IRD outlines sweeping tax changes

The Inland Revenue Department (IRD) has announced a broad package of tax reforms following the enactment of the Inland Revenue (Amendment) Act, No. 11 of 2026, introducing changes affecting individuals, businesses, professionals, investors and financial institutions.

In a special notice issued after the amendment was certified on 3 June, the Commissioner General of Inland Revenue said gains arising from the sale of personal motor vehicles will no longer be treated as taxable “other income”. The exemption applies retrospectively from 1 April 2024 and covers vehicles that are neither trading stock nor depreciable business assets.

The amendments also strengthen measures aimed at reducing large cash transactions. Payments of Rs. 500,000 or more made in cash or through non-approved methods will not qualify as deductible expenses or be included in the tax cost of an asset. Approved payment methods include account payee cheques, bank drafts, credit and debit cards, electronic bank transfers and direct cash deposits into the payee’s bank account.

The legislation expands tax relief relating to donations and gifts made to the Government and State universities. Donations made to Government-established funds will now be eligible for carry-forward treatment where they cannot be fully utilised during the relevant year of assessment.

The Act also clarifies the tax treatment of life insurance proceeds, providing that amounts received by policyholders or beneficiaries upon death, maturity or surrender of policies will generally be excluded from assessable income, subject to specified exceptions.

New compliance requirements have been introduced for unit trusts and mutual funds, which must issue annual tax certificates to unit holders. A unit trust or mutual fund that fails to comply with the requirement will be treated as a company for tax purposes.

The amendments introduce changes to tax residency provisions. Individuals employed overseas for at least one year under contracts with unrelated foreign employers will not be regarded as Sri Lankan tax residents during the contract period. Investor Category Residence Visa holders will also be excluded from tax residency status.

From 3 June 2026, the scope of the five percent withholding tax on service fees paid to resident individuals has been expanded to cover payments exceeding Rs. 100,000 per month to a wider range of professionals. The category includes IT specialists, social media specialists, translators, writers, photographers, videographers, coaches, personal trainers, artists, musicians, dentists, veterinarians, beauticians and event organisers.

In a move aimed at simplifying tax administration, the requirement to submit a Statement of Estimated Tax (SET) has been abolished. Quarterly income tax instalments will instead be determined based on the previous year’s tax liability.

The IRD has also granted relief to certain salaried employees. Individuals whose only income consists of employment income fully subject to Advance Personal Income Tax (APIT), and who have no additional tax liability, will no longer be required to maintain an income tax file or submit annual income tax returns. The concession also extends to employees earning annual interest income not exceeding Rs. 5,000.

The amendments expand the use of the Taxpayer Identification Number (TIN) across a range of transactions, including opening bank accounts, obtaining credit cards, registering businesses, motor vehicles and land, renewing vehicle licences, obtaining building approvals and transferring shares in Sri Lankan companies. The requirements will take effect once verification procedures are issued by the Commissioner General.

The legislation also strengthens enforcement powers available to the IRD. Failure to register, file returns, submit withholding tax statements or comply with notices issued by the Department may result in prosecution, with penalties of up to Rs. 400,000, imprisonment of up to six months, or both.

Capital gains tax rates have also been revised with effect from 3 June 2026. Individuals and partnerships will be subject to a 15% tax rate, while trusts, unit trusts, mutual funds and non-governmental organisations will be taxed at 30%.

Meanwhile, taxpayers with outstanding liabilities have been granted an interest waiver covering late-payment interest up to the 2024/25 year of assessment, provided the principal tax is paid in full by 2 December 2026.

The IRD urged taxpayers to familiarise themselves with the new provisions and ensure timely compliance with the amended law.