Sri Lanka’s Inland Revenue (Amendment) Act No. 11 of 2026 What every taxpayer needs to know -By Suresh R. I. Perera

Sri Lanka’s Inland Revenue (Amendment) Act No. 11 of 2026 What every taxpayer needs to know -By Suresh R. I. Perera

Source : sundayobserver.lk

The Inland Revenue (Amendment) Act No. 11 of 2026 received Parliamentary certification on June 3, 2026 and was published in the Gazette on June 5, 2026.

Motor vehicles: Finally out of the “other income” net

With retrospective effect from April 1, 2024, gains arising from the realisation of motor vehicles that are neither trading stock nor depreciable assets eligible for capital allowances are expressly excluded from “other income” under Section 8.

Gifting assets to the Government:

Donations of assets to the or to universities are treated as tax-neutral, meaning they do not result in either a capital gain or a capital loss. This provision came into effect on June 3, 2026.

Donation carry forward: Qualifying payments get a second life

The Act permits unused deductions for certain qualifying payments, including donations to Government and approved institutions, to be carried forward when they cannot be fully utilised due to insufficient assessable income. The balance can be claimed in subsequent years, starting from April 1, 2025.

Life insurance proceeds: Section 52A brings long-awaited clarity

From April 1, 2025, amounts received by an individual under a life insurance policy on death, maturity, or surrender are excluded from assessable income, except for payments treated as employment or business income, annuities, pensions, or similar benefits, with the rule applying only to policies issued by licensed insurers.

Unit Trusts and Mutual Funds: Comply or be treated as a company

From April 1, 2025, funds must issue unit holders certificates detailing income, exemptions, and withholding tax within five months of year-end. Non-compliance results in the fund being treated as a resident company subject to corporate tax.

Residency rules reshaped for ships, visas, and overseas contracts

From April 1, 2025, foreign nationals working on Sri Lankan ships are taxed only on that employment income, investor visa holders are excluded from tax residency, and individuals leaving for at least one year of foreign employment with an unrelated employer are deemed non-resident.

WHT expanded to a long list of professionals

From June 3, 2026, a 5% withholding tax applies to a significantly expanded list of professionals earning over Rs. 100,000 monthly, including auditors, modellers, personal trainers, coaches, valuers, artists, actors, dancers, singers, musicians, event organisers, photographers, videographers, therapists, counsellors, beauticians, cooks, electricians, dentists, veterinarians, social media specialists, brand ambassadors, sports persons, IT specialists, advertising agents, advisors, translators, writers, and debt collectors.

Quarterly instalment tax payment regime simplified

From 2026/2027, the Statement of Estimated Tax is abolished. Instalments could also be based on prior-year tax liability, with adjustments permitted. The system incorporates foreign tax credits and simplifies compliance for most taxpayers.

Salaried employees: A tax credit for salary arrears

The amendment introduced a credit mechanism to prevent excessive taxation on lump-sum salary arrears. Refunds must be processed within three months, improving fairness and administrative efficiency for affected employees.

Capital Gains tax rate increase: A significant policy shift

From June 3, 2026, capital gains tax rates rise from 10% to 15% for individuals and partnerships, and to 30% for trusts, unit trusts, mutual funds and NGOs.

Government-assisted private schools: A refined exemption framework

The amendment refines the tax exemption for certain educational institutions by replacing an unclear earlier provision with a clearer and more structured framework.

Previously, the exemption applied broadly to Government-assisted private schools without defining eligibility, creating uncertainty for the taxpayers and authorities. The revised approach introduces specific conditions while preserving the exemption for qualifying institutions.

It excludes schools incorporated under the Companies Act. Schools must also be registered with the Ministry of Education and comply with Government and Ministry directives, reinforcing accountability and alignment with national education policies. A clear definition is now provided, requiring that a qualifying school regularly receives Government support.

“Government assisted private school” is defined to mean, a private school that regularly receives assistance from the Government, whether in the form of monetary support or of essential goods needed for its functioning.

Magistrate’s Court recovery: A sharper collection tool

From April 1, 2026, unpaid taxes can be enforced through Magistrate’s Court orders treating tax as a fine, with limited judicial review. This significantly strengthens the Inland Revenue Department’s enforcement powers.

Prosecution under the new chapter XVIIA

The Act establishes penalties for non-compliance after a warning notice. This includes failure to file with the annual statement (WHT), failure to file the return income (CGT), failure to register with the Commissioner General, failure to appear before the Commissioner General in compliance with a notice given and failure to furnish a tax return.

Offences may result in fines up to Rs. 400,000 or imprisonment for six months, signalling stricter enforcement.

Interest waiver: A window that closes on December 2, 2026

Interest on taxes up to 2024/2025 will be waived if principal is paid by December 2, 2026. This applies even to disputed assessments, offering a valuable window for taxpayers to regularise liabilities.

TIN mandatory for a wide range of transactions

From April 1, 2026, Tax Identification Numbers are needed for a wide range of transactions, including banking, property registration, and licensing.

Overall impact

The Amendment Act represents a major shift in Sri Lanka’s tax system, combining stricter enforcement, broader tax coverage, and targeted incentives. While compliance obligations increase substantially, measures such as investment incentives and relief provisions aim to balance revenue mobilisation with economic growth and taxpayer support.

The writer, an Attorney-at-Law (LLB), FCMA(UK), CGMA, FCMA, was awarded Tax Practice Leader of the Year 2024 (ASPAC) by International Tax Review (ITR) and was a top-four finalist for Tax Litigation and Disputes Practice Leader of the Year (ASPAC).