Overview of Tax Compliance in Sri Lanka

Sri Lanka's tax system is an essential component of the country's economy, acting as a vital source of money for the government. It is intended to fund public services and infrastructure development, ensuring the nation's smooth operation and growth. Sri Lanka's tax system includes a variety of levies, each with a unique purpose. The Department of Inland Revenue supervises tax administration and enforcement and governs the Sri Lankan tax system. The department performs audits and investigations to verify that tax rules and regulations are followed. Sri Lanka's taxation system is divided into two categories: direct taxes and indirect taxes. Direct taxes are charged directly on persons and businesses, whereas indirect taxes are levied on the sale of products and services. In Sri Lanka, taxes take many types, including excise duties, value-added tax (VAT), income tax, and tariffs. By collecting tax income, these levies play an essential part in the government's budgetary strategy. 

Advantages of Tax Compliance

Following are some of the advantages of tax compliance:

• Avoiding Penalties and Legal Repercussions: One of the key advantages of tax compliance is avoiding penalties and legal ramifications. Noncompliance can result in fines, interest charges, and even legal action, such as failing to complete tax returns or underreporting income. Taxpayers can avoid costly penalties and keep a clean record with the tax authorities by being compliant.
• Improving Business Reputation and Credibility: Tax compliance is inextricably tied to a company's reputation and credibility. Businesses that are in compliance are seen as dependable, trustworthy, and ethical. Maintaining a positive reputation will help you attract clients, investors, and business partners, which can help the company to grow and succeed.
• Optimizing Tax Efficiency and Reducing Liabilities: Tax compliance enables people and businesses to find and take advantage of various tax deductions, credits, exemptions, and incentives. Taxpayers can maximize their tax efficiency, minimize their tax payments, and keep more of their earnings or profits by appropriately comprehending and using these regulations.
• Access to Government Perks and Assistance: Governments frequently provide various perks, incentives, and assistance programmes to compliant taxpayers. Grants, subsidies, tax credits, and access to government contracts are examples of these. Individuals and organizations become eligible for such programmes by maintaining tax compliance, which can provide financial help and other benefits.

Types of taxes in Sri Lanka

• Corporate Income Tax:A type of tax levied on the profits made by corporations or enterprises is known as corporate income tax. It is an essential part of a nation's tax system and boosts tax income. Typically, corporations must subtract permitted costs from their gross income in order to determine their taxable income. The government then applies a certain tax rate to the resultant taxable income. Corporate Tax Rate in Sri Lanka remained unchanged at 24 % in 2023. The maximum rate was 42 %, and the minimum was 15 %.
• Value Added Tax (VAT):VAT is a consumption-based tax levied on the value added at each level of the production chain. Many countries, including Sri Lanka, employ it as an indirect tax system. VAT is levied on the difference between the purchase price of inputs and the sale price of outputs by enterprises. This tax is meant to be paid by the final consumer.

Through exemptions or reduced rates on essential products and services, the VAT system helps the government earn revenue, encourages transparency, and reduces the burden on low-income persons. The rate of value-added tax (VAT) has been increased since the September of the year 2022. It was 12% earlier, which has now been increased to 15%., and is effective from 1st September 2022.

• Excise and Customs Duty:Excise duty is a government tax paid on the manufacture or sale of specific commodities within a country, whereas customs duty is a tax charged on goods imported or exported between countries. The customs value, which represents the transaction worth of products, is subject to duty. Sri Lanka adheres to the World Trade Organization's (WTO) customs valuation guidelines. The tariff structure of the country is streamlined, with three tiers.

The appropriate rates, which range from 0% to 15%, are published in government gazettes. Notably, the bulk of goods are subject to 10% and 15% tariffs, with only a few items subject to a 0% rate. Excise duty has emerged as a prominent tax in Sri Lanka since 2015. It largely applies to the manufacture of pharmaceuticals, alcoholic beverages, petroleum products, and automobiles. 

• Special Commodity Levy: The Special Commodity Levy is a combination duty on the import of a commodity, and no other tax, duty, cess, or other charge is levied on the product while the levy is in effect. The Special Commodity Levy is a one-of-a-kind tax imposed by the Sri Lankan government. It is a different form of tax from the rest of the country's levies. The Special Commodity Levy is applied in addition to regular customs duties or tariffs and is intended to target certain goods or commodities. This tax is levied on goods deemed special or having a substantial influence on the economy, environment, or public health. The Special Commodity Levy in Sri Lanka is a comprehensive levy that incorporates numerous charges and does not impose any additional tax, duty, levy, cess, or other fees on the designated commodities as per the relevant applicable laws.
• Local Taxes:A local tax is a type of tax levied by local governments, such as municipalities, counties, or districts, to generate income for local services and infrastructure spending. Local taxes, as opposed to national or federal taxes, which are imposed by the central government, are geographically localized and are collected by local governments. Local governments in Sri Lanka are in charge of assessing and collecting taxes, often known as rates, from property owners on a yearly basis. These taxes are levied based on the ownership of property and buildings within the territories of their respective governments. Furthermore, these agencies charge and collect annual license fees from specified enterprises operating within their jurisdictions.

Services offered by Enterslice

With knowledge in several sectors, we provide a variety of services aimed at controlling taxes. Our tax compliance advising service seeks to improve customer satisfaction, strategic value, cost containment, and risk mitigation. We support organizations in managing regulatory changes, converting data into insightful knowledge, and enhancing compliance and planning procedures. Effective communication between the tax, financial, and legal departments is encouraged by our multidisciplinary team.

In tax policy advising, we assist customers in addressing tax issues in various countries while taking into account the increased scrutiny and the requirement to justify their tax positions. Our experts create plans to reduce prospective tax obligations while assuring adherence to changing tax legislation. We provide specialized solutions and crucial guidance on how to handle tax issues.

We provide advice on R&D tax concerns for enterprises involved in research and development (R&D), notably in determining eligibility for R&D super-deductions in Bangladesh. Our services guarantee adherence to the law while maximizing R&D tax advantages.

We advise on challenging cross-border transactions in mergers and acquisitions. Throughout the M&A process, we take tax ramifications of local jurisdiction changes into account. In order to maximize tax outcomes and guarantee a smooth execution of transactions, our proactive strategy addresses any tax difficulties and challenges.