Hon. Nishantha Jayaweera - Deputy Minister of Economic Development

¶ 01 Mr. Speaker, we are debating the Second Reading of the Inland Revenue (Amendment) Bill. The Bill aims chiefly to simplify the tax system by removing complexities and uncertainties identified in administration, thereby improving compliance and broadening the base rather than increasing rates.

¶ 02 Key measures: - Eliminate the requirement to file a Statement of Estimated Tax Payable at the start of the year, and to keep revising estimates. This reduces unnecessary burdens on taxpayers. - If a taxpayer’s current-year income tax exceeds the prior-year tax by more than 120 percent, declares income correctly without fraud or evasion and submits a sworn declaration, and does not seek a refund, the return may be accepted without audit—encouraging compliant taxpayers and reducing harassment. - Capital allowances for machinery: previously, only investments above USD 3 million qualified for immediate relief. To support SMEs, the threshold is reduced to USD 250,000 for new machinery; such cost can be deducted at 100 percent in the year of acquisition, with further depreciation allowances as per rules thereafter. - Exporters may deduct certain overseas expenses incurred in relation to exports, addressing a previous limitation. - Interest and penalties relief: those who failed to pay income tax and surcharges on time due to shocks (pandemic, disasters, Middle East war impact), may settle arrears within six months and have the interest fully waived—supporting business recovery. - Arrears of salary (back-pay): tax will be computed as if received in the years to which it relates, rather than taxing the full lump sum in the year of receipt, to avoid undue spikes. - Withholding on interest: previously a 5 percent withholding applied to all deposit interest. Senior citizens (59+) can claim refunds where annual withholding on interest is less than LKR 60,000. Refund processing will be simplified—paid within three months without detailed audits, reducing paperwork and visits. - Employees with salary income who have other incidental income not exceeding LKR 5,000 per month need not maintain a separate income tax file. - Vehicle capital gains: the sale of a private motor vehicle by an individual will be exempt from capital gains tax; this is now explicitly clarified.

¶ 03 On disputes and litigation: - Following petitions to the Supreme Court against six Clauses in the gazetted Bill, Cabinet agreed to withdraw three Clauses (on insurance sector taxation method, thin capitalization interest provisions, and document production). For deficiency assessments and related appeals, minor amendments will be introduced consistent with Court observations.

¶ 04 Withholding Tax (WHT): - The first Budget of the new Government increased WHT on interest from 5 to 10 percent, but applies only to taxable persons on a self-declaration basis—this Bill provides the necessary legal framework for those declarations.

¶ 05 Overall, the Bill aligns the tax regime with international best practices, strengthens compliance, and broadens the base. In 2025, for the first time in history, Inland Revenue collections exceeded target by over LKR 41 billion despite granting reliefs amounting to around LKR 100 billion. Total tax collections by IRD, Excise and Customs exceeded Budget estimates for the first time, demonstrating improved administration and compliance.