This circular provides clear instructions for Withholding Agents (WHA) on how to apply tax deductions under the Inland Revenue Act. These rules apply to specific payments that have a source in Sri Lanka. It replaces the older Circular No. SEC/2022/E/03, which is now officially terminated.
Withholding Tax Rates at a Glance
Depending on the type of payment you are making, different tax rates apply. Here is a simplified table of the rates you need to deduct from the gross payment amounts:
| Payment Type | Tax Rate |
| Payments to non-residents for land, sea, air transport, or telecom services | 2% |
| Sale price of gems at National Gem & Jewellery Authority auctions | 2.5% |
| Service fees to resident individuals (like independent doctors, engineers, or artists) over Rs. 100,000 per month | 5% |
| Interest or discount paid | 10% |
| Rent paid to a resident over Rs. 100,000 per month | 10% |
| Lottery winnings, rewards, betting, or gambling | 14% |
| Charges, natural resource payments, or premiums | 14% |
| Royalties | 14% |
| Rent paid to non-residents | 14% |
| Service fees or insurance premiums paid to non-residents | 14% |
| Dividends | 15% |
Exemptions: When Do You Not Deduct WHT?
There are several situations where you do not need to deduct Withholding Tax.
- You do not need to deduct tax on payments made by the Sri Lanka Government, local authorities, and Government Departments.
- You do not need to deduct tax on payments made by individuals, unless the payment is a business expense.
- You do not need to deduct tax on interest paid to financial institutions for ordinary loans.
- You do not need to deduct tax on lottery winnings if the gross amount is Rs. 500,000 or less.
- You do not need to deduct tax on interest from foreign currency sovereign bonds issued by the Sri Lankan Government.
- You do not need to deduct tax on dividends from specific BOI-approved companies or dividends that are derived from another dividend.
Important Rules for Withholding Agents
Calculating the Tax
When you calculate the tax to deduct, you must use the gross payment amount before any Value Added Tax (VAT) is added. If you choose to pay a supplier’s invoice in full without deducting the tax from their payout, you must treat their invoice amount as the “net” amount and calculate the tax based on a grossed-up figure. For payments made in foreign currencies, you must use the Central Bank’s selling exchange rate on the exact date of the payment.
Deduction and Payment Deadlines
You are required to deduct the tax at the exact time the money is paid, credited, reinvested, or made available to the payee. Once you have deducted the money, you have 15 days after the end of the calendar month to pay it to the Inland Revenue Department. You can make these payments through the Online Tax Payments Platform (OTPP) or manually at Peoples Bank. When paying at the bank, use tax code 43 for interest payments and tax code 44 for all other payments.
Issuing Certificates and Record Keeping
As a Withholding Agent, you have a few administrative responsibilities to follow:
- You must register as a Withholding Agent at least 30 days before you start deducting tax.
- You are legally required to provide a WHT certificate to the payee free of charge within 30 days after the end of the month.
- You must keep proper records of all payments, tax deductions, and any tax clearance certificates you receive.
- You must submit annual schedules electronically in an Excel CSV format, but you may submit hard copies if you have fewer than 20 taxpayers you are deducting from.
- You must strictly follow the required formats for these statements, as failing to comply can result in a penalty of up to Rs. 200,000.
