Sri Lanka introduces significant new tax enforcements and prosecution methods

Inland Revenue Department

The Inland Revenue (Amendment) Act, No. 11 of 2026 and the Value Added Tax (Amendment) Act, No. 14 of 2026 have now been enacted, introducing significant changes to Sri Lanka’s tax enforcement framework. While much attention has been placed on the substantive tax changes, the amendments also strengthen the Inland Revenue Department’s enforcement powers and increase the criminal exposure for non-compliance.

1. Criminal prosecution for failure to obtain TIN and file income tax returns

The Inland Revenue amendments introduce a new framework for prosecuting tax offences, expanding enforcement beyond administrative penalties. Taxpayers may now face prosecution for failing to comply with key obligations, including failure to:

n Register with the Commissioner General of Inland Revenue

n File income tax returns

n Furnish certain tax returns required under the Act

n Submit annual statements

n Appear before the Commissioner General pursuant to a statutory notice

Prosecution will not commence automatically. The IRD must first issue a written notice and allow the taxpayer an opportunity to rectify the default.

Upon conviction, a taxpayer may be subject to a fine not exceeding Rs. 400,000, imprisonment of up to six months, or both.

Don’t wait for IRD notices:

Taxpayers should not wait until an IRD notice is issued. Businesses and individuals with outstanding registrations, returns or statutory filings should take timely steps to update their tax affairs, as non-compliance may now result in criminal proceedings.

2. Failure to pay tax? The path to court just got shorter

The amendments allow the IRD to recover unpaid taxes through Magistrate’s Court proceedings, where the tax in default may be treated as a Court-imposed fine. This does not apply where a review or appeal is pending, but once recovery begins, the focus will generally be on collecting the tax debt rather than revisiting the assessment.

Enhanced IRD powers must be matched by enhanced responsibility:

Given the evidentiary weight attached to the Commissioner General’s certificate, assessments must be raised on a proper factual and legal basis, with due process, proper notice and administrative fairness being carefully maintained.

3. The clock now runs longer for VAT offences

The VAT amendments allow the Attorney-General, or an authorised person, to prosecute VAT offences, confirming that such matters may now proceed through a formal criminal process where warranted.

Twelve year limitation period for VAT offences:

Criminal proceedings for VAT offences may now be instituted within 12 years from the date the offence was committed, or where an obligation was not performed, from the date it was due to be performed.

Extended exposure for non-disclosure and misrepresentation:

For non-disclosure or misrepresentation affecting VAT liability, the prosecution period runs from the date the correct VAT liability is finally determined, which may extend exposure during unresolved audits, disputes, reviews or appeals.

Taxpayers should not wait until an IRD notice is issued. Businesses and individuals with outstanding registrations, returns or statutory filings should take timely steps to update their tax affairs, as non-compliance may now result in criminal proceedings

4. Failure to issue valid tax invoices and Customs declarations now a criminal offence

Failure to provide valid tax invoices, customs goods declarations or other required documents may now attract a fine of up to Rs. 1 million, imprisonment of up to six months, or both, making accurate invoicing and record-keeping more critical.

5. Refund abuse now a criminal offence

It is now an offence to obtain or attempt to obtain a VAT refund through fraud, misrepresentation, false or misleading information or documents, or by concealing material facts. Taxpayers should ensure all VAT refund claims and supporting documents are accurate, complete and capable of substantiation.

6. Penalties increased by forty-fold

For offences committed before 1 October 2025, a person is liable to a fine not exceeding Rs. 25,000, imprisonment of up to six months, or both.

For offences committed on or after 1 October 2025, the penalties increase significantly to a fine not exceeding Rs. 1,000,000, imprisonment of up to six months, or both.

This forty-fold increase in the maximum monetary penalty underscores the Government’s commitment to strengthening tax enforcement and compliance.

The offences under the VAT act are as follows:

n Failure to register for VAT where registration is required. 

n Failure to notify the CGIR of changes or other matters required under the VAT Act. 

n Failure to issue a valid tax invoice, or issuing multiple invoices for the same taxable supply. 

n Issuing a tax invoice without being legally entitled to do so. 

n Failure to file VAT returns, annual adjustments or other prescribed returns, or comply with DIR notices. 

n Failure, without reasonable cause, to answer questions before an Inland Revenue officer under a statutory notice. 

n Providing incorrect information affecting their own or another person’s VAT liability. 

nDiverting payments required to be made to the CGIR.

nWillfully obstructing or delaying the CGIR or authorised officers in exercising statutory powers. 

nFailure to maintain proper books and records as required under the VAT Act. 

nIssuing tax invoices despite not being VAT-registered. 

n Failure to comply with Gazette Orders or CGIR guidelines

7. Digital Service Providers – may face penalties for non-compliance

Registered non-resident digital service providers may face an administrative penalty of up to Rs. 50,000 for failing to submit prescribed statements on supplies made to VAT-registered persons in Sri Lanka. The penalty may be reduced or waived where the failure was beyond the taxpayer’s control and later rectified.

Criminal proceedings for VAT offences may now be instituted within 12 years from the date the offence was committed, or where an obligation was not performed, from the date it was due to be performed

(Sulaiman Nishtar is Partner - Head of Tax at EY Sri Lanka and Maldives; Shehani Paranavitane is Partner - Tax and Shakthi Velauthapillai is Principal – Tax EY Sri Lanka)