The Hon. (Dr.) Anil Jayantha - Minister of Labour and Deputy Minister of Economic Development

¶ 01 Thank you very much, Hon. Deputy Speaker. I first state that this is a necessary Amendment Bill aligned with our estimated revenue proposals for 2025.

¶ 02 A number of misconceptions were raised about tax principles and collection mechanisms. One claim was that imposing 15 per cent tax on service exports creates a suicidal situation; another, that this is an unprecedented imposition. Let me remind the Opposition that taxation on service export income is grounded in the Inland Revenue Act, No. 24 of 2017. Under that Act, from 1 April 2018, tax was imposed on service exports as well as on goods exports. Companies then received a 50 per cent concession off the 28 per cent corporate rate, yielding 14 per cent. So this is not “unprecedented.” We must, however, be prudent: “income tax” is not a separate income of Government; it is the Government’s appropriation of part of national income. Poorly designed policy causes problems.

¶ 03 From April 2018, the 14 per cent rate applied. During President Gotabaya Rajapaksa’s tenure in 2019, broad tax cuts were introduced, including removal of the service export tax from 1 January 2020. Those were criticized for sharply lowering revenue and were short-sighted. We take decisions considering long-term impacts. I ask the Opposition not to panic. If our policy truly harms the economy, you may benefit politically—but we study the facts.

¶ 04 With advances in technology, taxing service exports and digital incomes faces compliance challenges. YouTubers, freelancers and similar earners are already within the income tax net but compliance is weak.

¶ 05 [Interjection by The Hon. Ravi Karunanayake]

¶ 06 Hon. Member, your point that the 2018 measure was later withdrawn by Minister Mangala Samaraweera within six months is noted. My point is that the concept and legal basis have existed since 2018; it is not something newly invented by this Government to “break technology.”

¶ 07 On tax architecture: taxes broadly split into indirect (ad valorem) and direct taxes. Around 80 per cent of many governments’ revenue in our region is from indirect taxes, but the present Bill concerns direct taxes—income tax. Here we must ensure fairness, simplicity and ease of compliance. We have focused on simplification and fairness in these amendments, with more to come.

¶ 08 For income tax, persons are either individuals or bodies corporate. Income arises from multiple sources—business profits, employment income, investment income, etc.—and rates vary. Companies now generally pay 30 per cent; individuals face progressive rates from 6 to 36 per cent, with preferential caps for some income such as dividends, capped at 15 per cent.

¶ 09 Service export income had become fully exempt, meaning persons whose entire income was from service exports could end up paying no tax at all, raising fairness concerns. We now cap the applicable rate at a maximum of 15 per cent, reflecting current realities and supporting technology while ensuring fairness. If any company or individual seeks to exploit concessions to avoid fair liability, that is not acceptable. This Government is intent on ending corruption, especially political corruption, and establishing a new discipline in public finance.

¶ 10 On personal income tax thresholds: before the election we stated our intent, if possible, to move the annual tax-free threshold to Rs. 2.4 million (Rs. 200,000 per month). Given fiscal constraints, we moved the monthly threshold from Rs. 100,000 to Rs. 150,000, prioritizing relief to the lowest income brackets. Some accuse us of not keeping a promise; others say moving to Rs. 150,000 deprives prior reliefs at Rs. 100,000. If we had moved straight to Rs. 200,000, the same critics would say we destroyed the tax base. Expanding the tax base is not merely increasing the number of files; Sri Lanka’s base is eroded by tax avoidance and evasion. The key is bringing those segments into the net using technology.

¶ 11 The Asian region’s average tax-to-GDP is about 22 per cent, yet Sri Lanka’s is far lower, indicating large leakages. We aim to close gaps while delivering relief and maintaining fairness.

¶ 12 How does the new threshold help? Previously, income over Rs. 100,000 per month was taxable. Now, only income over Rs. 150,000 is taxable. The first slab above Rs. 150,000—Rs. 41,666 per month—is taxed at 6 per cent; so is the second Rs. 41,666. Previously, that second slab was taxed at 12 per cent. Thus, beyond the Rs. 50,000 uplift, there is extra relief from the lower rate on the next slab. The maximum absolute monthly benefit from shifting the threshold by Rs. 50,000 occurs for those at the top bracket (36 per cent): 36 per cent of Rs. 50,000 equals Rs. 18,000. In addition, the lower 6 per cent rate on the next Rs. 41,666 yields Rs. 2,500 monthly. So the maximum absolute monthly benefit is Rs. 20,500, while, proportionally, the lowest-income taxpayers gain the highest relative benefit. For example, at Rs. 150,000, the relative gain is effectively 100 per cent versus prior liability; at Rs. 200,000, about 71.4 per cent; at Rs. 250,000, about 62 per cent; and it declines as income rises. This preserves fairness.

¶ 13 On so-called “sin taxes” (cigarettes, alcohol, betting and gaming): we increase the rate from 40 to 45 per cent. We must balance not unduly harming business while capturing due public health and fiscal returns, considering price elasticity of demand.

¶ 14 On withholding tax (WHT) on bank deposit interest: increasing WHT from 5 to 10 per cent improves collection efficiency and self-compliance. In good systems with unified income platforms, source withholding is best practice. Individual rates start at 6 per cent, but interest WHT at 5 per cent was below that, reducing efficiency. Moving to 10 per cent is not a separate final tax; it is a creditable withholding. Taxpayers can file returns and credit the WHT against their final liability. We acknowledge concerns that many small depositors below the monthly threshold may not file to reclaim small amounts. We are preparing instructions to banks and NBFIs and leveraging technology so eligible depositors can declare non-liability and avoid withholding where appropriate, or easily reclaim credits.

¶ 15 For minors’ accounts, multiple accounts may exist but must have a guardian. For tax purposes, husband and wife are two legal persons even if they are one family unit socially. Separate accounts pose no issue; assessments will be done per person. We will verify guardian accounts for minors and treat them fairly.

¶ 16 This Amendment Bill will support revenue targets necessary for managing next year’s Budget. With these clarifications, I conclude. Thank you.