16/03/2026
📢 Tax Update – Proposed Amendments to the Inland Revenue Act (Sri Lanka)
According to a recent tax update issued by KPMG, the Government has proposed several amendments to the Inland Revenue Act No. 24 of 2017. These amendments were published in February 2026 and will become effective once approved by Parliament.
🔹 Key Highlights of the Proposed Amendments
• Capital Gains Tax (CGT) – Proposed increase from 10% to 15% for individuals and partnerships.
• Relief on Tax Interest – Interest on outstanding taxes may be waived if taxpayers settle the full tax and penalties within the specified period.
• Removal of Statement of Estimated Tax (SET) – From 1 April 2026, taxpayers will no longer be required to submit the SET.
• Individual Tax Returns – Certain individual tax returns may be accepted without further assessment, subject to specified conditions.
• Tax Deductions – Cash payments exceeding LKR 500,000 will be allowed as deductions only if directly deposited into the payee’s bank account.
• Withholding Tax (WHT) – A 5% WHT may apply to certain professionals and service providers.
• Enhanced Capital Allowances – Businesses investing between USD 250,000 and USD 3 million may qualify for a 100% capital allowance.
📌 These proposed amendments aim to strengthen tax compliance, improve tax administration, and modernize the tax framework in Sri Lanka.
More clarity
1️⃣ Capital Gains Tax (CGT) – Increase from 10% to 15%
Example:
Mr. Silva sells a land for LKR 5,000,000.
The cost of the land was LKR 3,000,000.
Capital Gain = 5,000,000 – 3,000,000 = 2,000,000
Old CGT (10%) = 2,000,000 × 10% = 200,000
Proposed CGT (15%) = 2,000,000 × 15% = 300,000
➡️ Additional tax payable = 100,000
2️⃣ Relief on Tax Interest
Example:
A company has unpaid taxes:
Tax due = LKR 1,000,000
Penalty = LKR 200,000
Interest = LKR 150,000
If the taxpayer pays the tax and penalty within the relief period, the interest may be waived.
Amount payable:
1,000,000 + 200,000 = 1,200,000
➡️ Interest of 150,000 may be written off
3️⃣ Removal of Statement of Estimated Tax (SET)
Example (Before):
A business expected annual taxable income of LKR 4,000,000.
They had to submit SET and pay quarterly tax based on this estimate.
After 1 April 2026:
➡️ The business does not need to submit SET, but will pay tax according to the new compliance system determined by IRD.
4️⃣ Individual Tax Returns Accepted Without Further Assessment
Example:
Mrs. Perera:
Employment income = LKR 2,400,000 per year
APIT already deducted by employer = LKR 180,000
She submits her income tax return, and the information matches the employer records.
➡️ The IRD may accept the return without issuing further assessment.
5️⃣ Deduction for Cash Payments Above LKR 500,000
Example:
A company buys raw materials worth LKR 800,000.
Scenario 1 – Paid in physical cash
➡️ Expense may NOT be allowed as a tax deduction
Scenario 2 – Cash deposited directly to supplier's bank account
➡️ Expense will be allowed as a deduction
6️⃣ Withholding Tax (WHT) – 5% for Professionals
Example:
A company pays consulting fees to a professional.
Consulting fee = LKR 200,000
WHT deduction =
200,000 × 5% = 10,000
Payment to consultant =
200,000 – 10,000 = 190,000
➡️ Company remits 10,000 WHT to the Inland Revenue Department.
7️⃣ 100% Capital Allowance for Investments
Example:
A manufacturing company invests USD 500,000 in machinery.
If eligible for 100% capital allowance:
Total machinery cost = USD 500,000
➡️ The company can deduct the full USD 500,000 as an expense in the first year when calculating taxable profit.
Example:
Profit before allowance = USD 800,000
Taxable profit after allowance =
800,000 – 500,000 = USD 300,000
