2025 Tax Law Changes in Sri Lanka – Impact on Businesses & Individuals
On December 18, 2024, President Anura Kumara Dissanayake introduced major tax reforms in Parliament to enhance revenue collection, simplify the tax structure, and support economic recovery.
These reforms address both social pressures and the requirements of the International Monetary Fund (IMF) Extended Fund Facility. Below is a summary of the key highlights of the tax reforms:
Increase in Tax-Free Allowance and Revised Tax Slabs for Individuals
- The monthly tax-free allowance will increase from LKR 100,000 to LKR 150,000, which amounts to LKR 1.8 million annually.
- The tax slabs will be revised, with a 6% rate applied to the first LKR 1,000,000 (up from LKR 500,000), followed by 18%, 24%, and 30% on subsequent slabs, and a 36% rate on income exceeding LKR 4.3M annually.
The 12% tax slab will be eliminated under this new system. These changes are expected to result in tax savings, particularly for individuals with lower monthly incomes.
New Tax Slabs Table with Rates (Proposed Effective from April 1, 2025)
| Tax Rate | Amount in LKR (Annually) | Amount in LKR (Monthly) |
|---|---|---|
| 0% | The first 1,800,000 is tax free. | The first 150,000 is tax free. |
| 6% | From 1,800,000 to 2,800,000 | From 150,000 to 233,333.33 |
| 18% | From 2,800,000 to 3,300,000 | From 233,333.33 to 275,000 |
| 24% | From 3,300,000 to 3,800,000 | From 275,000 to 316,666.66 |
| 30% | From 3,800,000 to 4,300,000 | From 316,666.66 to 358,333.33 |
| 36% | Amount exceeding 4,300,000 | Amount exceeding 358,333.33 |
Increasing Withholding Tax (WHT) on Interest Income
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The withholding tax rate on interest income will increase from 5% to 10% (effective April 1, 2025).
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However, individuals with a total monthly income below LKR 150,000 can apply for an exemption from the withholding tax on their interest income. A streamlined process for exemption requests will be introduced through the Inland Revenue Department.
Removal of Export Service Exemption and Introduction of 15% Concessionary Tax Rate
The exemption for the export of services will be removed, affecting sectors such as IT companies, BPOs, and certain shipping services. These foreign service providers will now be subject to a 15% concessionary tax rate.
Increase in Corporate Income Tax (CIT) - Betting and Gaming, Tobacco and Liquor Industries
The tax rate on gains and profits from betting, gaming, and the manufacture, sale, or import of liquor or tobacco products will rise from 40% to 45%, effective April 1, 2025. This increase is part of the proposals in the IMF report (June 2024).
VAT Exemption for Dairy Products
To support the domestic dairy industry, locally produced liquid milk and yoghurt will be exempt from VAT.
VAT on Digital Services
Digital services provided to Sri Lankan consumers by Non-Resident digital service providers to be liable to VAT at 18%, aligning with global tax practices for cross-border digital services.
Increase in Stamp Duty on Leases
The stamp duty on leases will increase from 1% to 2%, impacting lease transactions for land, vehicles, and property.
Removal of Vehicle of Import Restrictions
It has been proposed to gradually lift all remaining import restrictions on motor vehicles, prioritizing:
- Public transport vehicles
- Goods transport vehicles
- General and private vehicles
This process will be guided by recommendations from the Central Bank of Sri Lanka, considering the potential impact on foreign currency reserves. (effective February, 2025)
These reforms represent a significant shift in Sri Lanka's tax policy, balancing revenue generation with social welfare considerations. The changes provide substantial relief to middle-income earners while maintaining fiscal consolidation targets under the IMF program. Businesses and individuals should begin planning for these changes to ensure smooth compliance when they take effect in 2025.