Sri Lanka’s New Tax Reforms

Sri Lanka’s newly elected cabinet of ministers has made refreshing changes on a number of local taxes adhering to the election campaign promises. Tax reliefs were a vital component in President Gotabaya Rajapaksa’s election policy. Hence, the following tax reforms are designed to create economic growth while giving Sri Lankan citizens a relief from tax burdens. 

  • Reduction in Value Added Tax (VAT) and Nation Building Tax (NBT)

The current VAT and NBT taxes have been reduced from 17% to 8%. The current threshold for VAT is Rs. 1 million turnover per month. It was raised to 25 million turnover per month. 

  • Capital Gains Tax is proposed to be removed with the advise of the Inland Revenue Department
  • Value Added Tax on Condominiums is proposed to be removed with the advise of the Inland Revenue Department 
  • PAYE Tax (Pay as you earn) threshold has been raised to Rs. 250,000 per month
  • A person’s income up to Rs. 300,000 per annum has been relieved of income tax
  • Businesses engaged in tourism will be treated as an export business, if more than 60% of suppliers are sourced locally. This has been proposed to be removed with the advise of the Inland Revenue Department
  • Income tax has been exempted for – agriculture, fisheries, livestock, IT and related services and religious places. The income tax rate for the construction industry is reduced to 14% from the previous 28%.

The above changes in taxes are expected to improve short-term growth. However, it is yet unclear if they will have a positive impact in the long run since these taxes account to 30% of the government’s tax revenue. In order to see the reaction of foreign investors to these changes, it is important to keep a close eye on foreign exchange and bond markets.

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