Why does a country need to impose a tax system? What are the benefits and who enjoys them?
A country is able to raise revenue by taxes. It is called “fiscal capacity”. The revenue collected in taxes is used to build and improve infrastructure, state formation & provide good public goods and services. Therefore, it is ultimately the taxpayer of the country who reaps benefits. Developing countries are able to raise only a small share as taxes. It is usually between 10% – 20% of the GDP. Developed nations on the other hand raise around 40%.
You will find two types of taxes in Sri Lanka as direct & indirect taxes. According to the Central Bank of Sri Lanka reports of 2018, 89% of the government expenditure is covered by taxes. Only 11% comprises as non-tax revenue. At the moment Sri Lanka faces continuous budget deficits because government expenditure exceeds the tax revenue.
Here is general guidance on Sri Lankas Taxes and how they are calculated.
Income Tax (Individual)
Whether you are a resident of the country or a non-resident you are subject to pay income tax. Residents are charged on their global income/profit while non-residents are charged based on the income/profits derived from Sri Lanka. Income Tax is charged on a yearly basis. The assessment year is the period between 1st April to 31st March of the following year.
A resident is a person who stays in the country for 183 days or more.
Types of Income generated are:
- Income from employment.
- Income from business.
- Income from Investments.
- Income from other sources.
Sri Lanka has a self-assessment system for income tax. Consequently, any person who has the tax liability must come forth and make payments. He/she should remit payments in four quarterly instalments. Following are dates payable:
- 1st quarter- On or before August 15 of the same year.
- 2nd quarter- On or before November 15 of the same year.
- 3rd quarter- On or before 15th February of the same year.
- 4th quarter- On or before May 15 of next year.
Payments made at least a month before due date allows individual a 10% discount.
However, failing to meet dead lines he/she risks facing penalties. 10% of the default tax is payable if late payments are made within a month. A further 2% additional payable for every month thereafter. The individual needs to pay at least 25% of the amount to avoid penalties.
What is a tax return form?
A tax return form is a document which discloses a persons Income details. It may contain claims applicable deductions, exemptions & taxes to be paid on your income.
The due date to present this form is on or before 30th November following the end of every assessment year. Failing to do so may have its consequences. You will be paying a penalty of LKR.50,000($360). You will also lose time bars to raise an assessment.
Read also: Income Tax Return in Sri Lanka
Who are subject to paying income tax?
According to the Inland Revenue Act, a resident person in Sri Lanka must pay Income Tax on income derived in Sri Lanka or from another country. A non-resident in Sri Lanka should pay taxes for income generated in the country.
For income generated outside of Sri Lanka by a non- citizen, (who is currently employed in the country), the tax is inapplicable.
- Citizens of Sri Lanka who are residents of Sri Lanka or a non-resident for an assessment year, receives an aggregate relief of LKR.500,000 for that year of assessment.
- Also, citizens enjoy an additional relief of (max) LKR.700,000 on employment income.
Tax Rates in Sri Lanka
Taxes are calculated on progressive rates according to taxable income. Current applicable are;
|1st LKR.600,000||4% of the taxable income.|
|Next LKR.600,000||8% of the taxable income.|
|Next LKR.600,000||12% of the taxable income.|
|Next LKR.600,000||16% of the taxable income.|
|Next LKR.600,000||20% of the taxable income.|
|Gains from Investment assets||10%|
|Income from betting & gaming, liquor or tobacco||40%|
|Tax on terminal employment benefits.|
Rates are exempted in the following situations:
- On the first 5 Million where the employment period is not less than 20 years.
- On the first 2 Million where the employment period is less than 20 years.
- On the next 1Million 5% applies & on the balance 10%.
- Compensation for loss of employment (maximum rate) – 24%.
Tax Rates for Companies
Taxable income of a company – 28%.
Export Businesses, Agricultural, Educational, promotion of tourism, information technology are subject to a tax rate of 14%. Tax rates for employees’ trust fund stands at 14%.
Relocating international business in Sri Lanka is not tax deductible until 3 years.
24% of tax rate applies to taxable income of tax.
14% of rate applies to charitable organizations.
Withholding Tax in Sri Lanka
This system in place required to withholding a certain local and international payments. Banks deduct WHT at 2.5% from partnerships, charitable institutions, or any individual. Other payments that WHT applies to are dividend, management fee, fees for technical services and royalty.
WHT applicable on income received as Investment return;
Interest or discount paid to a person 5%, Interest paid to a senior citizen (60+) 5%, Rent paid to a resident person 10%, in all other cases (royalty, natural resources, dividend, reward etc.) 14%.
Economic Service Charge
ESC is charged on every persons’ relevant turnover. If a company’s quarterly turnover exceeds 12.5Million then a 0.5% is applicable.
Value Added Tax in Sri Lanka
VAT is a tax applicable on domestic consumption of goods & services. The standard rate is 15%. VAT on financial services is at 15%. 15% VAT applies to;
Wholesale or retail businesses with turnover not less than 12.5Million. The subject matter of this tax are imported goods, goods & services supplied within the country.
A registered person should bear the responsibility of, displaying the certification at the premises, issuing tax invoices, keeping accounts for relevant periods, paying taxes on time, furnishing returns on time & informing changes on time.
Nation Building Tax in Sri Lanka
NBT introduced in 2009 was to see to the welfare of security forces & rebuilding of infrastructure affected by terrorism. The cost of the tax is borne by the end-user.
NBT is payable by persons who import items, manufacturers, retail & wholesale operators of goods & services. Some tourism related matters, gem imports for re-exports, equipment necessary for coconut oil are exempted from NBT.
Standard rate on turnover is 2%. Wholesale & retail companies pay 1% of turnover as NBT.
Pay As you Earn Taxes (P.A.Y.E)
Every employer deducts a PAYE tax at the time of paying monthly salaries.
Deductions are made on monthly regular profits;
|Up to Rs.100,000||– exempt|
|Rs.100,000-150,000||– 4% of monthly regular profits less Rs.4000/-|
|Rs.150,000-200,000||– 8% of monthly regular profits less Rs.10,000/-|
|Rs.200,000-250,000||– 12% of monthly regular profits less Rs.18,000/-|
|Rs.250,000-Rs.300,000||– 16% of monthly regular profits less Rs.28,000/-|
|Rs.300,000-350,000||– 20% of monthly regular profits less Rs.40,000/-|
|Exceeding Rs.350,000||– 24% of monthly regular profits less Rs.54,000/-|
Capital Gain Tax (CGT)
CGT is a tax on gains realized on transfer of ownership. This may include sale, exchange, transfer, distribute, or surrender of investment etc.
Standard CGT rate is 10%.
- Customs Duty – Imposed on goods entering Sri Lanka. Rates vary by type of product.
- Excise Duty – imposed on Liquor, cigarettes and other excisable products.
- Stamp Duty – imposed on specific instruments such and shares, deeds, insurance policies, based on instrument value.
- Share Transaction Levy – On the turnover of buyer & seller 0.3%.
- Betting & Gaming Levy – Betting business through agents, Rs. 4,000,000/ with live telecast facilities Rs.600,000, if live telecast is not used Rs,50,000/ Business of gaming per place of business Rs. 200,000,000, Tax on gross collection on betting 10% (only if the value doesn’t exceed 1 Million Rupees).
- Debt repayment Levy – 7% of the value addition on financial services.
- Rapidly know about business companies in Sri Lanka.