Sigh of relief for taxpayers

• Govt. agrees to drop controversial clauses from Inland Revenue (Amendment) Bill 2026 after strong objections and Supreme Court challenge

In a significant and welcome development, the Government last week decided to revise the much-debated Inland Revenue (Amendment) Bill 2026 following strong objections and a Supreme Court challenge.

The Bill, which was placed on the Order Paper of Parliament, faced immediate legal pushback when five petitioners challenged several provisions, arguing that they were unconstitutional.

The contested clauses included attempts to redefine “reserves,” introduce an evidentiary lockout, criminalise routine administrative lapses, and fast-track summary trials based on an unchallengeable certificate issued by the Commissioner General of Inland Revenue (CGIR).

On 2 April, when the Supreme Court began hearing the petitions, the Deputy Solicitor General presented a Cabinet Memorandum proposing key amendments to be introduced during the Committee Stage of the Bill. The move proved decisive.

As a result, three out of the five petitioners withdrew their cases, narrowing the remaining dispute to two main issues: the proposed criminalisation of administrative defaults and the summary trial procedure.

Parties were asked to submit written submissions by 3 p.m. on 3 April, with the Supreme Court’s determination expected to reach the Speaker sometime this week.

What’s being changed? Key amendments in the Cabinet paper

Here are the major revisions the Government has agreed to make:

1. Evidentiary lockout provision dropped

The Bill originally sought to introduce a harsh new rule (Section 122(8A)) that would have made any document or information not submitted within strict time limits completely inadmissible in Court or before the Tax Appeals Commission, even if it was crucial for the taxpayer to prove their case.

*Six months for local documents 

*Nine months for overseas documents 

This clause has now been completely withdrawn. Taxpayers can breathe a sigh of relief.

2. “Reserves” definition withdrawn and judicial precedent stands

The Government has dropped its attempt to redefine “reserves” under the Thin Capitalisation Rules (Section 18). The proposed change would have gone against the Court of Appeal’s ruling in the ‘Samson Raja Rata’ case and prohibiting a tax deduction for businesses in relation to loans even when they were making actual losses, a heavy blow especially to small and medium enterprises (SMEs) and startups still recovering from economic challenges.

By withdrawing Clause 4, the original judicial interpretation of “reserves” will continue to apply. This is being widely seen as a taxpayer-friendly and business-sensitive decision.

Additional recommendation:

Tax policymakers have also been advised to reconsider applying Thin Capitalisation Rules to non-related party loans. Some argue that the real concern lies with related-party debt used for profit shifting, not legitimate commercial borrowing from banks and third parties. Limiting the rule to related-party loans would make the law fairer and more practical.

3. Life insurance taxation changes scrapped

Proposed new rules for taxing life insurance companies, including changes to the calculation of taxable profits and giving the CGIR power to make adjustments related to IFRS 17, have also been withdrawn. The existing framework will remain unchanged for now.

4. Extended interest waiver: Greater relief for taxpayers

In a positive move, the Cabinet has extended the waiver of interest on underpayments and late payments. 

*Originally proposed up to the year of assessment ending 31 March 2023 

*Now extended up to 31 March 2025

To benefit from this waiver, taxpayers must settle the full principal tax and applicable penalties (excluding the waived interest) within six months of the Amendment Act coming into operation. This provides meaningful relief to businesses and individuals burdened by accumulated interest.

5. Investor category visa holders – updated terminology

The Bill updates the tax treatment for foreign investors. The old Golden Paradise Residence Visa is no longer issued. It has been replaced by the new ‘Investor Category Residence Visa.’

Holders of this visa will continue to enjoy deemed non-resident status for income tax purposes. This means they will only be taxed on Sri Lankan-source income, not their worldwide income, a major attraction for foreign investors. The necessary updates to Section 69 of the Act have been retained to reflect the current immigration rules.

A refreshing display of responsive governance

Overall, the Government’s willingness to revisit and revise contentious provisions in the Inland Revenue (Amendment) Bill 2026 has been warmly received by stakeholders.

By listening to concerns raised by taxpayers, professionals, and the business community and acting on them through the Cabinet paper, the authorities have demonstrated a pragmatic and constructive approach. These changes are expected to reduce compliance burdens, restore confidence in the tax system, and create a more balanced and business-friendly environment.

Analysts said this episode sends a clear message: when legitimate concerns are raised, Sri Lanka’s tax policymakers are prepared to listen and correct course.