Sri Lanka Budget 2027: Key Tax Changes and Their Impact on Taxpayers
Sri Lanka's Budget 2027 introduces several important tax proposals affecting individuals, businesses, investors, importers and exporters.
The following is a simplified analysis of the key proposals, comparing the present tax position with the proposed changes and their practical implications.
Important: Most proposals are expected to take effect from 1 April 2027, subject to the necessary legislative amendments, unless another date is specifically mentioned.
1. Personal Income Tax Relief
Proposed change: Annual personal relief will increase from Rs. 1.8 million to Rs. 1.95 million.
Present situation: Eligible individuals currently receive annual personal relief of Rs. 1.8 million, equivalent to Rs. 150,000 per month.
Impact: The monthly equivalent of personal relief increases to Rs. 162,500. Eligible individuals will generally pay less income tax.
2. Revision of Personal Income Tax Rates
Proposed change: A 12% tax bracket will be introduced, and the existing tax slabs will be revised.
| Taxable income | Present rate | Proposed taxable income | Proposed rate |
|---|---|---|---|
| First Rs. 1,000,000 | 6% | First Rs. 850,000 | 6% |
| Next Rs. 500,000 | 18% | Next Rs. 600,000 | 12% |
| Next Rs. 500,000 | 24% | Next Rs. 600,000 | 18% |
| Next Rs. 500,000 | 30% | Next Rs. 600,000 | 24% |
| Balance | 36% | Next Rs. 600,000 | 30% |
| — | — | Balance | 36% |
Present situation: Individual income tax is calculated using rates of 6%, 18%, 24%, 30% and 36%.
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Impact: Individuals will generally benefit from lower tax liabilities. For example, an employee earning Rs. 300,000 monthly could save Rs. 63,000 annually, assuming ordinary employment income and personal relief only.
3. Enhanced Capital Allowance for BOI-Approved Enterprises
Proposed change: A 200% enhanced capital allowance will be available to qualifying BOI-approved enterprises investing at least USD 3 million in export-oriented manufacturing or tourism development.
Investments must be made within three years for manufacturing and non-hotel tourism projects, or five years for hotels.
Present situation: Capital allowances are available under the existing Second and Fourth Schedules of the Inland Revenue Act, with different rates and qualifying conditions. Certain investments already qualify for enhanced allowances.
Impact: Eligible investors may receive larger tax deductions, reducing taxable business profits. Businesses choosing the new allowance cannot additionally claim existing capital allowances on the same expenditure.
4. Expansion of Capital Gains Tax Coverage
Proposed change: The definition of capital assets will be expanded to expressly include:
- Digital and virtual assets, including cryptocurrencies.
- Commercially valuable telecommunications and broadcasting licences and rights.
- Gems, jewellery, precious metals and other valuable movable assets exceeding a prescribed threshold.
Present situation: The existing definition covers specified investment assets but does not expressly identify all these categories.
Impact: Gains from disposing of additional types of assets may become subject to income tax under the applicable capital gains rules. The treatment will depend on the final legislation and relevant thresholds.
5. VAT Exemption for Books and Printed Materials
Proposed change: VAT exemptions will be introduced for specified books and printed materials, including exercise books, printed books, dictionaries, encyclopaedias, children's colouring books and printed music, based on the relevant HS classifications.
Present situation: These specified items do not all enjoy the proposed express VAT exemption.
Impact: The tax cost of qualifying educational and printed materials may decrease, potentially benefiting students, parents, publishers and booksellers.
6. Removal of Certain VAT Exemptions
Proposed change: VAT exemptions will be removed for Artemia eggs (HS 0511.91.20) and coconut coir pith (HS 1404.90.93).
Present situation: These items currently benefit from VAT exemptions.
Impact: Importers and suppliers may face additional VAT obligations, potentially increasing costs where input VAT cannot be recovered.
7. VAT Calculation on Cinema Tickets
Proposed change: VAT liability will be determined according to each party's share of cinema ticket revenue. The VAT calculation will use ticket value after Entertainment Tax but before VAT.
Present situation: The existing calculation and allocation arrangements differ from the proposed clarified basis.
Impact: Film producers, distributors, the National Film Corporation and cinema operators will need to review their VAT calculations and revenue-sharing arrangements.
8. VAT Eligibility for New Exporters
Proposed change: Newly VAT-registered businesses may qualify as eligible exporters where more than 80% of their turnover during the preceding six months comes from exports.
Present situation: The existing definition does not expressly accommodate newly registered exporters under this proposed six-month test.
Impact: New export-oriented businesses may qualify earlier for the VAT arrangements applicable to eligible exporters, subject to statutory requirements.
9. Exchange Rates for VAT Calculations
Proposed change: Foreign-currency supplies will be converted into Sri Lankan rupees using the Central Bank's indicative exchange rate, as specified by the Commissioner General of Inland Revenue.
Present situation: Existing VAT valuation provisions do not prescribe this proposed uniform Central Bank reference in the same manner.
Impact: Businesses invoicing in foreign currencies will have a clearer exchange-rate basis for VAT calculations.
10. Recognition of Electronic Tax Invoices
Proposed change: Electronic and digital tax invoices will be legally recognised, subject to requirements specified by the Commissioner General of Inland Revenue.
Present situation: VAT invoicing requirements are primarily based on the existing statutory tax invoice framework.
Impact: Businesses will be able to adopt compliant electronic invoicing, reducing paperwork and supporting digital recordkeeping.
11. SSCL Exemption for Bunker Fuel
Proposed change: Bunker fuel supplied to ships engaged in international transportation will be expressly exempted from the Social Security Contribution Levy.
Present situation: The existing legislation does not expressly provide the proposed exemption in this form.
Impact: Qualifying bunker fuel suppliers may benefit from reduced levy costs and clearer tax treatment.
12. Betting and Gaming Tax Reforms
Proposed change: The tax structure applicable to betting and gaming businesses will be simplified.
Present situation: The industry is subject to the existing Betting and Gaming Levy Act and other relevant tax laws.
Impact: Businesses may benefit from simpler compliance and clearer tax administration. Specific financial effects cannot yet be determined because revised rates have not been provided.
13. Special Commodity Levy Changes
Proposed change: The following changes will take effect from 13 November 2026.
| Product | Proposed change |
|---|---|
| Sprats and Maldive fish | Levy reduced to Rs. 10 per kg |
| Dried chillies | Levy reduced by Rs. 50 per kg |
| Sugar | Levy increased by Rs. 10 per kg |
Present situation: Existing levy rates apply until the revisions take effect.
Impact: Import costs may decrease for sprats, Maldive fish and dried chillies, while sugar import costs may increase. Retail prices will also depend on market conditions.
14. Removal of Ports and Airports Development Levy
Proposed change: PAL will be removed on imported newsprint and batteries used for solar energy storage from 1 January 2027.
Present situation: The applicable imports are subject to PAL under existing arrangements.
Impact: Import costs may decrease, benefiting the printing industry and solar energy storage sector.
15. Reduction of CESS
Proposed change: CESS rates will be reduced by 25% across 800 HS code lines.
Present situation: Existing CESS rates continue to apply to the relevant products.
Impact: Import costs may decrease for affected products, depending on their HS classification and applicable rates.
16. Certification of Cash Transaction Compliance
Proposed change: The Inland Revenue Department will accept certificates from approved accountants or other authorised persons to verify compliance with statutory cash transaction restrictions.
Present situation: Taxpayers must comply with existing restrictions on cash transactions and substantiate their compliance.
Impact: Professional certification may provide an additional method of demonstrating compliance, subject to the prescribed procedures.
17. Anti-Avoidance Rules for Company Mergers
Proposed change: New anti-avoidance provisions will address tax avoidance through company amalgamations and mergers.
Present situation: Existing tax laws contain general anti-avoidance provisions, but the Budget proposes more specific measures.
Impact: Companies undertaking mergers or restructuring will need to assess potential tax-avoidance implications. Genuine commercial restructurings are intended to remain protected.
18. Taxation of Donations Between NGOs
Proposed change: Provisions will be introduced to prevent double taxation of donations transferred between NGOs, where evidence confirms that the original recipient NGO paid the relevant tax.
Present situation: Existing arrangements may result in double taxation in certain circumstances.
Impact: Qualifying NGOs may avoid repeated taxation of the same donations.
19. Taxation of Remote and Digital Services
Proposed change: Section 73 of the Inland Revenue Act will be amended to clarify the source of income from remote and digital services, including online advertising and cloud services, by reference to the place of payment.
Present situation: Existing source-of-income rules do not expressly address these digital services in the proposed manner.
Impact: Digital service providers and businesses purchasing overseas digital services may face clearer Sri Lankan income tax obligations. The precise effect will depend on the enacted provisions and applicable tax treaties.
20. Changes to Double Taxation Agreement Terminology
Proposed change: Section 75(5) will replace the expression “prevention of fiscal evasion” with “prevention of tax evasion and avoidance.”
Present situation: The existing provision uses the expression “prevention of fiscal evasion.”
Impact: The terminology will better align with OECD and UN Model Tax Conventions, supporting the interpretation and administration of tax treaties.
21. Clarification of 14% Withholding Tax
Proposed change: Section 85(1B) will clarify that the 14% withholding tax on specified service fees and insurance premiums applies only to payments made to non-residents without a permanent establishment in Sri Lanka.
Present situation: The existing wording requires clarification regarding the scope of payments covered.
Impact: Businesses making payments to non-residents will have greater certainty regarding withholding tax obligations.
22. Relief for Delayed VAT Returns During COVID-19
Proposed change: Eligible taxpayers who submitted outstanding VAT returns for the COVID-19 period on or before 31 July 2026 will be allowed to claim previously disallowed input VAT.
Present situation: Certain input VAT claims were disallowed due to delays in submitting VAT returns.
Impact: Eligible businesses may recover previously disallowed input VAT, subject to the proposed conditions.
23. Confidentiality of Foreign Tax Information
Proposed change: Information received from foreign tax authorities may be disclosed only to authorised persons, with prior consent from the relevant foreign tax authority.
Present situation: Existing confidentiality provisions do not expressly incorporate all the proposed safeguards.
Impact: Taxpayers will benefit from stronger statutory protections for information exchanged between tax authorities.
24. Changes to Input VAT Claim Periods
Proposed change: Uniform time limits will be introduced for claiming input VAT:
- Local purchases: 12 months.
- Imports: 24 months.
These periods will apply irrespective of the VAT return submission date.
Present situation: Existing input VAT claim rules include timing requirements linked to the relevant VAT periods and return submission arrangements.
Impact: Businesses will have clearer claim deadlines, reducing uncertainty over eligible input VAT.
25. Other VAT Administrative Amendments
Proposed change: VAT legislation will be amended to clarify credit notes, debit notes, adjustments where tax invoices have not been issued, transactions on a Non-Foreign Exchange basis and related matters.
Present situation: Certain provisions contain ambiguities or inconsistencies, including differences between Sinhala and English texts.
Impact: Businesses may benefit from clearer VAT compliance requirements and fewer disputes over adjustments and documentation.
26. Abolition of Tourism Development Levy
Proposed change: Tourism Development Levy will be abolished from 1 April 2027.
Present situation: Qualifying tourism businesses are subject to TDL under the Finance Act, No. 25 of 2003.
Impact: Tourism businesses currently liable for TDL will benefit from the removal of this levy, reducing their tax-related operating costs.
27. Technical and Administrative Tax Amendments
Proposed change: Several tax laws will be amended to correct ambiguities, translation differences and unintended legislative effects.
Present situation: Certain provisions across existing tax legislation require clarification or correction.
Impact: These amendments are intended to simplify tax administration and improve legal certainty for taxpayers.
When Will These Changes Take Effect?
| Effective date | Proposals |
|---|---|
| 13 November 2026 | Special Commodity Levy revisions |
| 1 January 2027 | PAL removal on specified imports |
| 1 April 2027 | Most other proposed tax amendments, unless otherwise specified |
Final Remarks
Budget 2027 proposes tax relief for individuals, additional incentives for qualifying investments, changes to VAT exemptions and administration, and reforms affecting several industries.
While some measures may reduce the tax burden, others will introduce new compliance obligations or expand the scope of taxation.
Taxpayers and businesses should review the relevant legislative amendments before applying the proposed changes.
Prepared by Tax Advisor – Sri Lanka
Disclaimer: This article is based on the Budget 2027 Technical Notes, Annexure V. Budget proposals do not automatically amend existing tax legislation. The final legal position will depend on the relevant Acts, regulations and official implementation guidance.
