Sweeping Inland Revenue reforms signal higher capital gains taxes, broader withholding rules and aggressive compliance measures as Colombo pushes fiscal consolidation and tax base expansion amid economic recovery pressures.
Sri Lanka is preparing for one of the most significant tax overhauls in recent years, with the government unveiling a draft bill that proposes wide-ranging amendments to the Inland Revenue Act No. 24 of 2017. Published in an Extraordinary Gazette by President and Finance Minister Anura Kumara Dissanayake, the proposed reforms reflect a decisive shift in revenue policy as the country continues its fiscal consolidation program and economic stabilization efforts. Although the changes require parliamentary approval before taking effect, they already signal a clear policy direction focused on expanding the tax base, strengthening tax compliance and improving state revenue collection mechanisms.
At the heart of the proposed reforms is a notable increase in capital gains tax. Profits earned from the sale of land, buildings and shares, currently taxed at 10 percent, are set to rise to 15 percent. In addition, another category of capital gains is proposed to jump from 10 percent to 30 percent, marking a sharp escalation. The government’s objective appears straightforward: capture a larger share of high-value transactions and ensure that wealth generated through asset sales contributes more substantially to public finances. This move aligns with broader efforts to enhance progressive taxation and reinforce domestic revenue mobilization.
The bill also expands the Withholding Tax framework, significantly widening its reach across professional services. Under the revised system, a 5 percent tax will be deducted at the source of payment and remitted directly to the Inland Revenue Department. Newly included groups span auditors, valuers, personal trainers, sports consultants, artists, photographers, therapists, beauticians, social media specialists, brand ambassadors and debt collectors. Many of these professionals previously operated outside structured tax deduction channels. By incorporating them into the withholding mechanism, authorities aim to close compliance gaps and reduce revenue leakage within the informal and semi formal sectors.
Beyond higher rates and broader coverage, the reform package introduces a one time compliance relief measure. Individuals and businesses with outstanding tax liabilities may benefit from an interest waiver on unpaid taxes accrued before March 31, 2023. To qualify, taxpayers must settle the original dues and penalties in full within six months of the new law coming into force. This initiative seeks to encourage voluntary settlement while clearing legacy arrears that have weighed on the revenue system.
Administrative changes are also embedded in the proposal. From April 1, 2026, the requirement to submit estimated tax returns will be abolished. Instead, taxpayers will make installment payments calculated based on the previous year’s taxable income, a shift designed to simplify reporting and ease compliance burdens. Additionally, from April 1, 2025, taxpayers who declare and pay at least 120 percent more tax than in the preceding year may submit returns directly without facing additional investigations, a measure intended to promote voluntary disclosure and transparency.
Collectively, these amendments represent a calculated attempt to modernize tax policy, align incentives with economic objectives and reinforce Sri Lanka’s path toward fiscal sustainability.
