Understanding Withholding Tax (WHT) and Advance Income Tax (AIT) in Sri Lanka

The Sri Lankan government collects taxes in various ways to ensure a steady flow of revenue. Two important types of taxes affecting businesses and individuals are Withholding Tax (WHT) and Advance Income Tax (AIT). Here’s a simple breakdown of what they are and how they work.

What is Withholding Tax (WHT)?

Withholding Tax (WHT) is a tax deducted at the source when certain types of payments are made. The payer deducts a portion of the payment and sends it directly to the government. This ensures that taxes are collected upfront, reducing the risk of non-payment.

When is WHT Applied?

1. Service Fee Payments to a Resident Individual (Not an Employee)

   • Applicable When: Aggregate payment exceeds Rs. 100,000 per calendar month.
   • Includes:
     • Teaching, lecturing, examining, invigilating, or supervising examination.
     • as a commission or brokerage to a resident insurance, sales canvassing agent; or or Relevant WHT Rate (%) 5% on full payment
     • for services provided by such individual in the capacity of independent service provider such as doctor, engineer, accountant, lawyer, software developer, researcher, academic or any individual service provider as may be prescribed by regulation
   • WHT Rate: 5% on the full payment.

2. Interest or Discount Paid

   • WHT Rate: 5%.

3. Rent (defined in Section 195 of the IRA) payments to a resident person (if aggregate amount exceeds Rs. 100,000 per calendar month).

   • WHT Rate: 10%.

4. Includes:

   • Service fee or an insurance premium payments to a non-resident person

   • Royalty (as defined in Section 195 of the IRA).

   • Charge, natural resource payment (defined in Section 195 of the IRA) or premium

   • Winnings from a lottery, reward, betting, or gambling.

   • Rent payments to a non-resident person.

   • WHT Rate: 14%.

5. Dividend Payments

   • WHT Rate: 15%.

6. Payments to non-resident person with respect to land, sea, air transport or telecommunication service in terms of section 85(2) and Extraordinary Gazette Notification No. 2064/51 dated April 01, 2018

   • WHT Rate: 2%.

7. Sale price payable to the seller of any gem sold at an auction conducted by the National Gem & Jewellery Authority.

   • WHT Rate: 2.5%.

WHT tax will be applicable to both residents and non-residents. However, WHT will not be applicable when:

• Payments are made by the Sri Lanka Government, including any local authority and Government Departments (other than Public Corporations, Universities, and Government-owned entities and businesses).
• Payments are made by individuals, unless the payment is made in conducting a business.
• Interest is paid to a financial institution on the ordinary loans and advances provided by such financial institution.
• Interest or discount is paid to any person on Security or Treasury Bonds under the Registered Stocks and Securities Ordinance (Chapter 420) or Treasury Bills under the Local Treasury Bills Ordinance (Chapter 417).

When should you deduct and pay WHT?

The withholding agent must deduct the taxes at the time an amount is paid, credited, re-invested, accumulated, capitalized, or made available to a person.

The agent must pay the collected WHT amount to the Commissioner General of Inland Revenue within 15 days after the end of each calendar month. Each of these time periods is identified with a period code, which changes for every payment period.

Certificate of Deduction

Every withholding agent is required to issue a certificate of deduction to each person in the specified format. This certificate shall cover a calendar month and must be served within 30 days of the end of the month.

The certificate needs to comply with the formats as below.

How to File WHT Returns and Reference Materials

For more details on how to file WHT returns, refer to the official Inland Revenue Department guide: How to File WHT Return.

For more details on WHT regulations, refer to the official IRD circular: IRD Circular on WHT.

(Sources: Inland Revenue Department of Sri Lanka)

What is Advance Income Tax (AIT)?

Advance Income Tax (AIT) is a tax deducted in advance from certain types of income before it is received. It ensures that taxes are collected gradually rather than as a lump sum at the end of the year.

When is AIT Applied?

AIT is deducted from the following payments:

• Dividends: AIT is charged at 15% when a company distributes dividends to shareholders. This is considered a final tax, meaning the recipient does not have to pay any further tax on the dividend income.
• Interest or Discounts: Interest or discount income is subject to 5% AIT.
• Rent: If a resident individual earns rental income exceeding Rs. 100,000 per month, a 10% AIT is deducted on the total amount.
• Other Payments: Certain other payments are subject to a 14% AIT.

Key Takeaways

• WHT ensures that taxes are deducted at the source, making tax collection easier for the government.
• AIT applies to specific income types like dividends, interest, and rent, ensuring that taxes are collected in advance.
• If you receive payments subject to WHT or AIT, be aware that tax deductions may already have been made on your behalf.
• For businesses, it is important to comply with WHT and AIT rules to avoid penalties.

By understanding WHT and AIT, individuals and businesses can manage their taxes effectively and stay compliant with Sri Lankan tax regulations.