affect you or your business, contact Talentspark Consulting today for expert advice on tax compliance and planning.
By understanding these changes early, individuals and businesses can plan better and ensure they meet their tax obligations without unnecessary penalties or delays.
