Key Changes to the Inland Revenue Act Up to 2025 in Sri Lanka

The Inland Revenue Act, No. 24 of 2017 is Sri Lanka’s main law governing income tax, applicable from April 1, 2018. It reformed the tax system by simplifying rates, reducing exemptions, and widening the tax base. Since then, multiple amendments have been made through Act No. 10 of 2021, Act No. 45 of 2022, Acts No. 4 and 14 of 2023, and most recently, the 2025 amendment. These amendments altered key components like tax thresholds, rates, deductions, refund deadlines, and more. This article provides a simplified yet comprehensive explanation of the Inland Revenue Act and all the amendments made up to and including the year 2025.

Personal Income Tax (Individuals)

Under the 2017 Act, personal income tax applied to individuals earning above Rs. 500,000 annually, with a progressive rate structure of 4% to 24% across six tax brackets. In 2020, Act No. 10 of 2021 brought substantial changes, raising the annual tax-free threshold to Rs. 3 million and simplifying the tax rate structure to just three brackets: 6%, 12%, and 18%. This meant most taxpayers paid little to no tax. However, the 2022 economic crisis led to the reversal of these generous tax concessions. Act No. 45 of 2022 lowered the tax-free threshold to Rs. 1.2 million, effective from April 1, 2023, and reintroduced a six-bracket structure with higher rates, including a new top rate of 36%.

By 2025, another revision was made. The annual personal relief was increased to Rs. 1.8 million, starting from April 1, 2025. While the same six tax brackets and the 36% top rate remained, the structure was adjusted slightly: the 6% rate now applied to the first Rs. 1 million of taxable income (after deducting the Rs. 1.8 million), providing modest relief to middle-income earners. In summary, personal tax rates have fluctuated significantly—from moderate in 2017, to generous in 2020, to stricter in 2023, and then slightly relaxed again in 2025.

Corporate Income Tax (Companies)

Under the Inland Revenue Act No. 24 of 2017, Sri Lanka’s corporate income tax system introduced a structured three-tier rate system. The standard rate was 28%, while a concessionary rate of 14% applied to sectors such as SMEs, exporters, IT services, tourism, education, and healthcare. A higher rate of 40% was applied to businesses engaged in liquor, tobacco, and gaming. This structure aimed to support priority sectors while taxing high-profit or socially sensitive industries at elevated rates.

The 2021 amendment (Act No. 10 of 2021), effective from January 1, 2020, reduced the standard corporate tax rate from 28% to 24%, in line with the government’s push to promote private sector growth. The 14% concessionary rate was retained for qualifying sectors, and a new 18% rate was introduced specifically for manufacturing. This period marked one of the lowest overall tax burdens on companies in recent years, making Sri Lanka more attractive for investment.

However, this policy was reversed with the 2022 amendment (Act No. 45 of 2022), which came into force on October 1, 2022. The standard corporate tax rate was increased back to 30%, and both the 14% and 18% rates were removed. As a result, most sectors—including those previously eligible for reduced rates such as exporters, SMEs, construction, and renewable energy—were brought under the standard 30% rate. Companies with income spanning the rate change had to proportionately apply the old and new rates for the 2022/23 year of assessment.

The 2025 amendment (Act No. 2 of 2025) further adjusted rates in specific areas. The tax rate on businesses related to liquor, tobacco, and gaming was increased from 40% to 45%, reinforcing the policy of taxing harmful industries at a premium. Meanwhile, a new 15% concessionary tax rate was introduced for foreign-sourced income and services utilized outside Sri Lanka, provided such income is received in foreign currency and remitted through a bank. This move ended full exemptions on foreign income and replaced them with a more controlled relief framework to ensure such earnings remain within the tax net.

Taxation of Partnerships

Under the original Inland Revenue Act No. 24 of 2017, partnerships were generally excluded from income tax liability, except for withholding tax on partner allocations and tax on gains from the realization of investment assets. The taxable income of a partnership was deemed to be the individual income of each partner, who would declare and pay tax on their respective shares. The partnership itself was not taxed as a separate entity.

This approach changed significantly with the Inland Revenue (Amendment) Act No. 10 of 2021, which introduced a new system of direct taxation on partnerships, effective from January 1, 2020. Under this amendment:

All partnerships became liable to income tax at a flat rate of 6% on their taxable income, regardless of the number of partners or the nature of their activities.
The first Rs. 1 million of taxable income was tax-free, and the 6% rate applied only to income exceeding that threshold.
In addition, gains on realization of investment assets (excluding exempt gains) derived by partnerships continued to be taxed at 10%, consistent with treatment for individuals.
The responsibility for tax compliance—including the filing of returns and payment of tax—was placed on all partners jointly and severally, not just on the partnership as an entity.
To avoid double taxation, partners were allowed to claim a tax credit for their share of tax paid by the partnership—but only if the partnership had already settled the tax. This credit could not be refunded in cash, but any excess could be carried forward to the next year, although not beyond that.

This marked a shift from a pass-through structure to a hybrid model where the partnership itself was taxed first, followed by possible tax on the partners’ distributed profits if applicable.

No major changes to partnership taxation were introduced in Act No. 45 of 2022, Act No. 4 of 2023, or Act No. 14 of 2023. These amendments focused more on personal and corporate income tax reforms, withholding tax reinstatements, and removal of exemptions, rather than altering the treatment of partnerships.

As of the Inland Revenue (Amendment) Act No. 2 of 2025, there are no additional changes proposed or implemented to the taxation of partnerships. The flat 6% tax rate on partnerships remains in effect, as does the 10% rate on capital gains from investment assets.

From WHT and PAYE to AIT and APIT

Under the Inland Revenue Act No. 24 of 2017, Withholding Tax (WHT) and Pay-As-You-Earn (PAYE) were mandatory on payments such as interest, dividends, rent, and employment income.

The Inland Revenue (Amendment) Act No. 10 of 2021, effective from April 1, 2020, replaced these with Advance Income Tax (AIT) and Advance Personal Income Tax (APIT).

AIT deductions became optional, made only at the request of the income recipient.
APIT for employment income became voluntary for resident employees.

The Inland Revenue (Amendment) Act No. 45 of 2022, effective October 1, 2022, made both AIT and APIT mandatory again.

AIT rates were fixed: 5% on interest, 15% on dividends, 10% on rent over Rs. 100,000/month, and 14% on other payments.
APIT was reintroduced as a mandatory deduction on employment income exceeding the relief threshold.

From 2022 onward, both systems operate as compulsory tax deductions at source, similar to the earlier WHT and PAYE framework.

Exemptions

The Inland Revenue Act No. 24 of 2017 introduced a simplified and broad-based tax system by removing many of the exemptions that had been present under the previous tax regime.

The Inland Revenue (Amendment) Act No. 10 of 2021 introduced a wide range of tax exemptions aimed at promoting investment, foreign inflows, and specific sectoral growth. These exemptions were made effective from either January 1, 2020 or April 1, 2021, depending on the category.

Effective from January 1, 2020, the amendment exempted foreign-sourced income, provided it was received in foreign currency and remitted through a bank to Sri Lanka. This included:

Foreign employment income of Sri Lankans working abroad,
Service income for services rendered in or outside Sri Lanka and used abroad, and
Other foreign-source income, such as business profits or overseas investments.

In addition, profits from IT and enabled services were made exempt starting from January 1, 2020—this was a significant step to promote tech exports and attract foreign clients.

From April 1, 2021, a number of sector-specific tax exemptions were introduced for new undertakings, with fixed tax holiday periods:

Agro farming profits, exempted for 5 years (applicable retroactively from April 1, 2019),
Gold, gem, and jewellery exports, including gem cutting and polishing for re-export,
Vocational education institutions registered under the TVET concept, granted a 5-year exemption,
Recycling of construction materials, granted a 10-year exemption,
Manufacture and sale of boats or ships by resident persons, eligible for a 7-year exemption,
Renewable energy projects with a generation capacity of 100MW or more, eligible for a 7-year exemption,
Construction of communication towers using local inputs, given a 5-year exemption,
New businesses established by individuals who completed vocational training under TVET, also receiving a 5-year exemption,
Operation of bonded warehouses supporting offshore business at Colombo or Hambantota ports.

Further exemptions effective from 2020 or 2021 included:

Interest income from Special Deposit Accounts (SDA) opened from April 2020 onwards (excluding renewals),
Interest income on foreign currency accounts maintained in Sri Lanka with Central Bank approval,
Interest on loans extended by foreign lenders to the Government or Sri Lankan entities,
Interest or discount income from Sri Lanka Development Bonds and sovereign bonds, for both residents and non-residents,
Profits from laboratory testing and certification services provided by non-residents,
Capital gains from the sale or transfer of property to Sri Lanka Real Estate Investment Trusts (SLREITs),
Employment income of expatriate staff working in companies that made foreign direct investment of USD 250 million or more,
Donations to registered religious institutions,
Income received by public corporations out of government grants or budgetary allocations,
Amounts received by non-residents from SriLankan Airlines for services relating to aircraft, software, or technology.

These exemptions reflected the government's shift toward liberalised tax policy and investment incentives.

The broad exemptions introduced under Act No. 10 of 2021—covering foreign employment income, foreign-sourced service and business income, IT-enabled services, interest from Special Deposit Accounts (SDAs), dividends, capital gains, and income from several sectoral undertakings—were gradually reversed through amendments in 2022, 2023, and 2025. The 2022 amendment removed certain corporate-related exemptions, such as those related to dividends and SLREITs.

In 2023, exemptions for various new business undertakings and IT services were withdrawn with effect from April 1, 2023. The 2025 amendment marked the final shift by removing the full exemption on foreign-sourced service income, introducing a 15% concessionary tax rate on such income effective April 1, 2025, thereby ending their fully exempt status.

This series of amendments reflected a policy transition from broad tax exemptions to limited relief through concessionary rates, aimed at broadening the tax base and strengthening revenue collection.

Qualifying Payments and Reliefs

Under Act No. 10 of 2021, effective from January 1, 2020, resident individuals were granted the following qualifying reliefs in calculating taxable income:

A personal relief of Rs. 3 million per year, replacing earlier fragmented reliefs (Rs. 500,000 general, Rs. 700,000 on employment, Rs. 1.5 million for senior citizens' interest income).
An additional relief of up to Rs. 1.2 million per year for the following personal expenses:
- Medical and health insurance payments,
- Vocational or educational expenses for self or children,
- Interest on housing loans,
- Contributions to local pension schemes (not through employer),
- Investments in listed shares, treasury bonds, or treasury bills.
A further Rs. 600,000 annual deduction was granted from April 1, 2021, for expenses on acquiring solar panels or repaying loans used for such purchase when connected to the national grid.

In addition, deductions were introduced for specific taxpayers:

Public corporations could deduct sums paid to the Consolidated or President’s Fund (from April 1, 2019).
Financial institutions were allowed deductions for the cost of mergers or acquisitions, spread equally over three years, beginning April 1, 2021.
Contributions to establish shops for female Samurdhi beneficiaries, approved by the Samurdhi Department, were deductible for resident individuals from April 1, 2021.
For film industry-related investments, any person could deduct up to 1/3 of taxable income for:
- Film production costing at least Rs. 5 million,
- New cinema construction (up to Rs. 25 million),
- Cinema upgrading (up to Rs. 10 million), from April 1, 2021.

However, the 2022 amendment bill proposed to reduce the personal relief from Rs. 3 million to Rs. 1.2 million and to remove the Rs. 1.2 million expenditure-based relief entirely.

Business Losses

Under the Inland Revenue Act No. 24 of 2017, taxpayers were allowed to carry forward business losses and claim them against future income. This rule was maintained under the 2021 amendment (Act No. 10 of 2021), with an important clarification that business losses incurred while being taxed at a concessionary rate (e.g., 14%) could still be claimed in future years even if the taxpayer moved to a higher tax rate (e.g., 30%). There was no time limit imposed on carrying forward business losses, allowing continuous deductions until fully utilized. However, the 2022 amendment (Act No. 45 of 2022) introduced a significant restriction on investment losses. From that point onward, losses from the realization of investment assets (such as land, shares, or bonds) could only be carried forward for a maximum of six (6) years. After that period, any unused investment loss would expire. Additionally, the 2022 amendment reaffirmed that capital losses cannot be offset against gains from other investment assets—each realization must be assessed and taxed separately. These changes aimed to tighten the rules on capital gains taxation while preserving flexibility for business-related losses.

The changes made to the Inland Revenue Act from 2017 to 2025 reflect a significant evolution in Sri Lanka’s tax policy—moving from a structure with broad exemptions and voluntary compliance mechanisms to one focused on widening the tax base, strengthening enforcement, and improving revenue stability. Through amendments introduced in 2021, 2022, 2023, and 2025, the government restructured tax rates, adjusted relief thresholds, removed or replaced many exemptions with concessionary rates, and reintroduced mandatory advance tax deduction systems. These reforms highlight a clear shift toward greater accountability and fiscal discipline. For individuals, businesses, and tax professionals, understanding these developments is essential for accurate compliance, strategic planning, and responsible financial management in the years ahead.