• Last Update 2023-09-29 19:03:00

Taxes and the tax policy of the country


By A.A.Thilakarathne, Former Assistant Commissioner

Department of Inland Revenue


Taxation has a long history in Sri Lanka in various forms of charges and levies. Such taxes have evolved over a long period of time at deferent levels and at deferent forms up to the present day tax systems. However the present day tax system was introduced by the then British rulers with the promulgation of the Income Tax ordinance in the year 1932. Taxes were introduced to Europe in 1776 with the publication of “Wealth of Nations” by Adams Smith.   But in Sri Lanka the taxes have evolved from the period of our ancient kings in the country. Now the word “tax” has become a hot topic in the jargon in the streets of Colombo and trade union actions such as, sathyagraha, strikes, picketing and protest companies have become the order of the day due to the recent tax increase in Sri Lanka by the present government. Taxes have been increased on five occasions in the year 2022 alone. Now lets us see what the taxes so promulgated are:

1.     Value Added Tax (Amendment) Act No. 13 of 2022

This was an act to amend the Value Added Tax Act No. 14 of 2002 and it was certified by the Speaker on 31st March 2022.  By this Act, section 25C of the Value Added Tax Act No. 14 of 2022 was amended to increase the financial VAT (Value Added Tax) rate from 15% to 18% with effect from January 1, 2022 on the supply of financial services.

Financial VAT was originally imposed on the supply of financial services in Sri Lanka with effect from 01.01.2003 on the special institutions or by any person who carries on the business of financial services in Sri Lanka at the rate specified in section 25C of the Act.

Further under this Act, medical, apparatus, accessories and parts thereof hospital furniture, drugs and chemicals donated to a government hospital or the Ministry of Health for the provision of Health Services to address any pandemic or public health emergency approved by Minister were exempted with effect from 01st January 2022.

2.     Surcharge Tax Act No. 14 of 2022

This Act was passed in parliament and the Act was certified by Speaker on 08th April 2022 to impose a tax called the” Surcharge Tax”. It  was imposed on any individual, partnership or company whose Taxable Income calculated in accordance with the provision of Inland Revenue Act No. 24 of 2017 exceeds Rs. 2 billion for  the year of Assessment commencing from April 01st 2020 at the rate of 25% on the Taxable Income of such individual, partnership or a company. Main feature of this tax is that the burden of the tax cannot be transferred to the consumer as it happened in the case of indirect taxes such as VAT, GST or Turnover Tax. The taxpayer himself should bear the burden of payment of the tax. Every person liable for this tax should pay the tax in two equal installments on or before 30th July 2022.

The tax should be collected by the Commissioner General and should be remitted to the Consolidated Fund within 15 days from the date of collection. It shall be lawful for the assessment to be made in the name of the partnership and the amounts thereon shall be recoverable out of the assets of the partnership or from any partner or agent of the partnership.

3.     Social Security Contribution Levy (SSCL) Act No. 25 of 2022.

Social Security Contribution Levy was imposed by the Act No. 25 of 2022. It was certified by the Speaker on 20th October 2022. This Tax was imposed on importers, manufacturers, service providers, wholesalers and retailers whose revenue exceeds Rs.120 million per annum. Originally it was supposed to be implemented from 01st July 2022 but due to the delay of the approval, it was made effective from 01st October 2022.

The rate of tax for SSCL is 2.5% on the liable turnover and the following items have been made exempted from this tax. They are pharmaceuticals, Petrol, Diesel, Kerosene, LP Gas, Fresh milk, green leaf, Cinnamon, Rubber etc.

Following services are exempted under the Act:

Generation of Electricity and supply of electricity other than the supply of electricity by Ceylon Electricity Board, Medical Services, Supply of Water, Transportation  of goods and passengers, mentioned in the list provided under part II of the Act are have been made exempted.

Section 8 provides that every person shall furnish a return on or before 20th day immediately after the end of each relevant quarter in the specified form to the Department of Inland Revenue.

Under the SSCL, input tax is not allowed as it happens in indirect taxes such as the VAT, GST, and Turnover Tax. Input tax is allowed in VAT as an input. Therefore, the SSCL can have a major effect on the prices of goods and it (SSCL) will create a heavy burden on the customer with cascading effect on prices.  Each and every transaction is added with 2.5% of the price increase due to the effect of the Social Security contribution levy.

Accordingly it is not possible to avoid a continuous increase of prices of goods in the markets and thereby a bad effect on the inflation rate.

4.     Value Added Tax (Amendment) Act No 44 of 2022

Value Added Tax (amendment) Act No.44 of 2022 was certified by the Speaker on 14th December 2022 and when this Act comes into operation VAT is charged from persons whose value of taxable supply exceeds Rs. 30 million per quarter or Rs.120 million per annum.

By this amendment Act, the registration for Value Added Tax (VAT), VAT threshold was reduced for the persons whose value of Taxable Supply exceeded Rs. 20 million for the taxable period commencing from October 01st 2022 and tax payers were required to be registered on or before December 28th 2022.

Any other person is required to be registered for VAT not later than 15 days from the date on which the value of Taxable Supply exceeds or likely to exceed Rs. 20 million for Taxable period (3 months) or Rs. 80 million for 12 month period  from 01st June 2022- 01st October 2022 and  respectively.


VAT exemption for condominium properties removed 

The exemption provided for the supply of any condominiums residential accommodation was removed with effect from 31st December 2022. Hence supply of condominium residential accommodation will be liable to VAT with effect from 01st January 2023.

The registration threshold of Rs. 300 million (Rs. 75/- per quarter) is reduced to 80 million per annum with effect from 01st October 2022.

5.     Inland Revenue (Amendment) Act No. 45 of 2022

The Act was certified on 19th December 2022. The concessionary rate of 14% and 18% applicable on identified gains and profits such as specified undertaking, educational services, promotion of tourism, construction services, Health care services, Agro processing, gems Jewelry was increased to 30% with effect from 01st  October 2022.

The following are some of the key amendments in the Act to amend the Inland Revenue Act No. 24 of 2017. The changes listed out below have been enacted by Act and they are effective with effect from 01st October 2022:

*      Increase in standard corporate tax rate to 30%

The Act has increased the current standard corporate tax rate from 24% to 30%. The standard tax rare for trusts, unit trusts and NGOs is increased to 30%

*       14% concessionary tax rate for prioritized sectors and 18% for manufacturers - discontinued

This Act have done away with the concessionary tax rate of 14% which currently applies to sectors such as exporters of goods, specified services, agro processing, healthcare, education and SMEs and the 18% rate which currently applies to manufacturers is increased to 30%

*      Removal of certain tax exemptions

Several significant tax exemptions have been removed, notably the exemption for information technology (II) and enabled services, dividends paid to non-residents and new renewable energy projects. However, the exemptions granted for agro-farming, foreign currency services providers (service exports) interest income from Foreign Currency Business Undertaking (FCBU) accounts and interest income from foreign loans among others will continue.

*      Increase in capital gains tax rate of companies to 30%

Capital gains tax was introduced by Inland Revenue Act No. 24 of 2017 and this amendment Act has increased the tax on the gain from realization of an investment asset of a company from 10% to 30%. As such, the profits from the divestment of shares will be taxed at a 30% tax rate.


*      Non-resident shareholders – liable for dividend tax

The Act has discontinued the income tax exemption that is currently available for non-resident shareholders who receive dividends distributed by a company in Sri Lanka.

*      Increase in rate of dividend tax to 15%

The Act has increased the dividend tax rate to 15% which is currently at 14%. This dividend tax of 15% tax will be collected by way of withholding tax and no further tax will be imposed on dividend.

*      Additional deduction for marketing expenses – discontinued

The Act has discontinued the additional deduction that is available for marketing and communication expenses.

*      Withholding tax on service fees to resident individuals – 5% - Introduced

Withholding tax would apply to individual service providers such as doctors, lawyers, engineers, accountants, etc. at the rate of 5%, where such payments exceed Rs. 100,000/- per month. With Holding Tax was done away with by President Gotabaya Rajapaksa’s Government and now it is re-introduced and it would not be a final withholding tax’

*      Withholding tax on service fees and insurance premiums to non-residents – 14%

          There has been no change from the prevailing withholding tax liability.

*      Withholding tax on interest, discount – 5%, withholding on royalty – 14%

Currently withholding applies for payments made to non-residents and the Act has extended this withholding requirement to payments made to resident persons as well.

*      Withholding tax on rent paid to residents – 10% and

        Withholding tax on rent paid to non-residents – 14%


Tax should be withheld at the rate of 10% on the full amount, on rent paid to residents, where such rent payments exceed Rs. 100,000/- per month and such tax would not be a final withholding tax.



12    Reintroduction of mandatory APIT

Mandatory withholding on employment income will be reintroduced with effect from the enactment of the law.

14    Reduction of tax-free allowance and increase in maximum individual tax rate.

The Act has reduced the tax – free allowance from the current Rs. 3 million per annum to Rs 1.2 Mn per annum. As such any individual with income exceeding Rs. 100,000 per month will be liable for tax. Further the maximum individual tax rate will increase to 36%.

The progressive rates of tax will be at the rate of 6% 12%, 18%, 24%, 30%, on every additional Rs. 500,000 earned per annum.   Income Tax Rates Applicable to Individuals – Residents and Non-Residents for the year of assessment 2023/24 & onwards 01.04.2023:

First Rs. 500,000 -6%

Next Rs. 500,000 -12%

Next Rs. 500,000 -18%

Next Rs. 500,000 -30%

Balance -36%

Pursuant to circular dated 30.12.2022, the Inland Revenue Department (IRD) has issued the revised guidelines for quantification of certain amounts for benefits in calculating employment income. The significant changes were made as per the IRD guide number SEC/2022/E/05 (revised) issued in 07th February 2023. They are as follows:

Benefits provided by the employer with regard to Value of benefits from any residence, Value of benefits included in the Transport facilities, Value of Communication Facilities and Other non-cash benefits were exempted.

If the non-cash benefits of any employee have been calculated for the month commencing on January 01, 2023 in any manner other than that provided under the said circular, the difference between that the amount of tax deducted and the amount of tax that should be deducted in accordance with the said circular and should be adjusted accordingly in the immediately succeeding months. It is relevant to raise the question as why such a huge amount of taxes is needed to be imposed in a short period of time putting a heavy burden on the general public in the country.


Economic situation in the county

It is true that the country has fallen into a major foreign debt trap by the end of April 2022; and outstanding external debt of the Central Government was said to be US$34.8 billion. Gross domestic product is estimated to be US$318.6 in the year 2022 and GDP growth rate in 2022 is 3.0%.  Sri Lanka has now temporarily suspended payment of foreign debt in order to keep its foreign reserves for import and other essentials such as fuel etc. Now, it has come to a point that making debt payment is challenging and impossible. Tax revenue has come down to a greater extent since 1990s.

Contribution of Inland Revenue Department to the Gross Domestic Product:


% of IRD to the GDP











         Source: Performance report of Inland Revenue Department – 2021

It is not fair for Sri Lanka to be compared with developed countries. Anyway, Sri Lanka’s Tax Income is far below than that of the developing countries in the region. Reason for that is the low income level of the citizen of the country. At a time when there is a low level of income of the people, it is not fair to increase taxes giving an unbearable burden on the people. But the government has rapidly increased taxes in a short period of time. The government was compelled to increase taxes since there is no any other way for them to obtain foreign reserves and the government Treasury has no sufficient funds to pay at least salaries of the public servants. It is worthwhile to inquire what causes led to this level of the economy.

What are the causes for the tax revenue to be in a low level in the country?

Tax cut in November 2019

There were nonstop discussions about the tax system and its low level of revenue and related issues. In a bid to simplify the tax system, some taxes were abolished namely Nation Building Tax (NBT) with effect from 01st December 2019, Economic Service Charges (ESC) and Debt Repayment Levy (DRL) effective from 01st January 2020. Value Added Tax (VAT) rate was reduced from 15% to 8% from November 2019. Pay as you Earn (PAYE) was abolished. With Holding Tax (WHT) was done away with. As a result around 1 million taxpayers were cut off according to Minister Ali Sabri which cost the Inland Revenue Department approximately 601 billion rupees in tax revenue (1.65 billion US$).


Central Bank Bond Scam

Central Bank Bond scam is treated as one of the major revenue loss to the government in a turbulent period of the Sri Lankan economy. It has reportedly caused losses of more than US$ 11 million to the nation. Tax bond scam is also regarded as the largest reported financial scam in Sri Lanka.

Sugar Tax Scam

The national Audit office in a recent report has recommended that the government should immediately recover the revenue due to the state which was lost by sugar tax scam. This is one of the major losses out of corporate profit made at the expenses of ordinary citizen. The report recommends these sums of money to be recovered from importers who made a huge profit as a result of tax cut.

On the 13th October 2020 tax for sugar imports was brought down from Rs 50 to 25 cent (per /kg) as per a directive of the government. The special audit revealed that within for months of reducing tax from 14th October 2000 to 8th February 2021 the government has lost a tax revenue of a whopping Rs. 16.763 billion.

Infamous VAT fraud

The VAT scam is treated to be the largest VAT scam in South Asia and it has been estimated that the total revenue loss to the government was Rs. 3.9 billion. The said fraud took place during the period from 2003 to 2005 and it came to light with the arrest of eight persons including a Commissioner and a Deputy Commissioner of Value Added Branch of the Inland Revenue Department.  Eight more sentenced in VAT fraud case and fined; several other fraudsters are absconding in tax heavens in the world and the chief culprit in this massive VAT scam kamil kuthubdeen is believed be living safely in Dubai.

Panama Papers

International Consortium of Investigating Journalist (ICIJ) reveals that 65 Sri Lankans’ names are mentioned in the list published by them. Overseas Finance Ltd, TECLLOYD Ltd, and Best Cheers were three offshore entities linked to Sri Lanka incorporated in the British Virgin Islands. How did these individuals earn these huge sums of money? And whether they have paid due taxes to the state before taking the said wealth abroad?

Tax Amnesties failed to achieve targets

Tax Amnesties were introduced from time to time with a view to broadening the tax base. Amnesty period was declared during which time that undeclared assets and income could be declared and tax will not be charged.  Accordingly, tax amnesties have been declared under Tax Amnesty Act No.5 of 1989, Inland Revenue (Special Provisions) Act No 10 of 2003, Inland Revenue (Regulation of Amnesty) Act No. 10 of 2004, Inland Revenue Amendment Act No.22 of 2011, Inland Revenue (Amendment) Act No.10 of 2021, and Finance Act No.18 of 2021 from time to time.  But none of these amnesties has achieved their targets rather they provided benefits to the tax avoiding fraudsters who are politically affiliated business tycoons. Tax revenue has been increased in proportion with the growth of the Gross Domestic Product over the years.   

Hambanthota Hospital Construction fraud

There are several reports to say that Sri Lankan politicians misappropriate funds provided by the international financial agencies for the state. An investigation into a money laundering case involved an Australian medical company has revealed that details of illegal corrupt dealings during the construction of the Hambanthota General Hospital in Sri Lanka in 2012. The company had obtained formal Australian government support through a US$18.8 million insurance guarantee from the then Export Finance and Insurance Corporation on the basis that the company had been hired to supply equipment and associated medical design and infrastructure for the Hospital. First transaction of $2.1 million in Sri Lanka has been made to Sabre Vision Holdings which is a British Virgin Islands registered company. The transaction has come to the attention of Sri Lanka police.


In the context of revenue losses to the country, the said calamity could have been avoided. At present there are no dollars to buy medicine, no dollars to import fuel and other essential commodities. No monies to hold elections. There are no persons who can take the responsibility of the misdeeds to run away with the revenue.  If revenue could have been retained in government coffers, there is no need for a rapid tax increase in a short period of time during a period in which income level  of the general public has not gone up.  Tax rate must be reasonable. There should be adequate awareness among the public to comply with tax laws. Tax payer’s money should be used by the government for the benefit of the people for the growth of the economy.


You can share this post!

  • Nalin Bandaranayake

    Monday, 06 March 2023 12:01 PM

    Politicians get together and rob the wealth of the country and get the masses to pay for their sins.

    Likes : 0 Dislikes : 0


    Sunday, 12 March 2023 08:49 AM

    No benifits to Tax paying bodies in private sector, but more benefits used non Tax paying employees in Government sector. Ex. Car permits, lesser interest rate loans, forign tours etc (edited)

    Likes : 0 Dislikes : 0

Leave Comments