There are many reasons why a country would impose taxes or tariffs. One such reason is to develop infrastructure of the country. This may include, public transportation, education, health. Taxes help the government to improve the living conditions of a country. In other way, it creates more employment opportunities. In general, these are what that a government aim for when imposing taxes.
- To increase GDP (Economic growth)
- Lower the rates of unemployment
- Lower inflation
- Distribution of wealth
- Equalizing the balance of payments
Sri Lanka, being a developing country in the southeast Asian region would have many benefits by imposing tax. Withholding tax in Sri Lanka is therefore passively contributes in nation’s economic and social developments.
The country with its robust economy has seen a growth at 3.7% in 2019. It strives to make the transition to an upper middle-class income nation. The country focuses on long-term strategic & structural development. The country would greatly benefit in imposing of taxes to fulfill its journey to success!
The Sri Lanka Inland Revenue (IRD) does collecting and monitoring of tax. Withholding Tax or retention tax is a type of income Tax. It is payable to the government by the recipient of the income not the payer. There are separate Agents who carry out the collection of the tax money and submit to the IRD.
The Inland revenue Act No.24 of 2017 is the reference to withholding Agents to calculate this tax.
Here are brief guidelines on applying the Withholding Tax on payments to residents & nonresidents.
Withholding Tax in Sri Lanka on Investment Returns
Payment or allocation generated in Sri Lanka to any resident or non-resident is subject to Withholding Tax.
- The payment of dividends,
- Interest generated from financial institutes
- Various charges
- Natural resource payments
- rent payment on property
- royalty premium
- retirement payment gets subjected to this tax.
Which means profits shared with company’s shareholders?
after subjected to a Withholding tax will not receive the fullest amount. Instead, they receive their share after deduction of the tax.
The other type of earning that falls under this section is, winnings from lottery, reward, betting or gambling. For example, if someone wins a lottery of 10 Billion Sri Lankan Rupees, he or she will receive a lesser amount. Because it would have had a tax reduction.
Also, in a Partnership, a certain partners’ relevant share of the income also gets subjected to a percentage as the Withholding Tax.
In an instance of a Gem sold in an auction organized by the National Gem & Jewelry. The seller would set the price which would include the withholding tax. Thus, the buyer will be paying the price of the gem with the addition of the tax.
Types of Payments subjected to WHT reductions
Payment to a resident Individual
Service providers also get taxed for funds made in Sri Lanka and the individual is a resident of Sri Lanka.
Following are the categories that they fall into:
- Teachers, Invigilators, examination supervisors & lecturers who are educators
- Insurance brokerage and sales commission or canvassing agents’ fees
- Endorsement fee
- Supply of Contract basis articles through tender and quotations
- Doctors, Engineers, accountants, lawyers, software developers, researchers, academics or similar professions
- Construction work, entertainment, janitorial, even planners, catering, designers, tour guides, dress makers
- Management services
- Individual vocational service providers
Payments to a non-resident person:
- Service fee or Insurance premium sourced from Sri Lanka paid by a person to a non-resident person
- Payments made to a non-resident by a resident of Sri Lanka for services and products received by Land, sea, air or telecommunication.
- The Withholding Tax in Sri Lanka are applied to payments which is made to deliver passengers. Even payments for Cargo, mail or even movable, tangible assets will get subjected to this tax. These should directly embark in Sri Lanka.
- Rented Containers and equipment which are supplementary or necessary to carriage
- Telecommunication Services
- Payments received by an individual who is in the business of telecommunication.
- Method of transmission of messages is not relevant. They could be via cable, radio, optical fibre, satellite or even electronic communication.
- Messages also need not originate in Sri Lanka as well.
Time of deduction:
Now that we have a brief idea about the conditions where withholding tax is applicable, let us go in depth about what time we should deduct the tax.
- At the point when the payment is made to any person.
- Credited to a bank account on behalf of a recipient
- When allocating a partner’s relevant share of income
- When a service or contract fee is paid to any person
There are some situations when the withholding tax in Sri Lanka is not deductible:
- When employees receive payment, which are subjected to PAYE (Pay as You Earn tax) from employers.
- When individuals make payments (unless it is for business purposes)
- When an individual pays interest on an ordinary loan and advances provided it is non-deductible
- Interest or discounts paid to any person on security or Treasury bond or treasury bills
- Special instances in which the withholder possess a certificate that qualifies his/her exemption
(This certificate is issued by the Commissioner General of Inland Revenue. The certificate can be collected at the Business consultation Unit or any regional office by making a request.)