Sri Lanka’s Budget 2025 introduces comprehensive tax reforms designed to foster economic growth, enhance fiscal discipline, and streamline tax compliance for both individuals and businesses. These changes are expected to have far-reaching effects across various sectors of the economy, and it’s crucial to understand their implications. Below is a breakdown of the key tax proposals:

1. Capital Gains Tax (CGT) Rate Increase

One of the significant changes in Budget 2025 is the increase in the Capital Gains Tax (CGT). Individuals and partnerships will now face a CGT rate of 15%, while other entities will see the rate raised to 30%, aligning it with corporate tax rates. This move is aimed at boosting tax revenue from capital gains transactions.

2. Service Exporters’ Exemption Removed

Starting from April 1, 2025, the exemption on gains and profits from services provided to foreign clients, where payments are remitted through a Sri Lankan bank, will be removed. This applies to both individuals and corporate entities, although further clarity on this measure is expected. To mitigate the impact, service exporters will be taxed at a concessionary rate of 15%.

3. VAT on Digital Services

The government plans to expand the Value Added Tax (VAT) framework to include digital services. Digital platforms will be subject to VAT at an 18% rate, with detailed provisions outlining the collection, registration, and reporting processes for these taxes. This move aligns Sri Lanka with global taxation trends on digital services.

4. Mandatory Use of POS Machines for VAT

To ensure greater transparency in tax collection, the use of Point-of-Sale (POS) machines for VAT-registered entities will become mandatory. This is expected to streamline VAT collection and reporting.

5. Increase in Betting & Gaming Levy

To further boost revenue, the levy on betting and gaming activities will rise from 15% to 18%, while the casino entrance levy will double from USD 50 to USD 100. These changes target high-profit industries and are expected to contribute significantly to government revenue.

6. Corporate Income Tax (CIT) Rate Hike

The Corporate Income Tax (CIT) for businesses operating in industries such as betting, gaming, liquor, and tobacco will increase from 40% to 45% starting in April 2025. This change targets highly profitable and non-essential industries, generating additional revenue for public services and development initiatives.

7. Personal Income Tax Relief

The Budget provides personal income tax relief by raising the tax-free threshold from Rs 1.2 million to Rs 1.8 million per annum. The first tax slab will now be 6% for incomes up to Rs 1 million, with higher slabs progressively taxed at 18%, 24%, 30%, and 36% for incomes exceeding Rs 4.3 million. This revision offers significant tax savings and increases disposable income for taxpayers across various income levels.

8. Increase in Withholding Tax on Interest

The Withholding Tax (WHT) on interest will increase from 5% to 10%, starting from April 2025. However, individuals earning less than Rs. 150,000 per month will be eligible to apply for an exemption. This change is expected to help increase tax revenue for the government but may negatively impact lower-income savers by reducing their net interest income.

9. Stamp Duty and Administrative Reforms

The Stamp Duty payable for lease agreements will double from 1% to 2% with effect from 1st March 2025 enhancing revenue collection from property and equipment lease agreements. License agreements and tenancy agreements are still not subject to stamp duty. Additionally, the Tax Appeals Commission (TAC) fees will be revised, with more stringent administrative procedures to streamline tax disputes and appeals processes.

10. Import Taxes and Duties

The liberalization of vehicle imports will bring several changes to the tax structure:

• Excise Duty will increase by 5.9% across all vehicle categories.
• Customs Duty exemptions on vehicles will be removed, and the duty rate will be set at 20%.
• A 50% surcharge on customs duty will also apply.
• While Luxury Tax rates remain unchanged, the tax-free thresholds have been increased.

11. Imputed Rental Income Tax (IRIT) Withdrawal

The government has decided not to pursue the Imputed Rental Income Tax (IRIT), which was initially proposed by the International Monetary Fund (IMF) as an alternative to property taxes. This decision reflects the government’s cautious approach to introducing new tax burdens on individuals.

12. Removal of Statement of Estimated Tax (SET)

Beginning in the Year of Assessment 2025/2026, taxpayers will no longer need to submit a Statement of Estimated Tax (SET). Tax liabilities will instead be determined based on actual income reported in annual tax returns, reducing administrative burdens and simplifying compliance.

13. Tax Calculation Based on Previous Year’s Tax Payable

Tax payable for the upcoming year will be calculated based on the tax liability from the previous year. This provision gives taxpayers greater predictability and clarity in managing their financial obligations.

14. Exemption for Non-Resident Income

Income derived by non-residents from services such as aircraft operations, software licensing, or related services will be exempt from taxation. This reform aims to attract more foreign businesses and professionals to operate within Sri Lanka.

15. Withholding Tax (WHT) Adjustments for Senior Citizens

• Exemption for Senior Citizens: Individuals over 60 with annual income below Rs 1.8 million will not have WHT deducted from interest on deposits.
• Refund for Low-Income Individuals: Others with total income below Rs 1.8 million will be eligible for a WHT refund on interest payments, helping retain more income for lower-earning individuals.

16. Manual Filing Option for Senior Citizens

From the Year of Assessment 2024/2025, senior citizens will have the option to manually file their tax returns, addressing the challenges they may face with digital filing.

Conclusion

The tax reforms introduced in Sri Lanka’s Budget 2025 represent a strategic effort to bolster government revenues while providing relief for lower-income earners and senior citizens. By increasing corporate taxes in highly profitable sectors and expanding VAT on digital services, the government aims to create a more balanced tax system. Meanwhile, the relief measures for personal income tax and simplification of the tax filing process signal a move towards a more inclusive tax regime.

Businesses and individuals alike should be prepared to adapt to these changes and may benefit from consulting tax professionals to navigate the new regulations effectively.