In Sri Lanka, the taxation landscape has been evolving, and one of the significant changes that have garnered attention is the imposition of a 5% Advance Income Tax (AIT) on interest and discount on deposits. This article delves into the critical aspects of this tax, as outlined in the Inland Revenue Department’s Circulars SEC/2022/E/02 and SEC/2023/E/05.
Imposition of the 5% Advance Income Tax (AIT)
Effective from January 1, 2023, as per Section 84A(1A) of the Inland Revenue Act, a 5% AIT is levied on interest, discounts, and income derived from deposits in Sri Lanka. This tax applies to any amount paid by banks or financial institutions to deposit holders. The AIT is deducted at the source, meaning it is withheld by the bank or financial institution before the interest is paid out to the deposit holder.
This tax is part of the government’s efforts to streamline tax collection and ensure that income generated within the financial system is appropriately taxed. It is crucial for all deposit holders and financial institutions to understand the applicability of this tax, especially when it involves different types of interest payments, including those from Islamic financial transactions.
Application of Double Tax Avoidance Agreements (DTAA)
For non-resident deposit holders, the provisions of the Double Tax Avoidance Agreements (DTAA) between Sri Lanka and other countries are applicable. If a non-resident individual is eligible for a lower AIT rate under the DTAA, they must obtain a tax clearance certificate from the Commissioner General of Inland Revenue (CGIR) before the deduction of AIT. This certificate ensures that the correct tax rate is applied, reflecting any benefits accorded under the DTAA.
Exempt Interest
Not all interest payments are subject to the 5% AIT. The circular outlines specific exemptions, including interest on foreign currency accounts, special deposit accounts, and amounts derived by the government or international organizations under diplomatic immunity laws. Financial institutions must obtain confirmation from the CGIR if they believe that the interest is exempt from AIT before proceeding with the exemption.
Key Considerations for AIT Deduction
When calculating the AIT, banks and financial institutions must consider the gross interest, including any excess over the original payment or income derived from Islamic financial transactions. If a deposit is jointly owned, the interest payment must be apportioned according to the joint owners’ respective shares.
AIT must be deducted at the time the interest or discount is paid, credited, or otherwise made available to the deposit holder. The deducted amount must then be paid to the CGIR within fifteen days of the end of the calendar month in which the deduction was made.
Filing of Quarterly Statements of AIT
As per Circular SEC/2023/E/05, withholding agents responsible for deducting AIT are required to file quarterly statements. These statements must detail the amounts deducted and ensure compliance with the Inland Revenue Act. The quarterly statements must be submitted within 30 days after the end of each quarter, with specific period codes assigned for each quarter’s reporting.
For instance, the period code for the quarter ending on June 30, 2023, is “2310,” and the due date for submission is July 30, 2023. Similar deadlines apply to the subsequent quarters. This systematic filing ensures that the Inland Revenue Department can track and manage the collection of AIT efficiently.
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Conclusion
The 5% AIT on interest is a critical component of Sri Lanka’s taxation system, designed to ensure that income from deposits is appropriately taxed at the source. Both financial institutions and deposit holders must remain informed about these regulations to comply with the tax obligations effectively.
For a more in-depth explanation and practical examples of how this tax is applied, I invite you to watch my detailed video on this topic: AIT on Interest 5% | Sri Lanka.