Tax arrears interest fully waived under amended revenue law

The Inland Revenue Department says the Inland Revenue (Amendment) Act No. 11 of 2026 was formally certified by the Speaker on June 3 and published in the Gazette on June 5, while KPMG Sri Lanka has issued a tax analysis report on the new legislation.

The department, in a special official notice issued on June 8, also confirmed that under Section 42 of the amended Act, a relief mechanism has been introduced to fully waive interest on outstanding tax arrears. The amendment brings wide-ranging changes to tax rates, taxpayer obligations, and compliance procedures.

Below is a summary of key reforms and provisions:

1. Full waiver of interest on tax arrears

All interest charged on late or underpaid taxes under the Inland Revenue Act No. 24 of 2017 (including AIT, APIT, capital gains tax, withholding taxes, and NGO tax), the Surcharge Tax Act No. 14 of 2022, and the Debt Repayment Levy Act No. 35 of 2018 will be fully waived.

To qualify, taxpayers must settle the full principal tax liability within six months from June 3 (by December 2). Penalties may also be reduced upon written request with valid reasons, but any imposed penalties must also be paid by the deadline. The relief applies only to arrears up to the 2024/2025 assessment year.

Taxpayers who have already paid the principal amount are also eligible, but any interest already paid before June 3 will not be refunded. Those under audit or appeal may also settle dues and qualify for relief, with refund claims permitted if appeals are later decided in their favour.

2. Increase in Capital Gains Tax

The capital gains tax rate for individuals and partnerships has been increased from 10% to 15%.

For trusts, unit trusts, mutual funds, and NGOs, the rate has been raised to 30%.

Capital gains must be reported and tax paid within 30 days of the gain being realised, under a self-assessment system.

3. Tax credit for salary arrears

From January 1, 2024, employees receiving lump-sum salary arrears will be eligible for a tax credit, which can be offset against PAYE/APIT obligations.

4. Motor vehicle sale gains exempted

From April 1, 2024, capital gains from the sale or disposal of private motor vehicles are excluded from “other income” and are no longer subject to taxation.

5. Capital allowances for investment incentives

From April 1, BOI-approved businesses investing between USD 250,000 and USD 3 million in depreciable assets (excluding intangibles) anywhere in Sri Lanka will be eligible for a 100% enhanced capital allowance.

6. Expansion of withholding tax scope

The withholding tax system will now cover a wider range of professionals, including personal trainers, artists, performers, event organisers, photographers, IT specialists, social media professionals, athletes, consultants, writers, and others. Entities making payments must issue WHT certificates.

7. New return filing rules

The Statement of Estimated Tax Payable (SET) requirement will be abolished from April 1.

From April 1, 2025, individuals whose income is only subject to APIT and who earn less than Rs. 5,000 in annual interest income will not be required to file tax returns.

Senior citizens will be allowed to submit returns electronically or in writing.

8. TIN requirements expanded

From April 1, the Tax Identification Number (TIN) will no longer be confidential. It will be mandatory for banking services, credit cards, vehicle registration, land transfers, and company share transactions.

9. Stricter penalties for tax evasion

From April 1, the Inland Revenue Department will be empowered to submit certificates on tax evaders to magistrate courts, except where appeals or reviews are pending. Offences such as failure to file returns or register for TIN may result in fines up to Rs. 400,000, six months imprisonment, or both.

10. Withdrawn provisions

Mandatory deadlines of six to nine months for providing documents requested by the Inland Revenue Department have been removed following Supreme Court considerations