Proposed Amendments in Inland Revenue Bill 2026
The explanations provided below are based on the proposed changes contained in the Inland Revenue (Amendment) Bill, 2026. These changes reflect the amendments currently presented in the Bill.
Please note that these provisions will become legally effective only after the Bill is passed by Parliament and certified by the Hon. Speaker. Until such certification, the amendments discussed below should be considered as proposed changes and not yet enforceable law.
The following summary provides a simple and practical explanation of the key changes proposed in the Bill.
1. Gains from Sale of Motor Vehicles
Gains arising from the sale of motor vehicles will not be treated as income under the category of “income from other sources.”
Impact:
Reduces uncertainty regarding taxation of gains from selling personal vehicles.
Effective Date:
01 April 2024
2. Deductibility of Large Cash Payments
Cash payments exceeding Rs. 500,000 may still be allowed as a deductible expense if the cash is directly deposited into the bank account of the recipient and the expense is incurred in producing income.
Impact:
Businesses must maintain proper banking evidence for large payments.
Effective Date:
08 May 2023
3. Revised Definition of Company Reserves
The definition of reserves has been clarified to include negative retained earnings, accumulated losses and deficits, while excluding reserves created through asset revaluations.
Impact:
Prevents companies from artificially increasing reserves through accounting adjustments.
Effective Date:
01 April 2025
4. Donations of Assets to Government or Universities
Where assets are donated to the Government of Sri Lanka or to universities established under the Universities Act, the transfer will be treated at net cost value.
Impact:
Ensures that such donations do not create a capital gain tax liability.
Effective Date:
Upon enactment of the Act
5. Carry Forward of Unused Qualifying Donations
If qualifying donations cannot be fully claimed due to insufficient income, the unused portion may be carried forward and deducted in future years of assessment.
Impact:
Ensures that taxpayers do not lose the tax benefit of donations.
Effective Date:
01 April 2025
6. Clarification on Life Insurance Receipts
Amounts received from life insurance policies due to death, maturity or surrender will generally be excluded from taxable income, except where the payment relates to employment income or certain annuity-type arrangements.
Impact:
Provides clarity on the tax treatment of life insurance proceeds.
Effective Date:
01 April 2025
7. Compliance Requirement for Unit Trusts and Mutual Funds
If unit trusts or mutual funds fail to issue required income certificates to investors within the specified time, they may be treated as resident companies for tax purposes.
Impact:
Encourages timely reporting to investors and strengthens regulatory compliance.
Effective Date:
01 April 2025
8. Revised Tax Computation for Life Insurance Businesses
The method used to determine taxable profits of life insurance businesses has been refined and aligned more closely with actuarial and accounting principles.
Impact:
Life insurance companies may experience changes in their taxable income calculations.
Effective Date:
01 April 2025
9. Tax Credit for Certain Charitable Institutions
Certain charitable institutions that bear the cost of providing their services may be eligible for a tax credit subject to approval by the Commissioner-General of Inland Revenue.
Impact:
Encourages charitable institutions to provide social services.
Effective Date:
01 April 2025
10. Changes to Tax Residency Rules
Tax residency rules have been revised to address situations such as individuals working on ships, holders of special residence visas, and individuals leaving Sri Lanka for long-term employment abroad.
Impact:
These changes affect whether a person is taxed on worldwide income in Sri Lanka.
Effective Date:
01 April 2025
11. Deduction of Export-Related Foreign Expenses
Businesses exporting goods or services will be allowed to deduct certain expenses incurred outside Sri Lanka if those expenses are directly related to the export activity.
Impact:
Provides relief to exporters incurring foreign commissions or service charges.
Effective Date:
01 April 2018
12. Deduction for Head Office Expenses of Foreign Companies
Foreign companies operating through a branch or permanent establishment in Sri Lanka may deduct head office expenses subject to specified limits.
Impact:
Clarifies how multinational companies allocate overseas costs to Sri Lankan operations.
Effective Date:
01 April 2025
13. Interest Income Exemption for Certain Individuals
Interest or discount income earned by resident individuals from financial institutions may be exempt from withholding tax if the individual has no taxable income and submits a self-declaration.
Impact:
Provides relief for individuals with low or no taxable income.
Effective Date:
01 April 2025
14. Expansion of Withholding Tax to More Service Providers
The list of professionals subject to withholding tax has been expanded to include a wider range of independent service providers.
Impact:
Freelancers and service providers in several professions may now fall within the withholding tax framework.
Effective Date:
Upon enactment of the Act
15. Standardized Procedures for Withholding Tax Reporting
The Commissioner-General of Inland Revenue may prescribe specific formats and procedures for filing withholding tax statements.
Impact:
Businesses will need to follow updated reporting formats issued by the tax authority.
Effective Date:
Upon enactment of the Act
16. Withholding Tax Certificates Must Be Issued Free of Charge
Persons deducting withholding tax are required to provide the withholding tax certificate to the recipient free of charge.
Impact:
Taxpayers receiving payments will be able to claim tax credits without being charged administrative fees.
Effective Date:
Upon enactment of the Act
17. New Method for Paying Income Tax Instalments
A revised mechanism will be introduced for calculating quarterly income tax instalments, which will rely largely on the tax liability of the previous year of assessment.
Impact:
Reduces the risk of taxpayers underestimating their tax liabilities and improves predictability in tax payments.
Effective Date:
01 April 2026
18. Removal of the Requirement to File Tax Estimates
From the 2026 year of assessment onwards, taxpayers will no longer be required to file tax estimates for the purpose of calculating instalment tax payments.
Impact:
Simplifies the compliance process for taxpayers.
Effective Date:
01 April 2026
19. Transitional Rules for the New Instalment Tax System
Related provisions in the law will be adjusted to ensure a smooth transition from the tax estimate system to the new instalment tax calculation method.
Impact:
Helps taxpayers adapt to the new system without compliance confusion.
Effective Date:
01 April 2026
20. Certain Individuals May Not Be Required to File Tax Returns
Individuals whose employment income has already been taxed under APIT and whose interest income does not exceed Rs. 5,000 may not be required to file tax returns.
Impact:
Reduces compliance burden for employees with simple income sources.
Effective Date:
01 April 2025
21. Mandatory Return Filing for Certain Strategic Businesses
Businesses classified as Strategic Importance Businesses under the Colombo Port City framework will be required to file tax returns in the manner specified by the tax authority.
Impact:
Strengthens regulatory oversight of strategic investment projects.
Effective Date:
Upon enactment of the Act
22. Monthly Return Requirement for the National Gem and Jewellery Authority
The National Gem and Jewellery Authority will be required to file monthly tax returns as prescribed by the Commissioner-General.
Impact:
Improves monitoring of transactions in the gem and jewellery sector.
Effective Date:
01 April 2026
23. Capital Gains Tax Return Treated as Self-Assessment
A return filed in respect of capital gains tax will be treated as a self-assessment for the capital gains tax payable.
Impact:
Clarifies the legal status of capital gains tax returns and reduces disputes.
Effective Date:
Upon enactment of the Act
24. Tax Credit for Salary Arrears
Where employees receive salary arrears relating to previous years, a special tax credit mechanism will apply to prevent the income from being taxed unfairly at higher tax rates in a single year.
Impact:
Provides relief to employees receiving delayed payments.
Effective Date:
01 April 2024
25. Sharing of Taxpayer Information with Regulatory Authorities
The Inland Revenue Department may share taxpayer information with certain government and regulatory bodies such as financial intelligence authorities or law enforcement agencies.
Impact:
Strengthens measures against tax evasion, money laundering and financial crimes.
Effective Date:
Upon enactment of the Act
26. Mandatory Tax Registration for Companies
All companies incorporated or registered in Sri Lanka must register with the Inland Revenue Department within 30 days of incorporation.
Impact:
Ensures early tax registration and improves monitoring of new businesses.
Effective Date:
Upon enactment of the Act
27. Taxpayer Identification Number Required for Key Transactions
From 2026, a Taxpayer Identification Number (TIN) will be required for several significant transactions such as:
-
Opening bank accounts
-
Registering motor vehicles
-
Registering land
-
Registering businesses
-
Transferring shares
-
Obtaining credit cards
-
Obtaining building approvals
Impact:
Expands the tax identification system and improves tax compliance across the economy.
Effective Date:
01 April 2026
28. Flexible Tax Return Filing for Senior Citizens
Senior citizens will be allowed to file tax returns either electronically or in written form.
Impact:
Provides flexibility for elderly taxpayers who may not be comfortable with digital filing systems.
Effective Date:
01 April 2025
29. Late Documents May Not Be Accepted in Appeals
If taxpayers fail to submit documents requested by the tax authority within the prescribed time period, those documents may not be accepted later during appeal or court proceedings.
Impact:
Encourages taxpayers to cooperate during tax audits and investigations.
Effective Date:
01 April 2026
30. Safe Harbour Rule for Certain Individual Taxpayers
If an individual declares tax at least 120% of the tax paid in the previous year, pays the tax and provides a declaration confirming that the return is correct, the tax authority may not issue an additional assessment.
Impact:
Provides certainty and reduces audit risk for compliant taxpayers.
Effective Date:
01 April 2025
31. Faster Recovery of Unpaid Taxes
If a taxpayer fails to pay taxes when they become due, the Inland Revenue Department will be able to recover the unpaid tax through a Magistrate’s Court process.
Impact:
Unpaid taxes may be treated similarly to court fines, allowing quicker enforcement.
Effective Date:
01 April 2026
32. Tax Notices May Be Published in Newspapers
If a taxpayer cannot be located to serve legal notices or summons, the tax authority may publish the notice in newspapers.
Impact:
Prevents taxpayers from avoiding legal proceedings by remaining unreachable.
Effective Date:
Upon enactment of the Act
33. New Penalties for Procedural Non-Compliance
Penalties may be imposed where taxpayers or withholding agents fail to comply with certain procedural requirements under the Inland Revenue Act.
Impact:
Encourages better compliance with tax reporting and documentation requirements.
Effective Date:
Upon enactment of the Act
34. Criminal Liability for Serious Non-Compliance
Legal proceedings may be initiated where taxpayers repeatedly fail to comply with obligations such as filing tax returns, registering with the tax authority, or providing required information.
Impact:
Strengthens enforcement against deliberate tax non-compliance.
Effective Date:
Upon enactment of the Act
35. Revised Rules for Settlement of Tax Offences
The law introduces clearer rules for compounding or settling certain tax offences by paying a specified settlement amount.
Impact:
Creates a structured mechanism for resolving tax offences outside court.
Effective Date:
Upon enactment of the Act
36. Clarification of Certain Tax Definitions
Some key definitions in the Inland Revenue Act have been clarified, including definitions relating to authorised representatives, interest income and certain government authorities.
Impact:
Reduces ambiguity when interpreting tax provisions.
Effective Date:
Upon enactment of the Act
37. Limitation on Benefits from Repealed Tax Laws
Certain deductions, exemptions or concessions available under earlier tax laws will not continue indefinitely and will be subject to specified limits.
Impact:
Prevents taxpayers from relying indefinitely on concessions under repealed legislation.
Effective Date:
Upon enactment of the Act
38. Clarification of Transitional Provisions
Additional clarification has been introduced regarding how some provisions of the Inland Revenue Act apply during transitional periods.
Impact:
Helps taxpayers understand how new rules apply to earlier transactions.
Effective Date:
31 March 2025
39. Increase in Capital Gains Tax Rate
The Capital Gains Tax (CGT) rate applicable to individuals and partnerships will increase from 10% to 15%.
Impact:
Tax payable on gains from the sale of investment assets such as land, buildings and unlisted shares will increase.
Effective Date:
From the date the Act comes into force
40. Higher Capital Gains Tax Rate for Certain Entities
Capital gains earned by trusts, unit trusts, mutual funds and certain non-governmental organisations will be taxed at 30%.
Impact:
Entities falling within these categories may face significantly higher tax liabilities on capital gains.
Effective Date:
From the date the Act comes into force
41. Clarification of Certain Tax Exemptions
Some tax exemptions available under the law have been clarified, including exemptions relating to certain government-assisted institutions.
Impact:
Reduces uncertainty regarding eligibility for tax exemptions.
Effective Date:
01 April 2018
42. Conditions for Foreign Loan Interest Exemptions
Interest income arising from certain foreign loans will qualify for tax exemption only if the loan proceeds are remitted in foreign currency through a bank and used within Sri Lanka.
Impact:
Ensures that only genuine foreign-funded investments receive tax exemption.
Effective Date:
01 April 2025
43. Exemption for Certain Payments Made by the Sri Lanka Air Force
Certain payments made to non-residents by the Sri Lanka Air Force in relation to aircraft-related services, licenses or technical support will be exempt from tax.
Impact:
Facilitates defence-related international transactions.
Effective Date:
01 April 2025
44. Clarification of Deductibility of Charitable Donations
The rules governing qualifying charitable donations have been clarified to ensure that deductions are allowed only where the conditions specified in the law are satisfied.
Impact:
Encourages proper documentation and transparency for charitable donations.
Effective Date:
01 April 2025
45. Interest Relief for Certain Historical Tax Liabilities
Under specified conditions, interest imposed on certain past tax liabilities under various tax laws may be written off.
Impact:
Encourages taxpayers to settle outstanding tax liabilities by reducing accumulated interest.
Effective Date:
Upon certification of the Act
