Learn all about the updated Withholding Tax rules in Sri Lanka effective from 1st April 2025, as per the latest IRD Act. Understand rates, compliance, and how it affects you.
Everything You Need to Know About Withholding Tax in Sri Lanka from 01/04/2025 (IRD Act Update)
Withholding Tax (WHT) is a critical part of Sri Lanka’s tax system that affects individuals, businesses, and professionals alike. From April 1st, 2025, the Inland Revenue Department (IRD) has introduced important updates to the Withholding Tax regulations under the latest IRD Act. Whether you are a taxpayer, employer, or service provider, understanding these changes is essential for compliance and accurate tax planning.
What is Withholding Tax (WHT)?
Withholding Tax is a tax deducted at source on certain payments such as dividends, interest, rent, professional fees, and commissions before the payment reaches the recipient. The payer (often a business or employer) is responsible for deducting the tax and remitting it to the IRD.
This system helps the government collect tax revenue efficiently and ensures tax compliance by spreading the tax collection points.
Key Changes to Withholding Tax Effective 01/04/2025
The new IRD Act has revised withholding tax rates and broadened the scope of payments subject to WHT. Here are the main points to note:
1. Expanded List of Payments Subject to WHT
The following payments will attract withholding tax at specified rates:
- Dividends
- Interest income
- Rent payments
- Royalties
- Professional fees and technical services
- Contract payments
- Commission payments
2. Revised Tax Rates
The updated withholding tax rates effective from April 2025 are as follows:
| Payment Type | WHT Rate (%) |
|---|---|
| Dividends | 14% |
| Interest | 14% |
| Rent | 14% |
| Royalties | 14% |
| Professional Fees | 5% |
| Contract Payments | 5% |
| Commission Payments | 5% |
Note: Rates apply unless reduced or exempt under a double taxation agreement or specific IRD exemptions.
3. Thresholds and Exemptions
Small payments under a certain threshold may be exempt from WHT. Ensure to check the latest IRD circulars for applicable exemption limits.
Who is Responsible for Deducting Withholding Tax?
According to the IRD Act, the payer is responsible for deducting the WHT at the time of payment. Failure to deduct or remit WHT correctly can lead to penalties and interest charges.
If you receive payments subject to WHT, always confirm if tax has been deducted. If not, you may have to pay the tax directly when filing your income tax return.
How to File and Remit Withholding Tax
Businesses must:
- Deduct the correct amount of tax at the time of payment
- Submit monthly WHT returns to the IRD using prescribed forms
- Remit the deducted tax by the due date
Individuals or companies that receive income with WHT deducted should report the gross income and the withholding tax deducted when filing their annual tax returns.
Impact of Withholding Tax Changes on You
- Employees and Contractors: If you provide professional services or contracts, WHT will be deducted at 5% from your payments.
- Investors: Dividends and interest earned will now be taxed at 14% at source.
- Business Owners: Ensure your accounting systems are updated to deduct and remit WHT accurately to avoid penalties.
How TaxCalculator.lk Can Help
WHT compliance can be complex, especially with the new 2025 rules. At TaxCalculator.lk, we offer:
- Free online tax calculators to estimate your WHT liabilities
- Step-by-step guides on filing WHT returns
- Expert tips to stay updated with IRD regulations
👉 Try our free WHT calculator now: www.taxcalculator.lk
Frequently Asked Questions (FAQs)
Q1: What happens if I don’t deduct withholding tax correctly?
A: The IRD may impose penalties and interest. It is mandatory to deduct and remit WHT on time.
Q2: Can withholding tax rates change again?
A: Yes, tax rates can change with government budgets. Always check the latest IRD notifications.
Q3: Is withholding tax the final tax?
A: Not always. WHT is an advance tax; you may have to file a tax return and pay additional tax or claim a refund.
Conclusion
Understanding the new Withholding Tax rules effective from 01/04/2025 is essential for smooth financial operations and compliance in Sri Lanka. Keep your business informed, deduct correctly, and avoid penalties.
Stay tuned to TaxCalculator.lk for more tax updates and tools tailored for Sri Lankan taxpayers.
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