Amended tax code proposes higher rates, wider net and tighter compliance regime

 Capital Gains Tax to rise to 15% for individuals and 30% for trusts and unit trusts

 5% WHT net significantly expanded to cover professionals, creative and digital service providers

 100% capital allowance for new investments between $ 250,000 and $ 3 m with BOI approval

 Broader information-sharing powers, revised residency rules and stricter filing obligations

Fresh changes to the tax code will see higher tax rates on capital gains, a significant expansion of the Withholding Tax (WHT) base, tighter compliance, and more.

A Bill to amend the Inland Revenue Act, No. 24 of 2017 has been published in the Gazette Extraordinary dated 20 February 2026 and issued on 24 February 2026 by Finance, Planning and Economic Development Minister Anura Kumara Dissanayake.

According to a Tax Flash issued by KPMG in Sri Lanka, the provisions will obtain legal enforceability only upon completion of the constitutional legislative process and enactment by Parliament, after which the amendments will come into operation on the respective effective dates specified in the Bill.

The proposed amendments span Capital Gains Tax, exemptions, Withholding and Advance Income Tax provisions, enhanced capital allowances, residency rules, and a series of compliance and enforcement measures.

The Bill proposes to increase the Capital Gains Tax rate for individuals and partnerships from 10% to 15%, while trusts, unit trusts, mutual funds, and NGOs will face an increase from 10% to 30%, effective from enactment.

The change represents a direct increase in the tax burden on capital transactions, particularly for collective investment vehicles and non-individual entities.

The Commissioner General of Inland Revenue (CGIR) will be empowered to write off interest on underpayments and late payments outstanding under the Inland Revenue Act up to 31 March 2023, the Surcharge Tax Act, No. 14 of 2022, and the Debt Repayment Levy under the Finance Act, No. 35 of 2018. Relief is conditional on full settlement of tax and applicable penalties within six months from the date the new provisions come into operation. This operates as a targeted compliance incentive rather than a rate reduction.

From 1 April, instalment payments will be calculated based on the taxable income of the immediately preceding year. Where there was no taxable income or lower expected income, an alternative estimated basis may be used in accordance with CGIR procedures.

The requirement to lodge a Statement of Estimated Tax Payable will cease from 1 April, simplifying administrative processes but shifting calculation discipline onto taxpayers.

With effect from 1 April 2025, an individual’s return will be accepted without amended or additional assessment where taxable income declared results in tax that is at least 120% of the tax paid for the previous year, the full amount is paid without claiming a refund, and an affidavit confirms the absence of fraud, evasion or wilful default. This provision introduces a structured safe harbour, trading certainty for higher declared tax.

Cash transactions exceeding Rs. 500,000 will be deductible where directly deposited into the payee’s bank account and incurred in the production of income, effective from 8 May 2023. The definition of “reserves” is broadened to include negative retained earnings and accumulated losses, excluding revaluation reserves, from 1 April 2025.

Taxpayers may carry forward unclaimed qualifying payments to identified Government institutions where assessable income is insufficient, effective 1 April 2025.

Gains from the realisation of motor vehicles will be excluded from “other income” calculations from 1 April 2024.

The scope of qualifying payment deductions is expanded to cover donations to certain registered social service organisations collaborating with Government healthcare or education services, subject to statutory limits, with tax credits granted to such institutions subject to CGIR satisfaction.

A deduction is also allowed for payments incurred in relation to exports even if such payments have no source in Sri Lanka, effective from 1 April 2018.

A definition of head office expenditure has been introduced with clarification on deductibility from 1 April 2025.

Interest or discount paid by a financial institution to a resident individual will not be subject to Advance Income Tax where the individual has no taxable income and submits a self-declaration, effective 1 April 2025.

The 5% WHT net is significantly widened to include auditors, modellers, personal trainers, coaches, valuers, artists, actors, dancers, singers, musicians, event organisers, photographers, videographers, therapists, counsellors, beauticians, cooks, electricians, dentists, veterinarians, social media specialists, brand ambassadors, sports persons, IT specialists, advertising agents, advisers, translators, writers, debt collectors, and other prescribed individuals, effective from enactment.

Withholding agents must issue certificates at no cost, and failure to comply may attract penalties of up to Rs. 200,000 per year of assessment. The expansion broadens the tax base across service sectors and informal professional activities.

Individuals whose employment income is subject to Advance Personal Income Tax (APIT) and whose interest income is less than Rs. 5,000 will not be required to lodge a return from 1 April 2025. Businesses of Strategic Importance approved under the Colombo Port City Economic Commission Act must file returns in the manner specified by the CGIR.

The National Gem and Jewellery Authority will be required to file monthly returns from 1 April 2026 and senior citizens may file returns in writing or electronically from 1 April 2025.

Exemptions under the Third Schedule

A definition for “Government-assisted Private Schools” is introduced, confirming their exemption under the Act, effective 1 April 2018. Interest on foreign loans will be exempt only where the loan amount is remitted in foreign currency through a bank and utilised in Sri Lanka, from 1 April 2025.

Payments derived by a non-resident from the Sri Lanka Air Force for aircraft, software licences, or related services will be exempt.

From 1 April 2026, eligibility for enhanced capital allowances will require specific approval by the Board of Investment of Sri Lanka (BOI). A 100% capital allowance on depreciable assets, excluding intangible assets, will be available for new undertakings where total investment exceeds $ 250,000 but does not exceed $ 3 million during the year of assessment. This is one of the few provisions that directly reduces tax payable for qualifying investors.

Amounts received by an individual from a life insurance policy, whether as policyholder or beneficiary, will be excluded from assessable income from 1 April 2025. Amendments are proposed to the computation of gains and profits from life insurance business, including CGIR-specified adjustments where accounting standards change. 

Unit trusts or mutual funds that fail to issue required certificates to unit holders within five months after the end of the year of assessment will be treated as resident companies from 1 April 2025, and employees receiving salary arrears will be entitled to a tax credit deductible against employment income tax from 1 April 2024.

Persons reporting income on a cash basis may apply for refunds of excess tax where contracts are cancelled or altered, within 30 months of the refund date.

The CGIR will be authorised to share information with the Director of the Financial Intelligence Unit, the Inspector General of Police, and the Sri Lanka Accounting and Auditing Standards Monitoring Board.

All companies must register with the CGIR within 30 days of incorporation or registration. Residency rules are revised from 1 April 2025, including changes relating to persons working on Sri Lanka ships, Golden Paradise Visa holders, and individuals leaving the country for employment.

Impact

Taken together, the Bill represents a net tightening of the tax framework. Direct tax rates increase in the form of higher Capital Gains Tax and a substantially widened 5% Withholding regime. Compliance obligations are broadened, enforcement powers expanded, and filing requirements clarified.

At the same time, selective relief is provided through interest write-offs, export-related deductions, carry-forward of qualifying payments, exclusion of motor vehicle gains, salary arrears credits, and enhanced capital allowances for medium-scale investments. 

The direction of policy is clear: a broader tax base, higher effective taxation on capital transactions and professional services, and stronger administrative oversight, balanced by targeted investment incentives and structured compliance relief.