In his recent address to Parliament, the President announced proposed reforms to Sri Lanka’s Personal Income Tax (PIT) system.  These changes include raising the tax-free monthly income threshold from LKR 100,000 to LKR 150,000, as well as adjusting the tax brackets to offer substantial savings for taxpayers. At the same time, these proposals reinforce Sri Lanka’s position as one of the region’s least taxed countries for lower-income earners. 

Although the President did not outline the precise tax rates for each bracket, PublicFinance.lk has estimated the new rates and brackets based on the proposed reductions upto LKR 300,000 per month. Exhibit 1 below summarises these revised tax brackets and corresponding rates. 

Exhibit 1: Revised tax brackets and corresponding rates  

Sources: Inland Revenue Department of Sri Lanka, President’s Media Division 

Sri Lanka already provides the highest tax-free threshold and a comparatively lower tax burden for low-income earners than most other South Asian countries, with the exception of the Maldives. In a previous blog, PublicFinance.lk noted that Sri Lanka’s current tax-free income threshold of LKR 100,000 per month is higher than those in Bangladesh (LKR 75,682), Pakistan (LKR 54,710), and India and Bhutan (approximately LKR 91,000). However, while income earners below LKR 250,000 per month enjoy relatively low tax obligations, the burden beyond this amount rises sharply to the highest in the region. 

The proposed changes to Sri Lanka's PIT structure offer substantial reductions in the tax burden for all income groups (below LKR 300,000 per month) compared to the current system.  

Individuals earning below LKR 250,000 per month—who already enjoy significantly lower tax burdens than the regional average—will benefit even more. For example, someone earning LKR 200,000 currently pays 5.25% (LKR 10,500) in taxes, but this will drop to just 1.5% (LKR 3,000) with the proposed changes. 

Individuals earning between LKR 250,000 and LKR 300,000—who currently pay more than the South Asian average—will now face a reduced tax burden. For instance, someone earning LKR 300,000 would see their tax liability fall to around 6%, compared to 12% under the current system. 

Exhibit 2: Reduction in tax liability under the proposed tax structure across different income levels  

Notes 

In Flourish chart 2 - Afghanistan was excluded due to unavailability of data. Exchange rate as at 08 July 2024 was used for all countries. South Asian average (excluding Sri Lanka) includes the average of Pakistan, Bhutan, Nepal, Maldives, India, and Bangladesh. 

Sources

Inland Revenue Department of Sri Lanka, Pay As You Earn Tax at https://www.ird.gov.lk/en/Type%20of%20Taxes/SitePages/Pay%20As%20You%20Earn%20(PAYE).aspx?menuid=1202  

President’s Media Division, Press Release: Will Ensure that the 2022-23 Crisis Never Recurs in Our Country at https://pmd.gov.lk/news/will-ensure-that-the-2022-23-crisis-never-recurs-in-our-country/ 

Maldives Inland Revenue Authority, "FAQs - Income Tax" at https://www.mira.gov.mv/Pages/View/FAQ_IncomeTax [last accessed 3 September 2024]. 

Orbitax, "Nepal Confirms Income Tax Rate" at https://orbitax.com/news/archive.php/Nepal-Confirms-Income-Tax-Rate-52919  [last accessed 3 September 2024]. 

Orbitax, "Bhutan Enacts the Income Tax" at https://orbitax.com/news/archive.php/Bhutan-Enacts-the-Income-Tax--42878  [last accessed 3 September 2024]. 

Income Tax Department of India, "Individual - Income Tax Return Filing" at https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable -1 [last accessed 3 September 2024]. 

PwC, "Pakistan - Taxes on Personal Income" at https://taxsummaries.pwc.com/pakistan/individual/taxes-on-personal-income  [last accessed 3 September 2024]. 

PwC, "Bangladesh Key Budget Proposals 2024" at https://www.pwc.com/jp/en/services/globalization/news/assets/pdf/bangladesh-key-budget-proposal2024.pdf  [last accessed 3 September 2024]. 

Inland Revenue Department, Nepal. "Individual Income Tax Rates for FY 2023/24." Available at https://www.ird.gov.np/public/pdf/964678748.pdf  [last accessed 3 September 2024]. 

Central Bank of Sri Lanka. "Daily Indicative Exchange Rates." Available at https://www.cbsl.gov.lk/en/rates-and-indicators/exchange-rates/daily-indicative-exchange-rates  [last accessed 3 September 2024]. 

Central Bank of Sri Lanka Annual Economic Review 2023 at https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/annual-economic-review/annual-economic-review-2023  [last accessed 6 September 2024]. 

Research by: Chathuni Pabasara, Raj Prabu Rajakulendran and Anushan Kapilan