Withholding Tax in Sri Lanka

Posted by Simplebooks on April 1st, 2021

Withholding Tax is a type of income tax levied on an individual based on their income level. A withholding tax is the percentage that an employer deducts from an employee's salary and contributes to the government directly.

The rates of Withholding Tax in Sri Lanka needed to be paid may differ depending on the source of income. Resident (Locally operating) Companies are expected to withhold 14 percent tax on interest, discount, fee, allowances on natural resource, loans, dividends, royalty, premiums, or retirement payment, or pay percentages of lottery, incentive, gaming, or gambling winnings, and any payment or allocation that is derived from a Sri Lankan source.

While Withholding Tax is usually paid only on transactions made to non-residents, however in the following cases they are often charged on resident persons as well in the case of lotteries, bonus, gambling, or betting winnings and sale price owing to the Gem sellers through gem auctions performed by the National Gem and Jewelry Authority of Sri Lanka.

           

Any bank or financial institutions are mandated to deduct 5% of the interest paid to a corporation on any amount of money deposited with them as income tax. The depositor is entitled to a certificate which states the total amount of interest, the sum of withholding tax, and the net amount of interest paid. In the case of Treasury bills and Treasury bonds sold by the Central Bank, no Withholding Tax is deductible as the Central Bank itself sells the Treasury bills and Treasury bonds in the primary market.

How Withholding Tax is Calculated? Calculations for With Holding Tax should be based on the total sum payable, without including any Value Added Tax (VAT). Once you've calculated the gross payables, you'll need to add the applicable tax rate to that amount. If a party wants to transfer the total cost of an invoice to a non-resident, this is considered the net amount so therefore applicable tax rate should be determined on the total amount. However, when a collective investment is made, the necessary payments are made depending on the percentage of ownership owned by each party. If the share proportion cannot be determined, the percentages will be considered equal. Furthermore, In the case that foreign currency needs to be converted into rupees, the entity making the payment must use the currency exchange rate (selling rate) reported on the Sri Lankan Central Bank Website on the date of remittance.

However, an important aspect that should be noted that according to Sections 179, 180, and 181 of the Inland Revenue Act, penalties would be levied in the circumstances where there are late payments on tax, underpayment of tax or false or misrepresentative statements to tax officials. In the case of Late Payments of tax, section 179 states that an entity who fails to pay the due or at least partial of the total due within 14 days after the initial due date, will be subjected to a 20% penalty on the total sum. In the case of Underpayment of taxes, according to the section 180, if a taxpayer has underpaid (whether it is a result of incorrect statements or omissions either intentionally or due to negligence), a penalty of 75% will be imposed if the value of the underpayment amounts to more than LKR 10 million or 25% of the entity's overall tax liabilities for the year, and a penalty of 25% if the above limits are not met. Finally, as for the case of making false or misleading claims to tax officials, as per section 181, the penalty would be the total overlooked or overestimated amount as a result of the false statement that exceeds Rs.50,000. There will be no liability levied, however, whether the person who made the claim is anonymous or may not fairly be assumed to know that the information was incorrect or misleading.

The entity responsible for paying the withholding tax is known as the “Withholding Agent”. The withholding agent is responsible for maintaining the Withholding Tax payable sum from any form of payment specified in the Inland Revenue Department notice and crediting the retained amount to the government. The withholding agent is responsible for deducting the Withholding Tax when an amount is paid, reinvested, credited, accumulated, or made available to another party. The received Withholding Tax amount must be paid to the Commissioner General of Inland Revenue Department within 15 days of the end of each calendar month by the Withholding Agent. Furthermore, every Withholding Agent is required to provide each individual with a certification of deduction in the given format. This certificate covers one calendar month and must be served within 30 days of the month's end.

If one is looking to become a withholding agent, they are required to register under the purview of the Commissioner General of Inland Revenue, within 30 days before deducting the Withholding Tax. The registration process can be either done via manually or online. Either method would make no difference should you prefer one more than the other since it's up to you to select the most preferred method. Should you require more details, you could always contact the Inland Revenue Department of Sri Lanka to clarify any inquiries you may have.

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Simplebooks
Joined: April 1st, 2021
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