As an employer in Sri Lanka, you have the responsibility of withholding and remitting taxes on behalf of your employees.

Pay As You Earn (PAYE)

Sri Lanka operates a PAYE system, which requires employers to deduct income tax from their employees' salaries at the point of payment. The deducted amount is then remitted to the Inland Revenue Department (IRD).

Your specific responsibilities under PAYE include:

• Calculate and deduct income tax: Withhold the appropriate income tax amount based on your employee's salary and tax band using the PAYE tables provided by the IRD.
• Maintain PAYE records: Keep detailed records of employee salaries, tax deductions, and PAYE tax payments for audit purposes.
• Remit deducted tax: Pay the deducted income tax to the IRD by the 15th day of the month following the deduction.
• Issue tax certificates: Provide each employee with a Certificate of Tax Deduction (Form T-10) by April 30th of the following year, detailing the total tax deducted throughout the year.
• Submit annual declaration: File an annual declaration with the IRD by April 30th, summarizing the total PAYE deductions made for all employees during the year.

It's important to note that employers are liable for the recovery and remittance of PAYE taxes. Failure to comply can result in personal liability for the unpaid taxes.

Social Security Contributions

In addition to PAYE, employers also contribute towards social security schemes for their employees:

• Employees' Provident Fund (EPF): Contribute 12% of the employee's monthly salary towards the EPF, a government-managed retirement savings scheme.
• Employees' Trust Fund (ETF): Contribute 3% of the employee's monthly salary to the ETF, a government-managed fund that provides benefits like unemployment allowance and death benefits.

Employers may be required to make additional contributions depending on the industry and specific employee benefits offered.

By complying with these tax obligations, you ensure your employees' tax contributions are made and that you operate within Sri Lankan tax regulations.

In Sri Lanka, there are two main types of employee tax deductions: Pay-As-You-Earn (PAYE) Tax and Employees’ Provident Fund (EPF).

PAYE Tax

PAYE Tax is an income tax deducted directly from employees' salaries. The tax rates are progressive, meaning higher income earners pay higher percentages. This tax is applicable to all residents and non-residents earning income in Sri Lanka, although residents and non-residents may have different tax treatments. The tax is calculated using a progressive tax scale and is based on an employee's taxable income after certain deductions are accounted for.

Employees’ Provident Fund (EPF)

The EPF is a mandatory contribution to a retirement savings scheme. Employees contribute 8% of their monthly gross salary. This is generally mandatory for all employees working in the private sector in Sri Lanka. There might be exceptions based on specific circumstances or social security agreements with other countries. The EPF is calculated as 8% of an employee's gross monthly salary.

In Sri Lanka, the standard VAT Rate is currently 18%, effective from January 1, 2024. This rate applies to most services. However, certain services are exempt from VAT. These include education services, healthcare services, specific financial services, transportation of passengers by public transport, and residential property rental.

VAT Registration and Filing Procedures

Businesses and individuals providing taxable services in Sri Lanka exceeding a specified turnover threshold are required to register for VAT. The current annual turnover threshold for mandatory VAT registration is LKR 80 million (LKR 20 million per quarter). However, there's also a voluntary registration scheme for those below the threshold.

VAT returns must typically be filed monthly or quarterly, depending on specified criteria by the Inland Revenue Department (IRD). VAT payments must be made monthly, even if filing returns quarterly.

Important Considerations

Exports of services are zero-rated under VAT in Sri Lanka. This means no VAT is charged on the export, and the exporter can claim a refund of input VAT incurred. Businesses can generally claim a credit for VAT paid on inputs (purchases) used for providing taxable services (this is known as input VAT).

The Sri Lankan government offers a range of tax incentives to attract investment and stimulate economic activity. These incentives include reduced corporate income tax rates, tax holidays, and various exemptions and deductions.

Types of Tax Incentives

Corporate Income Tax Rate: The standard corporate income tax rate in Sri Lanka is 28%. However, several incentives offer reduced tax rates:

• BOI Incentives: Businesses operating under the Board of Investment (BOI) can enjoy a concessionary tax rate of 14% on profits for a specific period. This applies to businesses in sectors like manufacturing, exports, and tourism.
• Other Reduced Rates: Businesses in specific sectors like agriculture, education, and IT may qualify for a reduced tax rate of 14% under the Inland Revenue Act.

Tax Holidays: Businesses in certain sectors can be granted a complete tax holiday on profits for an initial period under the BOI scheme.

Exemptions and Deductions: Businesses may benefit from various exemptions and deductions, including:

• Import Duty and Excise Duty Exemptions: BOI-approved businesses can import machinery and equipment duty-free.
• Enhanced Depreciation Allowances: Businesses can claim additional depreciation allowances for qualifying assets.
• Investment Allowances: Businesses can deduct a portion of their capital investment from their taxable income.

Qualification Criteria

The specific qualification criteria for each tax incentive program vary. However, some general factors considered include:

• Industry Sector: Incentives are often targeted towards specific industries the government aims to promote.
• Nature of Business Activity: Export-oriented businesses and those with high investment or job creation potential are generally more favorable.
• Location: Setting up operations in designated economic zones or less developed areas may offer additional benefits.

BOI Incentives - Application Process

For BOI incentives, the application process involves submitting a detailed proposal outlining the business project, including investment amount, job creation potential, and export earnings (if applicable). Following approval, the BOI issues a Certificate of Registration, granting the business access to the relevant tax benefits.

Other Incentives - Application Process

For incentives outside the BOI scheme, the application process typically involves consulting with a tax advisor or the Inland Revenue Department (IRD) to determine eligibility and complete any necessary forms.

Important Considerations

Tax incentives are subject to change. It's crucial to consult with a qualified tax advisor for the latest information and tailored advice for your specific business situation. Maintaining accurate records and documentation is essential for claiming tax benefits and complying with regulations.