Recent Tax Updates

Sri Lanka’s tax landscape has undergone a range of changes in 2025 and new measures have been introduced that affect key tax types including personal income tax, corporate tax, value added tax (VAT), and withholding tax. Understanding these changes helps individuals and businesses stay compliant and plan effectively.

Personal Income Tax

Key Updates:

• The personal tax-free allowance has been increased. Individuals earning up to LKR 150,000 per month are now exempt from personal income tax.
• A revised progressive income tax rate structure applies for income above the exempt threshold. For example, the first segment of taxable income is taxed at a lower rate (6%) under the new thresholds effective 1 April 2025.
  
  

Implications:
This change provides tax relief for middle-income earners, reducing the immediate tax burden on salaries and personal earnings.

Corporate & Business Tax

Key Changes:

• The exemption on export of services has been removed. This means profits from services exported and paid in foreign currency are now subject to tax, typically at 15%, effective from the 2025/26 tax year.
• Certain industries such as betting, gaming, tobacco, and liquor face higher corporate tax rates for their gains and profits.
• Advance Income Tax (AIT) rates on interest income and other categories have been increased from previous levels, impacting cash flow and tax planning.
  
  

Implications:
Businesses engaged in service exports will need to revisit pricing structures and tax compliance processes. Companies in high-impact sectors should also adjust their financial planning to accommodate increased corporate tax liabilities.

Value Added Tax (VAT)

Recent Developments:

• A key change in the VAT framework is the **imposition of 18% VAT on digital services supplied by non-resident providers through electronic platforms to Sri Lankan consumers, effective 1 October 2025. This includes services such as cloud computing, software subscriptions, and digital advertising.
• The amended VAT law also replaced the simplified VAT (SVAT) scheme with a VAT refund mechanism, and changes to VAT treatment on certain goods/services have been introduced.
• Additionally, proposals under the 2026 budget include reducing the VAT registration threshold from LKR 60 million to LKR 36 million, effective 1 April 2026, which will bring more small and medium enterprises into the VAT net.
  
  

Implications:
Businesses that consume digital services from abroad may experience increased costs as providers pass on VAT costs. Locally VAT-registered businesses should prepare for the expanded VAT base and changes to registration thresholds.

Withholding Tax & Other Direct Taxes

Highlights:

• Changes to withholding tax (WHT) include an increase in rates for interest income and certain other payments, which affects both individuals and corporations.
  
  

Implications:
With higher WHT rates, careful attention to tax withholding procedures is crucial to avoid shortfalls or penalties during filing and compliance reviews.