Discover how Sri Lanka’s income tax threshold raise to LKR 150,000 benefits taxpayers. Read the full analysis now.
On December 18, 2024, President Anura Kumara Dissanayake announced a landmark revision to Sri Lanka’s income tax framework. This change, negotiated with the International Monetary Fund (IMF), aims to provide significant relief to middle-income earners while ensuring fiscal responsibility. Here’s an in-depth analysis of the changes, their rationale, and their broader implications.
Motive: Addressing Economic Challenges and Public Concerns
Sri Lanka has faced numerous economic challenges in recent years, including debt restructuring, inflation, and public dissatisfaction with tax policies. The government’s decision to revise the Pay As You Earn (PAYE) tax threshold from LKR 100,000 to LKR 150,000 reflects its commitment to easing financial burdens on citizens, especially professionals who had expressed dissatisfaction with the previous tax regime.
President Dissanayake stated, “We have succeeded in revising the PAYE tax to provide more relief to lower-income earners while offering less to higher-income brackets.” This change aligns with the government’s broader strategy of balancing fiscal consolidation with social equity.
Body: Key Changes to the Tax System
1. Revised Income Tax Thresholds
The PAYE tax threshold will increase to LKR 150,000 per month, effective April 1, 2025. This adjustment provides full tax exemption for individuals earning up to LKR 150,000 monthly. Furthermore, the first tax slab, taxed at 6%, now extends from LKR 500,000 to LKR 1,000,000 annually.
Impact on Taxpayers:
- Individuals earning LKR 150,000 per month: 100% tax-exempt.
- Monthly income of LKR 200,000: 71% tax-exempt.
- Monthly income of LKR 250,000: 61% tax-exempt.
- Monthly income of LKR 300,000: 47% tax-exempt.
- Monthly income of LKR 350,000: 25.5% tax-exempt.
These changes offer considerable relief to middle-income earners, enhancing disposable income and economic participation.
2. Adjustments to Corporate and Value Added Taxes
To foster a more competitive business environment, the corporate tax rate for service exports will reduce from 30% to 15%. Additionally, Value Added Tax (VAT) will be removed from locally produced milk and yogurt, promoting nutritional access and supporting the dairy industry.
3. Withholding Tax on Bank Deposits
The withholding tax on bank deposits will increase from 5% to 10%. However, exemptions will be available for lower-income earners, who can claim them through a streamlined process at the Inland Revenue Department.
4. Property Tax and Levy Revisions
The government plans to introduce a property tax in 2025 and replace the Special Commodity Levy with VAT. These measures aim to simplify the tax system while safeguarding local producers.
Conclusion: A Balanced Approach to Taxation
The revisions to Sri Lanka’s income tax policy signify a step toward a more equitable tax system. By providing greater relief to lower-income earners and moderately taxing higher-income brackets, the government addresses public grievances while maintaining fiscal responsibility. These changes, coupled with strategic amendments to corporate and VAT policies, aim to stimulate economic growth, improve living standards, and rebuild public trust.
However, the success of these reforms depends on their implementation and the government’s ability to manage potential challenges, such as ensuring compliance and mitigating impacts on business operations.
As Sri Lanka navigates its economic recovery, the revised income tax framework represents a hopeful stride toward stability and prosperity.