Sri Lanka brings back PAYE as Advance Income Tax

ECONOMYNEXT – Sri Lanka has brought a revised version of pay-you-earn tax as an Advance Personal Income Tax to be deducted by the employer, following requests from employed persons, the Department of Inland Revenue has said.

Withholding taxes including PAYE allows taxes to be paid without going into the hassle of filing tax returns, sometimes multiple time of the year.

It also allows the government to collect taxes on an ongoing basis, providing steady cashlows.

Sri Lanka’s new administration suddenly announced that PAYE tax would be abolished without any prior announcement and also abolished a number of other withholding taxes, which upset tax payers who were comfortable with advance deductions each month.

A lifting of the threshold to 250,000 rupees a month for income tax remains.

Sri Lanka gradually moved away from developing policy using white papers and public consultation, after independence from British rule, paving the way for an extreme form of regime uncertainty.

The policy instability along monetary instability from the central bank (which triggers currency crises, negative output shocks, inflation and higher interest rates) are key factors that have held the country back over the last 70 years, analysts have said.

The Inland Revenue Department said withholding tax agents (WHAs) who are not employers could also deduct regular fixed payments such as interest and rent on the request of the recipient.

It is not clear whether legislation will force persons to open income tax files.

Under the British system originally inherited income tax was voluntary, and anyone who paid sufficient PAYE and WHT did not have to file year end taxes burdening both themselves and the tax office if they did not have large incomes through other sources which were not captured by advance taxes.

The full notice to Withholding Tax Agents is reproduced below:

INLAND REVENUE DEPARTMENT

Notice to the Taxpayers and Withholding Agents (WHA)

Implementation of Proposed Changes to the Inland Revenue Act, No. 24 of 2017

As instructed by the Ministry of Finance on January 31, 2020 and March 05, 2020, following changes have been proposed to the Inland Revenue Act, No. 24 of 2017 (IRA), pending formal amendments being made to the Act and to be implemented with effect from January 01, 2020, unless otherwise stated.

1. Removal of Withholding Tax (WHT) on the payments for Resident Persons

Requirement for deduction of WHT (including PAYE) on any payment which is due and payable to any of the following persons by any WHA is removed;

a) Resident employee in respect of the services performed (employment) by such employee.

However,

i. Retaining part of the payment of terminal benefits in lieu of income tax by the employer/ETF/Provident Fund is required. (A separate guideline has been published for this purpose by

a Circular No. SEC/2020/02 dated 18.02.2020)

ii. With effect from 01.04.2020, on the request of employee whose gross remuneration for a month exceeds Rs. 250,000 per month or Rs. 3,000,000 for a year of assessment, an Advance Personal Income Tax could be deducted by the employer. (A separate guideline will be published for this purpose in due course)

b) Resident person in respect of the dividend, interest, discount, charge, natural resource payment, rent, royalty, premium or retirement payment received and /or on service performed by such individual

However, with effect from 01.04.2020, if any of above payment is a regular fixed payment (interest, rent etc.), on the request of the recipient, an Advance Income Tax could be deducted by the payer of such payment (if such payer is a WHA), as per the declaration made to the WHA. (A separate guideline will be published for this purpose in due course)

c) Resident partner in respect of the partner’s share of profit allocated by the partnership

d) Resident individual in respect of any service fee paid [referred to in section 85(1)(a) of the IRA as published in the notice on 01.01.2020]

Accordingly, WHA is not required to deduct WHT on the above payments [except the circumstances referred to in above sub-paragraphs (a) and (b)] and taxpayers are required to declare the income from above sources also in their income tax return and make the income tax payment (after crediting Advance taxes deducted) in quarterly installment basis subject to the provisions of the IRA.

Those who have not registered for tax are required to register with IRD for this purpose.

However, WHT on following payments to be made to any person shall continue to apply:

• Amounts as winning from lottery, reward, betting or gambling – 14%.

• Sale price payable to the seller of any gem sold at an auction conducted by the National Gem & Jewellery Authority – 2.5%

2. WHT on the payments to Non-Resident Persons

Deduction of WHT is applicable by any person on or after January 01, 2020, on any payment which has a source in Sri Lanka and is due and payable to any non-resident person.

The tax (WHT) shall be deducted at the rate as appended, subject to the provisions of relevant Double Tax Avoidance Agreement (DTAA), on any of the following payments;

• Dividend – Exempt

Interest (Excluding exempt Interest) – 5%

However, deduction of WHT on interest payments to any non-resident individual but who is a citizen of Sri Lanka, should be made, if his aggregate interest income from a bank/financial institution exceeds 3

Rs. 250,000 per month or Rs. 3,000,000 for the year of assessment (for the period from 01.01.2020 to 31.03.2020 if exceeds Rs. 750, 000)

Any other payment [excluding the payments under section 85(2)and exempt gains & Profits]- 14%

Deduction of WHT under section 85(2) and Extraordinary Gazette Notification No. 2064/51 dated April 01, 2018, remains unchanged. Accordingly, when a resident person makes a payment to a non-resident person with respect to land, sea, air transport or telecommunication service is subject to WHT at 2% of the payment, subject to the provisions of relevant DTAA.

3. Revision of Income tax rates

Income tax rate of a company, an individual or a partnership, income tax rates on certain profits of specific industries and tax slabs of individuals are revised as appended.

i. For Companies

a) on taxable income of a company – 24%

b) on gains and profits from following specific businesses – 14%

i. Small and Medium enterprises (as defined in section 195)

ii. Conducting a business of sale of goods or merchandise where the payment for such sale is received in foreign currency and remitted through a bank to Sri Lanka

iii. Specified undertaking (as defined in section 195)

iv. Educational services

v. Promotion of tourism

vi. Construction services

vii. Agro processing

viii. Healthcare services

ix. Dividends received from a resident company

c) on gains and profits from Manufacturing – 18%

d) on gains and profits from conducting betting and gaming – 40%

e) on gains and profits from manufacture and sale or import and sale of any liquor or tobacco products – 40%

ii. For individuals (Residents, non-residents)

On taxable income (in the case of non-resident individuals, on the income other than final withholding payment)

Taxable Income Tax Payable

1st – Rs. 3,000,000 6%

2nd – Rs. 3,000,000 12%

On the balance 18%