The only effective tax reduction in Sri Lanka since September 2024 has been a higher tax-free threshold on annual income, while almost every other tax has stayed the same or risen.

The threshold went up from Rs. 1.2 million to Rs. 1.8 million a year. For a taxpayer, that gives a maximum saving of Rs. 20,500 a month.

Measures that raised the tax burden began in January 2025, when excise duty rose by about 6 percent on liquor, cigarettes, tobacco, sweetened beverages and motor vehicles. In February 2025, excise duty rates on electric vehicles were doubled, a 100 percent increase.

Vehicle import duty also changed in February 2025. The earlier Customs duty exemption was removed and a 20 percent import duty introduced. A further 50 percent surcharge lifted the effective duty to 30 percent.

In April 2025, withholding tax on bank deposit interest doubled from 5 percent to 10 percent. Eligible low-income depositors can obtain relief through self-declarations. Corporate income tax for businesses in liquor, tobacco, betting and gaming rose from 40 percent to 45 percent. Income from qualifying service exports and foreign sources, previously exempt, became taxable at a maximum rate of 15 percent under the Export Services Tax.

Background

More changes followed in 2026. The Customs tariff structure was revised in April from three bands of 0 percent, 15 percent and 20 percent to four bands of 0 percent, 10 percent, 20 percent and 30 percent. The new 30 percent band applies to selected imports, while certain other duties were reduced.

In May 2026, a 50 percent surcharge on the existing 30 percent Customs duty took the effective rate for applicable vehicles to 45 percent. The surcharge was later extended until 31 December 2026. In the same month, the 2.5 percent Social Security Contribution Levy (SSCL) was extended to vehicle imports, which changed the stage at which the levy is charged and its taxable base.

In June 2026, Capital Gains Tax rose from 10 percent to 15 percent for individuals and partnerships, and from 10 percent to 30 percent for trusts, unit trusts, mutual funds and non-governmental organisations. The 5 percent withholding tax on professional services was extended to more categories, including photographers, artists, IT specialists and social media specialists, on qualifying payments above Rs. 100,000 a month.

In July 2026, qualifying digital services supplied by non-resident providers were brought within the 18 percent Value Added Tax (VAT) framework. Practical implementation of that measure remains incomplete.

What it means

For most households, the one confirmed saving is the higher income tax-free threshold, and it benefits only people whose annual income is above the old threshold of Rs. 1.2 million.

Savers who earn interest on bank deposits face a higher withholding tax, although eligible low-income depositors can seek relief by self-declaration. Buyers of vehicles, including electric vehicles, face higher import duties and levies. Investors, freelancers and professionals paying capital gains tax or withholding tax are also affected by the 2026 changes.