Sri Lanka Tax Regime

Legal framework and administering authority

Direct taxation in Sri Lanka is governed by the Inland Revenue Act No. 24 of 2017, as extensively amended, and administered by the Inland Revenue Department (IRD). The Act adopts a schedular-then-aggregated design: income is first classified into employment, business, investment and other income, computed under source-specific rules, and then aggregated into a single taxable income subject to progressive (individuals) or flat (companies) rates. Value added tax, the Social Security Contribution Levy, excise duties and stamp duty are administered separately, with VAT and SSCL also collected by the IRD and excise by the Department of Excise and Sri Lanka Customs.

The year of assessment runs from 1 April to 31 March; the current year, referenced throughout this handbook, is 2025/2026 (1 April 2025 to 31 March 2026). The system operates on self-assessment, with taxpayers computing their own liability, paying quarterly instalments during the year and filing an annual reconciling return. Electronic filing is mandatory for most taxpayers under section 113(1B) of the Act.

The IMF-programme reform context

Sri Lanka's tax landscape has been reshaped by the fiscal consolidation required under the IMF Extended Fund Facility approved in March 2023 following the 2022 sovereign debt default and economic crisis. Successive budgets sharply raised revenue: VAT rose to 18% with a broadened base, the personal relief and rate structure were tightened, and new and elevated levies (including the SSCL) were introduced. On 18 December 2024, the government announced a further package of income-tax changes — anchored in the second EFF review — that took effect from 1 April 2025, easing the burden on lower- and middle-income earners while introducing new charges on investment and service-export income. These 2025/2026 changes are the principal reason figures in older references are now out of date.

Residents are taxed on worldwide income; a company is resident if incorporated in Sri Lanka or if its management and control is exercised in Sri Lanka. An individual is resident if present for 183 days or more in a 12-month period overlapping the year of assessment, or in certain cases as a Sri Lankan government official abroad. Non-residents are taxed only on Sri Lanka-source income, largely through final withholding taxes.

Headline statutory corporate income tax rate for a resident company. Where sub-national (state, provincial, cantonal or municipal) corporate taxes apply, the combined rate reported by the OECD is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Top marginal statutory personal income tax rate on employment income for a resident individual. Where sub-national (state, provincial, cantonal or municipal) income taxes are a standard part of the system, the combined top rate is shown. Projected 2026–2028 rates carry the current rate forward unless a change is already enacted or officially scheduled. As-of 2026.

Standard and sector rates

The standard corporate income tax rate is 30% of taxable income for 2025/2026. Sri Lanka layers a set of concessionary and elevated sector rates over this baseline. The most significant 2025/2026 change is that the export of services (including IT, business process outsourcing and other services consumed outside Sri Lanka), previously exempt, is now taxed at a concessionary 15% from 1 April 2025. Elevated 45% rates apply to betting and gaming and to the manufacture and sale of liquor and tobacco products — increased from 40% under the reform programme.

Computing taxable income, losses and dividends

Taxable income is business and investment profit computed on an accruals basis, with statutory adjustments: capital allowances replace book depreciation, specific deductions and disallowances apply, and enhanced capital allowances are available for qualifying investments in certain assets and regions. Tax losses may generally be carried forward for up to six years, subject to continuity-of-ownership and same-business restrictions and, for losses attributable to concessionary-rate activity, ring-fencing against income of the same class. There is no group consolidation; each company files separately.

Dividends distributed by a resident company are subject to 15% withholding at source. For a resident company receiving dividends, relief mechanisms exist to mitigate cascading where the distributing company has itself borne tax, but investors should model the interaction carefully because the 15% is a final tax in the hands of resident individuals and many funds. Capital gains realised by companies on investment assets are folded into taxable income and taxed at the 30% corporate rate rather than the 10% rate applicable to individuals.

Exemptions, incentives and SVAT

Targeted incentives remain available, chiefly through the Board of Investment regime, Port City Colombo (Colombo Port City Economic Commission), and Strategic Development Project approvals, which can grant time-limited concessions and enhanced allowances. The reform trajectory, however, has been to narrow blanket exemptions in favour of lower headline and concessionary rates. On the indirect-tax side, the Simplified VAT (SVAT) scheme — which lets registered exporters and zero-rated suppliers avoid paying and reclaiming VAT on qualifying supplies — has been repeatedly slated for abolition to close a compliance gap, but continues to operate; businesses relying on SVAT should monitor its status closely as a planned move to a refund-based system would materially change working-capital positions.

Rate bands and personal relief for 2025/2026

Resident individuals are taxed on worldwide income at progressive rates after a personal relief of LKR 1,800,000 per year (LKR 150,000 per month), raised from LKR 1,200,000. The reform widened the bands and lowered the entry rate: the first LKR 1,000,000 of taxable income (i.e. above the relief) is now taxed at 6%, and the previous 12% band was removed. The resulting structure runs from 6% to a top marginal rate of 36%.

Gains on the realisation of investment assets by individuals are taxed at a separate 10% rate and are excluded from the personal relief. Income from betting, gaming, liquor and tobacco activities is taxed at 45%. Remitted foreign-source income is taxed at 15%. Terminal benefits (such as retirement gratuities and provident fund payments) are taxed under a separate concessionary scale.

APIT (employment withholding) and investment income

Employers deduct tax from remuneration under the Advance Personal Income Tax (APIT) scheme, the successor to PAYE. APIT is compulsory for primary employment and is computed using IRD monthly tax tables that gross up the annual bands; employees with only one employment and no other income are generally not required to file a return where APIT fully settles the liability. Employees may consent to APIT on secondary employment, otherwise a flat deduction applies. Investment income is largely collected through withholding: 15% final tax on dividends and 10% on interest/discount. A resident individual whose total assessable income is below the LKR 1,800,000 relief can, in defined cases, provide a declaration to the payer to reduce or avoid deduction on interest.

Individuals with business, professional, rental or substantial investment income not fully covered by APIT must register with the IRD, pay quarterly instalments on estimated income and file an annual return. Deductions and reliefs are limited under the current regime, with the increased personal relief now doing most of the work previously done by qualifying-payment reliefs.

Domestic withholding matrix

Sri Lanka operates a broad withholding and Advance Income Tax (AIT) regime. The table below shows domestic statutory rates for 2025/2026 before any treaty relief. A notable 2025/2026 change is the increase of the interest/discount withholding rate from 5% to 10% with effect from 1 April 2025.

Treaty network and relief

Sri Lanka has an extensive network of comprehensive double taxation agreements (more than 40, including with India, the United Kingdom, most EU member states, China, Japan, Singapore, the UAE and others). Treaties commonly cap withholding on dividends, interest and royalties below the domestic statutory rates and allocate taxing rights over business profits by reference to a permanent establishment. Relief is not automatic: the payer or recipient must establish treaty entitlement, typically through a certificate of residence and, in practice, confirmation from the IRD, and the beneficial-ownership and limitation-on-benefits conditions of the relevant treaty must be met.

Where no treaty applies, the domestic rates above are the final charge for non-residents on passive income. For non-residents carrying on business through a permanent establishment, profits are taxed at the corporate rate and a remittance tax may apply to profits repatriated abroad, so cross-border structures should be modelled on an all-in basis rather than headline WHT alone.

Transfer pricing

Transactions between associated enterprises must be conducted at arm's length. The Inland Revenue Act and dedicated transfer pricing regulations require pricing consistent with the arm's length principle, adopting the OECD-aligned methods (comparable uncontrolled price, resale price, cost plus, transactional net margin and profit split). Taxpayers with cross-border associated-party transactions above prescribed thresholds must maintain contemporaneous documentation (local file and, for larger groups, master file) and file a disclosure with the return; a dedicated transfer pricing unit within the IRD conducts audits. Country-by-country reporting obligations apply to in-scope multinational groups.

Thin capitalisation and interest limitation

Interest deductibility on related-party debt is restricted by thin-capitalisation rules. Broadly, a company's deductible interest on debt owed to associated relations is limited by reference to a debt-to-equity ceiling (a higher multiple for financial institutions and manufacturers, a lower multiple for other companies), with disallowed interest carried forward. These rules operate alongside the general requirement that expenditure be incurred in the production of income.

General anti-avoidance and Pillar Two status

The Act contains a general anti-avoidance rule empowering the Commissioner-General to disregard or re-characterise arrangements whose main purpose is to obtain a tax benefit, together with specific anti-avoidance provisions covering income splitting, transfer of assets and artificial transactions. As at July 2026, Sri Lanka has not enacted the OECD/G20 Pillar Two global minimum tax (GloBE) rules; there is no domestic minimum top-up tax, income inclusion rule or undertaxed-profits rule in force. Multinational groups headquartered elsewhere may nonetheless face top-up tax abroad on low-taxed Sri Lankan profits (for example those benefiting from concessionary 15% or incentive rates), so effective-tax-rate monitoring is advisable even though Sri Lanka itself does not yet collect Pillar Two tax.

Value Added Tax

VAT applies at the standard rate of 18% (in force since 1 January 2024) on the supply of goods and services and on imports. Registration is required once taxable turnover exceeds the statutory threshold. Direct exports and specified services consumed abroad are zero-rated, and a range of essential goods and services are exempt. From 1 July 2026, banks and financial-service providers move to a consolidated 20.5% VAT that replaces the combination of 18% VAT and the 2.5% SSCL previously borne by that sector — a repackaging rather than a rate increase for those institutions. The SVAT scheme (see Corporate taxation) continues to operate pending its planned replacement.

Social Security Contribution Levy (SSCL)

The SSCL is a turnover levy of 2.5% imposed under the Social Security Contribution Levy Act No. 25 of 2022 (in force from 1 October 2022 and amended, most recently by Act No. 24 of 2025). It applies to importers, manufacturers, service providers and wholesalers/retailers whose relevant quarterly turnover exceeds the statutory threshold (broadly LKR 15 million per quarter). Because it is levied on turnover at multiple points in the supply chain rather than on value added, it cascades and is generally not creditable, effectively raising the tax cost of goods and services beyond the headline VAT rate.

Excise, stamp duty and other charges

Excise duties are imposed on liquor, tobacco, motor vehicles, petroleum and other specified articles and are a major revenue source. Stamp duty applies to specified instruments: transfers of immovable property are broadly charged at 4% of consideration, and stamp duty on leases was doubled from 1% to 2% with effect from 1 January 2025. Other charges include the Betting and Gaming Levy, various cess and port/airport levies on imports, and provincial-level taxes. Employers and employees also contribute to the Employees' Provident Fund and Employees' Trust Fund, which are social-security contributions rather than taxes but form part of the overall cost of employment.

Registration, self-assessment and audit

Taxpayers register with the IRD to obtain a Taxpayer Identification Number (TIN) and transact largely through the RAMIS online portal, which supports e-registration, e-filing and e-payment. The system is self-assessment based: the taxpayer computes and pays tax, and the IRD may issue additional assessments following audit within statutory time limits. The Commissioner-General has broad information-gathering powers, and record-retention obligations generally run for several years. Penalties apply for late registration, late or non-filing, understatement and failure to withhold, together with interest on late payment.

Objections, appeals and rulings

A taxpayer aggrieved by an assessment may lodge an administrative objection with the IRD within the prescribed period. If the objection is not resolved satisfactorily, the matter may be taken to the independent Tax Appeals Commission, and thereafter, on questions of law, to the Court of Appeal and ultimately the Supreme Court. The IRD issues public and private rulings providing binding or persuasive guidance, and advance rulings can offer certainty on the treatment of proposed transactions. Given the pace of reform, taxpayers frequently rely on IRD circulars and notices (such as the 2025 notice implementing the revised rate structure) to confirm current treatment.

Key dates for 2025/2026

Income tax is paid in four quarterly instalments during the year of assessment based on estimated tax (the Statement of Estimated Tax Payable, SET), with a final balancing payment and the annual return filed after year-end. Withholding taxes and APIT are remitted monthly. The principal deadlines for the 2025/2026 year of assessment are set out below.

Late payment of an instalment attracts a penalty (commonly 10% of the shortfall) plus interest at 1.5% per month under section 179 of the Act; late filing and understatement carry separate penalties. Because e-filing is mandatory for most taxpayers, deadlines should be managed through RAMIS, and estimates should be revised during the year to avoid instalment shortfalls being penalised at reconciliation.

Structuring and entry

Foreign investors typically operate through a locally incorporated private limited company, a branch of a foreign company, or a Board of Investment (BOI) enterprise where incentives and specific exchange-control treatment are sought. The Colombo Port City Special Economic Zone offers a distinct fiscal and regulatory regime intended to attract offshore-oriented business. Choice of vehicle affects the rate mix (for example whether service-export income qualifies for the 15% rate), remittance-tax exposure on repatriated branch profits, and access to treaty relief, so the structure should be chosen with the all-in effective rate in mind rather than the headline 30%.

Cash-flow, compliance and reform risk

The turnover-based SSCL, the cascading nature of some levies, and the working-capital implications of SVAT's possible replacement mean indirect taxes often drive the real tax cost more than headline income tax. Exchange-control approvals administered by the Central Bank remain relevant to inbound and outbound flows, dividend repatriation and foreign borrowing. Above all, businesses should treat the Sri Lankan regime as fast-moving: the IMF-programme-driven reforms have changed rates, thresholds and reliefs annually since 2022, so every figure should be re-verified against current IRD notices before it is relied on for a transaction.