Two tax bills to amend VAT and IR Act
View(s):Two Tax Bills to amend the principal Value Added Tax (VAT) Act and the Inland Revenue Act were published in the gazette last week.
The Inland Revenue Amendment Bill introduces income tax refunds- personal income tax of Rs.100,000 per year and Rs.25,000 per quarter, Suresh R I Perera, Principal – Tax and Regulatory at KPMG in Sri Lanka said noting that the amendment allows non-senior citizens with a tax refund claim of Rs.100,000 for 2023/2024 and 2024/2025 to receive the refund within three months, before a tax audit. The bill aims to reduce the refund claim amount from Rs.100,000 to Rs.60,000 retrospectively for the past two years without auditing for the prior year. In the current law, senior citizen resident individuals are entitled to receive their refund claims which do not exceed Rs.25,000 per quarter within three months of the refund claim being made (quarterly refunds).
DIR Circular
Earlier the Department of Inland Revenue (DIR) issued a Circular dated September 25, 2023, under Section 150(2A) of the IRA, which sets out that senior citizen resident individuals are entitled to receive refund claims which do not exceed Rs. 25,000 per quarter subject to the condition that the refund claim for the Year of Assessment does not exceed Rs.60,000. The contents of the circular which was unfavourable to senior citizens was not in alignment with the Amending Act No. 4 of 2023, Mr. Perera said. “The latest Amendment Bill is attempting to legally incorporate the unfavourable situation created by the circular, into the law with retrospective effect to both senior citizens as well as resident individuals who were not senior citizens, for the past 2023/2024 and 2024/2025,” he added.
He also noted that for future years (i.e. starting from April 1, 2025), the latest Amending Bill has created a favourable situation for senior citizens and resident individuals who are not senior citizens. “As per the said Bill, all resident individuals are entitled to a higher refund claim of up to Rs.180,000 per year before audit and senior citizens have the added advantage of being entitled to a refund claim quarterly if the said refund claim is less than Rs.45,000 per quarter (which used to be Rs.25,000 earlier).”
The bill proposes a reduction in the time frame for income tax refund claims from four years to 30 months from the date of filing the return.The bill increases Personal Relief from Rs. 1.2 million to Rs.1.8 million for each year of assessment, allowing Sri Lankan citizens to deduct it from their taxable income. It also amends tax rates and slabs. The first slab which was earlier Rs.500,000 taxed at 6 per cent, is now increased to Rs.1 million. In addition, the second slab rate, which was earlier 12 per cent has now been increased to 18 per cent.
Starting in 2025/2026, companies and individual service exporters in Sri Lanka will be taxed at 15 per cent on foreign currency income from services used outside the country and remitted to the country via banks. Mixed-income service exporters will receive a personal relief of Rs.1,800,000 against local income. The Advance Income Tax rate on interest or discount payments will increase to 10 per cent.
VAT Amendment Bill
Starting April 1, 2025, non-resident services provided via electronic platforms in Sri Lanka will be subject to 18 per cent VAT, with the Commissioner General of Inland Revenue dictating payment methods.
The Simplified VAT scheme (SVAT) will be abolished in this bill which was published on February 21, 2025. The bill introduces a risk-based refund scheme, allowing eligible exporters to receive refunds without audit, depending on their risk grading. Exporters with Medium and Low-risk grading can receive refunds within 45 days, while those with High risk grading require pre-verification.
The amendment bill mandates VAT registration for all commercial exporters or importers, regardless of tax exemptions. The DIR will specify the tax invoice format through Gazette Notification. E-filing of VAT returns is mandatory for taxable periods starting on or after July 1, 2025.
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