Sri Lanka’s New Tax Proposals: Impact on Individuals and Businesses

On December 18, 2024, the President of Sri Lanka announced a series of tax reforms aimed at balancing fiscal consolidation with social relief. Below is a summary of the key proposals and their impacts:

1. Revision of Personal Income Tax (Effective April 1, 2025)

The tax-free allowance will increase from LKR 100,000 to LKR 150,000 per month. Additionally, the tax slabs for the 6% rate will expand from LKR 500,000 per annum to LKR 1,000,000 per annum.
Impact:

  • Significant tax savings for individuals, especially middle-income earners.

  • Reduction in monthly tax burdens across various income levels, enhancing disposable income.

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2. Increase in Withholding Tax on Interest

The withholding tax on interest will rise from 5% to 10%. Individuals earning less than LKR 150,000 monthly can apply for an exemption.
Impact:

  • Higher immediate tax cashflows for the government.

  • Potential administrative challenges for taxpayers managing withholding tax credits.

3. Imposition of VAT on Digital Services

From April 1, 2025, VAT will apply to digital services based on consumer jurisdiction at an 18% rate.
Impact:

  • Aligns Sri Lanka’s tax system with global digital taxation practices.

  • May increase costs for consumers of digital services and compliance requirements for service providers.

4. Removal of Export Service Exemption

The exemption on income from exported services will be removed, subjecting this income to a 15% tax from April 1, 2025.
Impact:

  • Businesses in IT, BPO, and shipping sectors will face increased tax liabilities.

  • Aligns with regional taxation trends to ensure a fair contribution from service exports.

5. Changes in Corporate Tax Rates

Taxes on betting, gaming, tobacco, and liquor industries will increase from 40% to 45% from April 1, 2025.
Impact:

  • Higher revenue from these sectors.

  • Potential cost increases for consumers of affected products.

6. Exemption for Locally Produced Dairy Products

VAT exemptions for locally produced liquid milk and yogurt will be reinstated from April 1, 2025.
Impact:

  • Supports the domestic dairy industry.

  • Contributes to reducing malnutrition rates.

7. Simplified Value Added Tax (SVAT) to be Continued

The SVAT scheme, initially intended to ease cash flow burdens for exporters and zero-rated suppliers, will continue.
Impact:

  • Provides relief to exporters by mitigating delays in VAT refunds.

  • Aligns with the IMF agreement to maintain trade-friendly practices.

8. Increase in Stamp Duty on Leases

Stamp duty on leases will rise from 1% to 2%, effective January 1, 2025.
Impact:

  • Higher costs for leasing agreements.

  • Additional revenue for the government.

9. Removal of Vehicle Import Restrictions

The government has proposed a phased removal of remaining vehicle import restrictions, with full removal expected by February 2025. This includes public transport, goods transport, and general private vehicles, subject to recommendations from the Central Bank to ensure foreign currency reserves remain stable.
Impact:

  • Expected to rejuvenate the vehicle import industry.

  • Provides increased accessibility to vehicles for consumers while potentially boosting economic activity.

These tax reforms reflect a delicate balance between addressing fiscal demands and providing relief to individuals and businesses. While some measures will ease financial pressures, others will require adjustments by taxpayers and businesses to comply effectively.

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