Tax Implication of Budget 2025

Understanding the Key Amendments to Taxes in Budget 2025

In the recent Budget 2025, presented by President Anura Kumara Dissanayake in his capacity as Minister of Finance today (17.02.2025), several key amendments have been proposed to Sri Lanka’s Income Tax system. (These amendments have been sourced from the technical note of Budget 2025.)

Please note that in the Finance Minister’s speech, he mentioned that the proposals introduced on December 18, 2024, including the increase in personal tax relief to Rs. 1.8 million and other related measures, will continue. However, we observed that these provisions are not included in the technical note.

If you would like to review the proposals from December 18, 2024, please refer Tax Proposals on 18th Dec 2024

Our summary based on the technical note is provided below.

1.Income Tax (Amendments to the Inland Revenue Act, No.24 of 2017)

1.1 Removal of Statement of Estimated Tax (SET)

The requirement for filing the Statement of Estimated Tax payable (SET) will be removed starting from the Year of Assessment 2025/2026. This means that taxpayers will no longer need to submit an estimate of their tax liabilities for the upcoming year. Instead, they will only be required to file their actual tax return after the end of the year, based on the income earned and taxes due.

1.2 Calculation of Tax Payable Based on Previous Year

Provisions will be introduced to calculate the amount of tax payable based on the income tax payable from the immediately preceding year of assessment. This means that your tax liability for the next year will be determined by the amount of tax you paid in the previous year, making the tax calculation process more straightforward.

1.3 Exemption for Non-Resident Income

Any amounts derived by non-resident persons for services like air crafts, software licenses, or other related services from the Sri Lanka Air Force will be exempted from taxation. This move aims to encourage foreign businesses and professionals to engage in activities that benefit Sri Lanka.

1.4 Withholding Tax (WHT) for Senior Citizens

One of the most significant changes in the Budget 2025 relates to the withholding tax (WHT) applicable to senior citizens. 

i. No Withholding Tax Deduction for Senior Citizens with Income Below Rs. 1.8 Million

• What’s Changing:
  Senior citizens whose total assessable income from all sources does not exceed Rs. 1.8 million will not have WHT deducted from the interest earned on deposits.

• Why This Matters:
  This exemption will help senior citizens retain the full amount of interest earned on their savings without the tax deduction, providing relief to those living on fixed income.

ii. Refund of WHT for Other Individuals

• What’s Changing:
  Any individual, other than senior citizens, whose total assessable income does not exceed Rs. 1.8 million will be eligible to receive a refund for any WHT deducted from their interest payments.

• Why This Matters:
  This ensures that individuals with lower income who fall below the threshold of Rs. 1.8 million are not unfairly taxed. They will be able to claim back any tax deducted, which makes the tax system more equitable.

iii. Guidelines for Declaration

• What’s Changing:
  The Commissioner General of Inland Revenue (CGIR) will issue relevant guidelines regarding the declaration format that individuals must use to confirm their assessable income.

• Why This Matters:
  A clear and standardized process will be implemented for individuals to submit their income declarations to financial institutions. This ensures that the exemption or refund process works smoothly and transparently.

1.5 Manual Filing for Senior Citizens

Senior citizens will now be able to file their income tax returns manually starting from the Year of Assessment 2024/2025. This change recognizes the challenges that some senior citizens may face with digital platforms and ensures they can still fulfill their tax obligations with ease.

1.6 Clarification on Life Insurance Proceeds and Policyholder Payments

The Budget proposes provisions to clarify whether life insurance proceeds and other amounts received by policyholders will be subject to income tax. This will provide greater transparency and certainty for policyholders, helping them understand how their insurance payouts will be treated for tax purposes.

1.7 Expansion of Tax Treatment for Transfer of Assets

The current tax treatment under Section 46 of the Inland Revenue Act, which applies to the transfer of ownership of assets to an associate of an individual or a charitable institution, will be expanded.

• What's New:
  The new amendments will include the transfer of assets to the Sri Lankan Government or to a university established or deemed to be established under the Universities Act, No. 16 of 1978. This expansion broadens the scope of tax treatment, encouraging support for government and educational institutions.

• Why This Matters:
  This change facilitates asset transfers that benefit government initiatives or educational institutions, supporting social and economic development.

1.8 Increase in Capital Gains Tax (CGT)

The Capital Gains Tax (CGT) rate applicable for individuals and partnerships will be raised to 15%. Similarly, the CGT rate for other entities will be increased to 30%, aligning it with the corporate capital gains tax rate.

• What's Changing:
  • Individuals and Partnerships: CGT will be increased to 15%.
  • Other Entities: The rate for all other entities will be increased to 30%.
• Why This Matters:
  This tax increase aims to ensure that gains from asset sales are appropriately taxed, contributing to government revenue. The increase for non-individual entities aligns their rates with those applicable to corporations.

1.9 Authorization to Waive Interest on Tax Liabilities

The Commissioner General of Inland Revenue (CGIR) will be authorized to waive interest imposed under the provisions of the Inland Revenue Act, No. 24 of 2017, and the Surcharge Tax Act, No. 14 of 2022, in specific circumstances:

• Conditions:

  • The tax liability must have arisen for the Year of Assessment 2022/2023 or any previous year of assessment.
  • The total amount of tax must be paid within six months of the statutory amendment.

• Why This Matters:
  The provision allows the CGIR to waive penalties or interest charges in certain cases where taxpayers promptly pay their tax liabilities. This flexibility encourages timely compliance and helps taxpayers avoid excessive financial burdens.

1.10 Changes to Tax Residency Rules

The tax residency rules will be revisited to provide clarity on specific categories of individuals:

i. Golden Paradise Resident Visa Holders

• What's Changing:
  Holders of the Golden Paradise Resident visa will be treated as non-residents for income tax purposes.

• Why This Matters:
  This change aligns tax residency rules with the growing trend of foreign investors and expatriates obtaining long-term visas. It ensures that visa holders are not taxed as residents for their global income.

ii. Individuals Employed on Sri Lanka Flagged Vessels

• What's Changing:
  Any individual who is deemed to be a tax resident due to being employed on a Sri Lanka flagged vessel will be treated as a resident in Sri Lanka during their employment period.

• Why This Matters:
  This provision ensures that employees working on Sri Lankan vessels are taxed in Sri Lanka while they are employed there, even if they are not otherwise considered tax residents of the country.

iii. Non-Sri Lankan Citizens Working on Sri Lanka Flagged Vessels

• What's Changing:
  Non-Sri Lankan citizens employed on Sri Lanka flagged vessels will not be liable for income tax on income from sources outside Sri Lanka, except for income earned from their employment on such ships.

• Why This Matters:
  This aims to clarify the tax obligations of non-resident foreign workers on Sri Lankan vessels, ensuring they are only taxed for the income earned within Sri Lanka, aligning their tax liabilities with the source of their income.

2. Value Added Tax (VAT) [Amendments to the Value Added Tax Act, No.14 of 2002]

2.1 Exemption for Packing Materials Used for Pharmaceuticals and Ayurvedic Medicines

The import of packing materials used for packing pharmaceuticals or Ayurvedic medicines manufactured in Sri Lanka will be exempt from VAT. This applies to cases where such packing materials are imported by the manufacturer, and these materials are not produced locally in Sri Lanka.

• Why This Matters:
  This exemption is introduced to support the pharmaceutical and Ayurvedic industries in Sri Lanka, encouraging local manufacturing by reducing costs associated with importing packaging materials.

2.2 Provisions for VAT on Digital Platforms

Provisions will be introduced to regulate VAT on services provided through digital platforms. This will include defining the manner of registration, charging, collection, filing returns, and other procedures related to VAT on services offered by digital platforms.

• Why This Matters:
  As the economy becomes more digital, this amendment aims to bring clarity to the taxation of digital services, ensuring that VAT is properly applied to businesses operating online or through digital services.

2.3 Amendments Related to the Removal of SVAT and Refund Process

Amendments will be introduced to remove the Simplified VAT (SVAT) system and streamline the VAT refund process. These changes will also include provisions to facilitate an efficient VAT refund system under the new VAT Act.

• Why This Matters:
  The removal of SVAT and improvements to the VAT refund process will simplify the administration of VAT, making it easier for businesses to comply and for the government to process refunds quickly.

2.4 Replacement of SVAT with a Risk-Based Refund System

The Simplified Value Added Tax (SVAT) system will be replaced by a risk-based refund system. To ensure the effective implementation of this new system, a pilot project will be conducted to test and refine the process, and it will operate through the RAMIS (Revenue Administration Management Information System) under the Risk-Based Refund Scheme.

• Why This Matters:
  By introducing a risk-based approach, the government aims to streamline VAT refunds and reduce delays. This system will also help identify businesses with higher risks for audit and inspection, improving compliance.

2.5 Entertainment Tax Deduction for Film Exhibition Services

The entertainment tax charged by local authorities on the supply of film exhibition services will be allowed as a deductible expense when calculating the value of the supply of these services.

• Why This Matters:
  This amendment provides a tax relief for businesses in the entertainment sector, allowing them to offset the cost of entertainment tax against their income, ultimately promoting the growth of the film and entertainment industry.

2.6 Supply of Goods and Services to "Business of Strategic Importance"

The supply of goods or services to businesses classified as a "Business of Strategic Importance" will be subject to VAT exemptions as per the regulations in the Colombo Port City Economic Commission Act, No. 11 of 2021. These businesses will also benefit from grants and incentives under the Colombo Port City regulations.

• Why This Matters:
  This exemption aims to attract investment in strategic sectors identified by the government, such as those related to the Colombo Port City project, and stimulate economic growth by offering tax relief for businesses involved in critical development projects.

2.7 Write-off of VAT Arrears for Tsunami Projects

VAT arrears related to projects conducted by construction contractors for Tsunami recovery projects will be written off, based on the records maintained by the Commissioner General of Inland Revenue.

• Why This Matters:
  This provides relief to contractors involved in post-Tsunami reconstruction projects, helping them clear outstanding VAT liabilities that arose during the recovery period. This is an effort to recognize the long-term impact of the Tsunami and the need to support businesses that contributed to rebuilding affected communities.

2.8 Disallowance of Input Tax Deduction for Capital Goods

The input tax deduction on capital goods such as machinery, equipment, or vehicles imported for projects will not be allowed if the VAT at the time of import is deferred.

• What's Changing:
  The amendment disallows the input tax deduction for capital goods like machinery, equipment, and vehicles that are imported for projects if VAT on those items is deferred at the time of import.

• Why This Matters:
  This change ensures that businesses do not claim input tax deductions on capital goods imported with deferred VAT. This is aimed at simplifying the VAT process and ensuring that the proper taxes are paid when the goods are imported, reducing potential tax avoidance through deferred payments.

2.9 Mandatory Use of Point of Sale (POS) Machines for VAT-Registered Persons

The use of Point of Sale (POS) machines will be made mandatory for all VAT-registered businesses and will be operationalized.

• What's Changing:
  The Point of Sale (POS) system, which is already widely used in retail and other industries, will now be a mandatory requirement for all VAT-registered businesses. This ensures that VAT payments are recorded and collected efficiently at the point of sale.

• Why This Matters:
  Making POS machines mandatory is a step towards greater digitization and transparency in the VAT collection process. It will enable businesses to automatically record VAT transactions and ensure that taxes are being properly collected and reported to the tax authorities, reducing manual errors and enhancing tax compliance.

3. Social Security Contribution Levy (SSCL) [Amendments to the Social Security Contribution Levy Act, No.25 of 2022]

3.1 Definition of "Transportation of Goods and Passengers"

The term "transportation of goods and passengers" will be defined to include services provided in relation to international transportation by container terminal operators.

• What's Changing:
  The definition of "transportation of goods and passengers" will now specifically include services provided by container terminal operators involved in international transportation. This means that these services will be subject to the SSCL, ensuring that container terminal operators contribute to the social security fund.

• Why This Matters:
  By expanding the definition, the government ensures that all relevant transport services, including those related to international cargo handling, are taxed under the SSCL framework. This will help create a more comprehensive system that accounts for all forms of transport involved in global trade.

3.2 Clarification on Exemption for Certain Articles

Exemption provided under Item 4 of Part 1B of the First Schedule of the SSCL Act will be clarified to include the wholesale or retail sale of the specified articles.

• What's Changing:
  The amendment will clarify that the exemption for certain articles under the SSCL Act extends to wholesale and retail sales of those articles, in addition to other sales methods previously included.

• Why This Matters:
  This clarification will provide greater certainty to businesses in the wholesale and retail sectors, ensuring that they understand the tax exemptions applicable to the products they sell. It also reduces ambiguity around the scope of the exemption, making it easier for businesses to comply with the tax laws.

3.3 Exemption for Machinery and Equipment for Electricity Generation

Exemption under Item 24 of Part 1A of the First Schedule of the SSCL Act will be granted for machinery or equipment imported or purchased locally for the purpose of generating electricity by any institution that has entered into an agreement with the Ceylon Electricity Board (CEB) prior to February 18, 2025.

• What's Changing:
  Machinery or equipment imported or purchased locally for the purpose of generating electricity will be exempt from SSCL, provided that the institution has an agreement with the Ceylon Electricity Board (CEB) before the specified date of February 18, 2025.

• Why This Matters:
  This exemption aims to support the growth of the renewable energy sector in Sri Lanka by reducing the tax burden on businesses involved in electricity generation. The requirement for a prior agreement with the CEB ensures that the exemption is targeted at projects that align with the country’s energy goals.

4. Stamp Duty

4.1 Increase in Stamp Duty for Leases and Hires

The Stamp Duty applicable on any instrument related to the lease or hire of property will be increased from Rs. 10 to Rs. 20 for every Rs. 1,000 or part thereof of the total lease or hire amount, including any premiums payable for the entire lease term (other than hire purchase agreements).

• What's Changing:

  • The Stamp Duty for leases and hires of property will now be calculated at Rs. 20 for every Rs. 1,000 of the total lease or hire amount.
  • This increase in the Stamp Duty applies to the total lease term (excluding hire purchase agreements).
  • The change will take effect from March 1, 2025.

• Why This Matters:
  The increased Stamp Duty rate, which currently stands at 1%, will now rise to 2%. This means that businesses and individuals entering into property lease or hire agreements will need to account for a higher cost when registering these agreements.

  For example, if the total lease or hire amount for a property over the term is Rs. 1,000,000, the Stamp Duty would previously have been Rs. 10,000. With the increase, the Stamp Duty will now be Rs. 20,000 for the same amount.

5. Betting and Gaming Levy (Amendments to the Betting and gaming Levy Act, No. 40 of 1988

The Betting and Gaming Levy Act, No. 40 of 1988 has undergone some key amendments in Budget 2025. These changes impact the Gross Collection Levy and the Casino Entrance Levy. Here’s an overview of the key points:

5.1 Increase in Gross Collection Levy

• Current Rate:
  The Gross Collection Levy for betting and gaming activities in Sri Lanka is currently 15%.

• Proposed Change:
  The levy will be increased to 18% starting from Budget 2025.

• Why This Matters:
  The increase in the Gross Collection Levy will result in a higher tax burden for businesses involved in betting and gaming activities. This change is expected to boost government revenue from these sectors. The increased levy may also impact the pricing and operations of betting and gaming businesses, particularly in the tourism and entertainment industries.

5.2 Increase in Casino Entrance Levy

• Current Rate:
  The current Casino Entrance Levy is USD 50.

• Proposed Change:
  The levy will be increased to USD 100 for each entrance to a casino.

• Why This Matters:
  The increase in the casino entrance fee is aimed at raising additional revenue from the gaming sector. This change will directly affect casino operators and tourists or residents who frequent casinos. The higher entrance fee may also affect the overall revenue generation from this sector, as well as the appeal of casinos for local and international visitors.

6. Tax Appeals Commission Act, No.23 of 2011

6.1 Increase in Fee for Court of Appeal Opinions

• The fee to state a case for the opinion of the Court of Appeal will increase from the current amount to Rs. 10,000.

6.2 Increase in Appeal Fee

• The fee to make an appeal to the Tax Appeals Commission (TAC) will be increased to Rs. 15,000, as per the Gazette Notification under Section 8 of the TAC Act.

6.3 Mandatory Bank Guarantee for Appeals

• The appellant must provide a bank guarantee to the Commissioner General of Inland Revenue (CGIR) when appealing, regardless of their decision to appeal to the Court of Appeal.

6.4 Cash Deposit Requirement for TAC Appeal

• To appeal to the TAC, a 25% cash deposit of the disputed tax, penalty, and interest must be made into a special account opened by the CGIR.

6.5 Administrative Review Requirement Before Appeal

• Appeals to the TAC will only be allowed if there was an administrative review first, or if the CGIR’s decision on such a review is deemed to have been disallowed.

6.6 Provisions for Settling Disputes

• New provisions will allow for settlement discussions between the CGIR and the appellant during the hearing, subject to supervision by the Commission.

6.7 Panel Members’ Term of Office

• The term of office for Legal Advisers to the Commission will be aligned with the term of the Commission's members, with eligibility for reappointment.

6.8 Increase in Term of Office for Commission Members

• The term of office for members of the Commission will be increased from 3 years to 5 years from the date of their appointment.

Source :  Technical Note -Budget 2025