On 8 April 2020, the Inland Revenue Department (IRD) of Sri Lanka published a revised version of a notice regarding the implementation of proposed amendments to the Inland Revenue Act, No. 24 of 2017.

As instructed by the Ministry of Finance on 31 January 2020 and 05 March 2020, following changes have been proposed to the Inland Revenue Act, No. 24 of 2017 (IRA), pending formal amendments being made to the Act and to be implemented with effect from January 01, 2020, unless otherwise stated.

1. Removal of Withholding Tax (WHT) on the payments for Resident Persons

Requirement for deduction of WHT (including PAYE) on any payment which is due and payable to any of the following persons by any Withholding Agents (WHA) is removed;

a) Resident employee in respect of the services performed (employment) by such employee.

However,

i. Retaining part of the payment of terminal benefits in lieu of income tax by the employer/ETF/Provident Fund is required. (A separate guideline has been published for this purpose by a Circular No. SEC/2020/02 dated 18.02.2020).

ii. With effect from 01.04.2020, on the request of employee whose gross remuneration for a month exceeds Rs. 250,000 per month or Rs. 3,000,000 for a year of assessment, an Advance Personal Income Tax could be deducted by the employer.

b) Resident person in respect of the dividend, interest, discount, charge, natural resource payment, rent, royalty, premium or retirement payment received and /or on service performed by such individual.

However, with effect from 01.04.2020, if any of above payment is a regular fixed payment (interest, rent etc.), on the request of the recipient, an Advance Income Tax could be deducted by the payer of such payment (if such payer is a WHA), as per the declaration made to the WHA.

c) Resident partner in respect of the partner’s share of profit allocated by the partnership.

d) Resident individual in respect of any service fee paid [referred to in section 85(1)(a) of the IRA as published in the notice on 01.01.2020].

However, WHT on following payments to be made to any person shall continue to apply:

• Amounts as winning from lottery, reward, betting or gambling – 14%.
• Sale price payable to the seller of any gem sold at an auction conducted by the National Gem & Jewellery Authority – 2.5%.

2. WHT on the payments to Non-Resident Persons

Deduction of WHT is applicable by any person on or after January 01, 2020, on any payment which has a source in Sri Lanka and is due and payable to any non-resident person.

The tax (WHT) shall be deducted at the rate as appended, subject to the provisions of relevant Double Tax Avoidance Agreement (DTAA), on any of the following payments;

• Dividend – Exempt
• Interest (Excluding exempt Interest) – 5%. However, deduction of WHT on interest payments to any non-resident individual but who is a citizen of Sri Lanka, should be made, if his aggregate interest income from a bank/financial institution exceeds Rs. 250,000 per month or Rs. 3,000,000 for the year of assessment (for the period from 01.01.2020 to 31.03.2020 if exceeds Rs. 750, 000).
• Any other payment [excluding the payments under section 85(2)and exempt gains & Profits]- 14%.

Deduction of WHT under section 85(2) and Extraordinary Gazette Notification No. 2064/51 dated April 01, 2018, remains unchanged. Accordingly, when a resident person makes a payment to a non-resident person with respect to land, sea, air transport or telecommunication service is subject to WHT at 2% of the payment, subject to the provisions of relevant DTAA.

3. Revision of Company Tax Rates

The updated company tax rates are following: