Starting April 1, 2025, Sri Lanka will implement some important updates to its tax laws under the Inland Revenue (Amendment) Act, No. 2 of 2025. These changes aim to enhance tax compliance, improve the tax revenue system, and offer new opportunities for businesses and individuals to benefit from increased thresholds and revised tax rates.
1. Refunds of Overpaid Taxes: What’s Changing?
One of the most noteworthy updates under the new Act is how overpaid taxes can be refunded. The good news is that the maximum refund limits are increasing, making it easier for taxpayers to get back more of their money when they overpay. Previously, taxpayers could claim refunds of up to Rs. 60,000 annually or Rs. 15,000 per quarter. However, from April 1, 2025, this limit will be raised to Rs. 180,000 per year and Rs. 45,000 per quarter. This increase provides businesses and individuals with more financial flexibility. But there’s a catch: the timeline for submitting refund claims will now differ based on the assessment year. For claims related to assessment years before April 1, 2024, taxpayers still have 4 years to submit their refund claims. However, for assessment years after April 1, 2024, claims must be filed within 30 months from the end of the assessment year. These deadlines may seem generous, but they still require careful planning and timely submissions to ensure you don't miss out.
2. Tax-Free Threshold for Individuals
In a bid to provide more financial relief to individual taxpayers, the government is raising the tax-free threshold. Starting April 1, 2025, individuals earning up to Rs. 1.8 million annually will no longer have to pay income tax. This means that lower-income earners stand to benefit from a significant reduction in their tax burden, allowing them to keep more of their hard-earned money.
3. New Tax Rates for Individuals: A Progressive Approach
In addition to the increased tax-free threshold, the government is introducing a new, more progressive tax system for individuals, which will come into effect in April 2025. Here’s a breakdown of the updated tax rates based on income brackets:
- Up To Rs. 1,800,000 – Tax-free (No tax applies)
- First Rs. 1,000,000- tax rate is 6% tax.
- Second Rs. 500,000 – tax rate is 18% tax
- Third Rs. 500,000 – tax rate is 24% tax
- Fourth Rs. 500,000 – tax rate is 30% tax
- For the balance – individuals will pay 36% tax
These new tax rates reflect a progressive approach where higher income earners will contribute a larger proportion of their earnings toward taxes, while still providing some relief for middle and lower-income earners.
Want to estimate your tax liability? Use the our Tax Calculator to calculate your payable tax based on the latest rates.
4. Business Income Tax Rates: Focus on High-Revenue Sectors
Business owners will also see changes in their tax responsibilities under the new Act. Sectors such as betting, gaming, liquor, and tobacco will face an increase in tax rates, with businesses in these sectors being taxed at 45%. This change comes as part of a broader initiative to raise revenue from high-profit industries.
On the other hand, businesses generating foreign income and providing services utilized outside Sri Lanka will benefit from a tax rate of just 15%. This preferential tax rate is designed to encourage businesses to engage in international trade and investment, benefiting from a favorable tax structure for foreign income and services. For other businesses, the tax rates will remain aligned with the new individual tax brackets, depending on the nature of the income.
5. Tax on Interest and Discounts: A New Rate for Financial Transactions
Interest and discount payments, which were previously taxed at 5%, will now face a tax rate of 10% starting April 1, 2025. This increase in tax on financial transactions could affect businesses and individuals who regularly deal with loans or financial discounts, leading to higher costs in some cases.
6. Language Priority: Ensuring Clarity in Interpretation
A significant change under the new Act is the introduction of a language priority rule. If there is any discrepancy between the Sinhala and Tamil versions of the Act, the Sinhala version will be considered the final, authoritative version. This decision aims to reduce confusion and maintain consistency in interpreting and applying the law.
What Do These Changes Mean for You?
The Inland Revenue (Amendment) Act No. 2 of 2025 brings several important changes that will affect both individuals and businesses across Sri Lanka. Here are the key takeaways:
- Higher tax rates for high-income earners and businesses in specific sectors like gaming, betting, and tobacco.
- Increased refund limits, but with stricter deadlines for submission.
- A higher tax-free threshold of Rs. 1.8 million, benefiting lower-income earners.
- A progressive tax rate system for individuals that imposes higher taxes on larger incomes.
- Reduced tax rates for businesses generating foreign income or providing international services.
- A new tax rate of 10% on interest and discount payments.
These amendments reflect the government’s ongoing efforts to boost tax revenue and compliance while providing relief to lower-income earners and encouraging international trade. For businesses and individuals alike, it’s important to understand how these changes will affect your tax obligations and make sure you're prepared for the adjustments that take effect from April 2025.
At Talentspark Consulting, we specialize in helping businesses navigate complex tax landscapes and stay compliant with all tax regulations. If you need expert advice or assistance with the new tax laws, our team is here to guide you through the process and ensure you make the most of these changes. Source: Inland Revenue Tax Amendment ACT, No. 2 OF 2025
