March 2, 2025

Sri Lanka’s 2025 Tax Reforms: Effects for the Local Businesses

As part of its economic recovery and modernization agenda, Sri Lanka has rolled out a comprehensive tax reform package for 2025. These reforms aim to simplify the tax system, widen the tax net, and ease the burden on lower-income earners and SMEs—while increasing compliance and revenue collection for the government.

Let’s break down the key changes and what they mean for individuals and businesses in Sri Lanka.

For Individuals

1. Raised Personal Tax-Free Threshold

  • Old threshold: LKR 100,000/month
  • New threshold: LKR 150,000/month

Workers earning below LKR 150,000/month are now exempt from income tax, providing relief amid rising living costs.

2. Revised Tax Brackets

  • Lower income earners now face reduced tax rates, while higher brackets remain progressive.
  • New marginal tax rates range from 6% to 36%, with mid-tier reductions for incomes between LKR 200,000–500,000.

For Businesses

1. End of SVAT – Welcome the Risk-Based Refund Scheme

  • The Simplified VAT (SVAT) system ends on October 1, 2025.
  • Replaced by a Risk-Based VAT Refund System, aiming for faster, more accountable refunds to exporters and BOI companies.

Exporters must now maintain strong documentation and tax compliance to benefit from quicker VAT refunds.

2. 18% VAT on Digital Services

  • Non-resident digital service providers (e.g., Meta, Google, Netflix) now face 18% VAT if selling to Sri Lankan consumers.
  • Local businesses importing digital services must register and account for VAT under the new digital economy rules.

What This Means for You

  • Individuals should review their tax status, especially if earning from abroad or on variable incomes.
  • Businesses must prepare for stricter VAT filing, especially exporters and tech importers.
  • Digital companies and freelancers need to clarify tax obligations under the new VAT-on-services framework.