1. Introduction The Inland Revenue (Amendment) Bill, 2025, seeks to modify key provisions of the Inland Revenue Act, No. 24 of 2017. The amendments primarily focus on tax refund timelines, tax rate adjustments, and exemptions applicable to personal and corporate income taxation. This report evaluates the implications of these changes on taxpayers, businesses, and government revenue.

2. Key Amendments and Their Impacts

2.1 Reduction in Tax Refund Request Period

• Amendment: The bill reduces the period within which taxpayers can request a tax refund from four years to two and a half years.
• Impact:
  • Encourages taxpayers to submit refund requests promptly.
  • Reduces the backlog of pending tax refunds for the Inland Revenue Department (IRD).
  • May disadvantage taxpayers who fail to meet the shorter deadline, leading to potential revenue retention by the government.

2.2 Increase in Tax-Free Threshold and Revised Tax Rates

• Amendment: The tax-free threshold for personal income tax is increased, with revised tax slabs and higher rates for specific earnings.
• Impact:
  • Provides relief to low- and middle-income earners, reducing their overall tax burden.
  • Higher tax rates on increased income brackets could generate additional government revenue.
  • Businesses with higher earnings may experience increased tax liabilities, influencing investment decisions.

2.3 Exclusion of Certain Services from Tax Exemptions

• Amendment: Gains and profits from certain services will no longer qualify for tax exemptions effective April 1, 2025.
• Impact:
  • Expands the tax base by including previously exempted earnings.
  • Service-oriented industries may face higher tax liabilities, potentially leading to price adjustments for consumers.
  • Government revenue is likely to increase due to the removal of these exemptions.

2.4 Increased Tax Rates for Specific Business Activities

• Amendment:
  • Business income tax rates are revised from 40% to 45% for certain sectors.
  • Gains and profits from betting, gaming, liquor, and tobacco industries will be taxed at 45%.
• Impact:
  • Additional revenue generation from high-margin industries.
  • Potential deterrent for businesses operating in these sectors due to increased tax costs.
  • May discourage investment in these industries, affecting employment and economic contributions.

2.5 Preferential Tax Rates for Foreign Income Remittances

• Amendment: Income earned from foreign sources and remitted to Sri Lanka will be taxed at a maximum rate of 15%.
• Impact:
  • Encourages foreign earnings to be brought into the country, boosting foreign exchange reserves.
  • May incentivize professionals and businesses to engage in international service contracts.
  • Enhances the attractiveness of Sri Lanka as a destination for expatriates and foreign investors.

3. Overall Economic and Social Impact

• Revenue Generation: The amendments are structured to enhance government revenue through higher tax rates and reduced exemptions.
• Investment Climate: While preferential rates for foreign income promote economic inflows, increased business taxes may deter local investments.
• Tax Compliance: Shortening the refund claim period encourages efficient tax filing but may also increase disputes and grievances.
• Cost of Living: Potential price hikes in service-based sectors could affect affordability for consumers.

4. Conclusion The Inland Revenue (Amendment) Bill, 2025, introduces significant changes that balance tax relief for individuals with increased obligations for high-earning businesses and industries. While these amendments aim to boost government revenue and encourage foreign remittances, they also pose challenges for compliance and business growth. Continuous monitoring and stakeholder engagement will be crucial to mitigating any negative effects while maximizing the intended benefits.

Read the Bill