The law raises capital gains taxes, offers targeted relief for employees, investors, and charitable institutions, and introduces stricter compliance measures to modernise the country’s tax system.
Sri Lanka’s government has issued a Bill amending the Inland Revenue Act on 20 February 2026, marking substantive tax changes and compliance reforms. Published in the gazette on 24 February 2026, it introduces capital gains tax rate revisions and targeted relief for taxpayers and investors.
Capital gains tax increases
The amendment raises capital gains tax rates for the following entities, effective immediately:
- Individuals and Partnerships: Rate increases from 10% to 15%.
- Trusts, Unit Trusts, and Non-Governmental Organisations: Rate rises from 10% to 30%.
- Exemption: Gains from the sale of motor vehicles are excluded from taxable profits from other sources.
Targeted relief and incentives
The law introduces provisions to reduce tax burdens and encourage investment:
- Salary Arrears Credit: Employees receiving arrears due to reinstatement or promotions can claim a credit to avoid higher tax penalties.
- Life Insurance Benefits: Most life insurance payments—including death, maturity, or surrender proceeds—are exempt from assessable income.
- Interest Write-Off: The Commissioner-General may waive interest on unpaid taxes if the principal and penalties are settled within six months.
- Investment Incentives: New undertakings investing USD 250,000–3 million in depreciable assets can claim a 100% capital allowance.
- Charitable Institutions: Charities providing care for the sick or needy may receive a tax credit equal to the tax payable on their taxable income.
Enhanced compliance measures
The amendment strengthens tax administration through stricter rules:
- Mandatory TIN Submission: From 1 April 2026, individuals must present their TIN Certificate for key activities, including opening bank accounts, registering motor vehicles, obtaining building approvals, and land registration.
- Bank Payment Requirement: Business deductions may be denied if payments are not made via a bank account.
- Magistrate’s Court Recovery: The Commissioner-General can recover tax defaults through the Magistrate’s Court, with unpaid taxes treated as fines.
- Time Limits for Evidence: Documents not provided within six to nine months of a request will be inadmissible in court or Tax Appeals Commission proceedings.
- Company Registration: All companies must register with the Commissioner-General within 30 days of incorporation.
- Prosecution Powers: Failure to file tax returns, annual statements, or register for a TIN may result in fines up to LKR 400,000 or imprisonment.
The amendments are intended to modernise Sri Lanka’s tax system, enhance compliance, encourage investment, and provide relief to taxpayers, representing a comprehensive update to the country’s revenue framework.
