Selected professionals to pay 5% withholding tax on income earned as service providers

Selected professionals, including doctors, engineers, accountants and lawyers, who provide services as "Independent Service Providers" will have to pay a five percent Withholding Tax (WHT), according to the new tax system now in operation.

Issuing a note on the calculation of WHT and Advanced Income Tax (AIT), the Inland Revenue Department categorised the professionals who would be taxed.

The others are software developers, researchers and academics.

The IRD circular says the tax will be applicable only to the seven professions mentioned.

Accordingly, the WHT agents are required to limit WHT deduction to service payments made to the independent service providers in terms of Sections 84, 84A and 85 of the Inland Revenue Act.

The service fee payment which exceeds Rs 100,000 a month is subject to a WHT deduction and WHT is applied to the entire amount as well. In case, if the payment for a month is exactly Rs 100,000, a WHT deduction is not required, the IRD note said. Service payments for transport services are not subjected to WHT deduction. However, renting out vehicles is subject to tax.

Rent payments made to non-residents are subjected to WHT at the rate of 14 percent without having any threshold but a lower rate of WHT can be applicable as per Provisions of Double Tax

Avoidance Agreement between Sri Lanka and another country.

"Except for the directions for exempt amounts mentioned in circulars issued by the Commissioner General of IRD, WHT agents should not direct service providers to get clarifications over such specific issues from the Tax Policy and Legislation Unit. Provisions of the Inland Revenue Act will be applied to WHT agents who fail to deduct WHT as required and instructed," Commissioner General D.R.S. Happuarachchi warned in the note.