Withholding Tax When You Pay Someone in Sri Lanka

Most people meet withholding tax from the wrong end. A payment arrives short, you go looking for why, and you find out somebody deducted 5% or 10% before it reached you.

This article is about the other seat. The one where you're the person writing the cheque, and the law has quietly decided that part of that money was never yours to send.

Here's what makes it awkward. Nobody tells you when you cross into it. There's no letter, no notification, no moment where the Inland Revenue Department registers you. You rent an office, you hire an assistant, you take a loan from a family member instead of a bank, and somewhere in there you picked up a monthly filing obligation you didn't know existed.

Am I a withholding agent in Sri Lanka?

Probably, if you run a business. Section 195 of the Inland Revenue Act No. 24 of 2017 says a "withholding agent" means a person required to withhold tax from a payment under this Act.

That's circular on purpose. You're an agent because you made a payment the Act says to withhold from. Not because you registered, not because you were told, not because you're big enough. The duty attaches to the payment.

The same section closes the loop on what that makes you:

So the real question isn't whether you're an agent in the abstract. It's which of the payments you actually make are on the list.

Which payments do I have to withhold tax from?

There are two live tracks in Division II of Chapter VIII, plus employment. Together they cover almost everything a small business pays out.

The big one, and the one nobody writes about from the payer's side, is Advance Income Tax under Section 84A(1A):

Eight payment types, and two of them (rent and interest) are things ordinary small businesses pay every month.

One point of housekeeping, because it trips people reading an older copy of the Act. Section 84(1)(a)(i) looks like it covers the same ground, and it used to. It's now limited to payments made "prior to January 1, 2020". If a rate table you found online cites Section 84(1)(a), it's describing a regime that closed.

Here's the whole picture in one place. Rates come from paragraph 10 of the First Schedule.

Two rows you can mostly set aside. Dividends only arise if you've incorporated and are distributing profit to shareholders, which a sole trader never does. And service fees are covered thoroughly elsewhere, because the 5% deduction interacts with whether you can claim the payment as an expense at all. Our guide to deducting subcontractor payments walks through that in full, and the 5% withholding on professional fees explains the same deduction from the recipient's side.

The rest of this article is about the rows nobody has explained to you.

Does it matter that I'm an individual and not a company?

Enormously, and this is the filter that decides most of it.

Section 84(3)(b) exempts from the whole Advance Income Tax regime "payments made by individuals, unless made in conducting a business."

Read those last five words slowly, because they carry the entire provision. Renting a flat to live in is a payment made by an individual. Renting a shop to trade out of is a payment made by an individual in conducting a business, and it's inside the rule.

Same money, same landlord, potentially the same building. What moves it across the line is what you use it for.

Section 84(3) carries five other exclusions. Four of them matter to a payer:

• (a) payments already subject to withholding under Section 83, so you never double up on employment pay
• (c) interest paid to a financial institution on the ordinary loans and advances provided by it
• (d) interest or discount on Treasury Bonds and Treasury Bills
• (e) payments or allocations that are exempt amounts under Section 9

The fifth, (f), was added by the Inland Revenue (Amendment) Act, No. 11 of 2026 and sits on the other side of the counter. It lets a financial institution pay deposit interest gross to a resident individual who has no taxable income for the year and files a self-declaration with them. Unless you are a bank, it's not your exclusion to use.

Do I withhold tax on the rent I pay for my office or shop?

If it's Rs. 100,000 a month or more and your landlord is resident, yes. 10% of the full amount, not 10% of the excess.

That "full amount" wording is the part that catches people, and it's right there in the schedule. Paragraph 10(1)(d)(iii) reads "rent payments made to a resident person where the aggregate payment exceeds or equal to Rs. 100,000 per month, 10% on full amount." Rent of Rs. 120,000 doesn't produce 10% of Rs. 20,000. It produces Rs. 12,000.

Note aggregate. It's a monthly test on the total going to one landlord, so two units in the same building at Rs. 60,000 each land you at Rs. 120,000, not twice-under-the-line.

If your landlord is one of several co-owners, the credit has to be split correctly or somebody loses it. We covered that in rental income from jointly owned property.

Do I withhold tax on interest I pay on a loan?

It depends entirely on who lent you the money, and the answer flips completely between two lenders charging you identical interest.

Bank loan or overdraft: nothing. Section 84(3)(c) excludes "interest paid to a financial institution on the ordinary loans and advances provided by it." Your monthly repayment to the bank carries no withholding obligation at all.

Private loan from an individual: 10%. That interest sits squarely inside Section 84A(1A), the financial-institution exclusion doesn't reach it, and if you're paying in the course of your business the Section 84(3)(b) escape doesn't apply either.

Whether that interest is deductible at all is a separate question with its own rules, and we've written it up in business loan interest and tax.

Do I have to withhold tax from my employee's pay?

Yes, and there's no size threshold protecting you. Section 83A(1A): "An employer shall deduct the Advance Personal Income Tax with effect from January 1, 2023 on any payment which falls under section 5 made to his employee, as specified by the Commissioner-General."

The old consent mechanism is gone too. Before January 2023, APIT withholding for a resident citizen employee required their consent. That option was repealed. The deduction is now compulsory regardless of what the employee wants.

What saves most small employers isn't an exclusion, it's the tax table itself. Under Tax Table No. 01, monthly regular profits from primary employment up to Rs. 150,000 carry relief from tax, so the amount you deduct is zero. Above that, the first band takes 6% of monthly regular profits less Rs. 9,000.

But zero deducted is not the same as no obligation. You're still an employer, you're still a withholding agent, and Section 87 still wants a certificate out of you.

What do I have to give the person I paid?

A withholding certificate, and the deadline depends on which track the payment sat in.

Section 87(2) says the certificate sets out "the amount of payments made to the withholdee during the period and tax withheld by the withholding agent from those payments." Section 87(3) is the general rule: a certificate covers a calendar month and is served within thirty days after the end of the month.

Employment breaks that pattern entirely. Section 87(4) says that for tax withheld under Section 83 or 83A, the certificate "(a) shall cover the part of the year during which the employee is employed; and (b) shall be served not later than the thirtieth day of April of the subsequent year or, where the employee has ceased employment with the withholding agent during the year, no more than thirty days from the date on which the employment ceased."

So your landlord gets a monthly certificate within thirty days. Your employee gets one annual certificate by 30 April. Two clocks, one business.

When do I remit the tax, and what do I file?

Three separate obligations, on three separate clocks. This is where the admin actually lives.

1. Pay it monthly. Section 86(1): "Every withholding agent shall pay to the Commissioner General within fifteen days after the end of each calendar month any tax that has been withheld in accordance with this Division during the month." Withhold in June, remit by 15 July.

2. File a quarterly statement, but only for Advance Income Tax. This one is easy to miss because it applies to one track and not the others. Section 86(8) requires every withholding agent who has deducted AIT under Section 84A to file "a quarterly statement as specified by the Commissioner-General, within thirty days after the end of each quarter, ending on the thirtieth day of June, thirtieth day of September and thirty first day of December."

Note the three quarters the subsection names: June, September and December. It doesn't name the March quarter.

3. File the annual statement. Section 86(2) requires a statement within thirty days after the end of each year ending on 31 March, setting out the payments subject to withholding, the name, address and tax identification number of the withholdee, the tax withheld from each payment, and anything else the Commissioner-General specifies.

Section 86(9), added by the 2026 amendment, lets the Commissioner-General specify the procedures, formats and forms for both the annual and quarterly statements, and requires agents to comply with them. Check the current form rather than reusing last year's.

A worked month

Priyanka runs a small design studio in Colombo as a sole proprietor. In June 2026 she pays:

She hands her landlord Rs. 108,000 and her uncle Rs. 27,000. She remits Rs. 15,000 to the Commissioner-General by 15 July.

Then the paperwork. Certificates to the landlord and her uncle within thirty days of June ending. The AIT quarterly statement covering the June quarter, within thirty days of 30 June. A certificate to her designer by 30 April 2027, showing Rs. 140,000 a month and nil tax. And the annual statement by 30 April 2027, which needs her uncle's TIN in it.

Her total business cost hasn't changed by a rupee. All the withholding does is redirect part of each payment.

What happens if I get this wrong?

The mildest outcome is that you pay the tax anyway out of your own pocket. Section 86(3): a withholding agent who fails to withhold "shall however pay the tax that should have been withheld in the same manner and at the same time as tax that is withheld."

There are two softeners. Under Section 86(4) the recipient is jointly and severally liable, and under Section 86(6) an agent who pays tax that should have been withheld "shall be entitled to recover an equal amount from the withholdee." Recovering it in practice, a year later, from a landlord you're still renting from, is another matter.

Late remittance is worse than never deducting, because now you're holding money that isn't yours.

On top of that, the ordinary late-payment machinery applies to you as a withholding agent, because Section 195 put you inside the definition of taxpayer. Section 179(1) charges a penalty of 20% of tax due but not paid within fourteen days of the due date, and Section 159(1) adds interest at 1.5% per month or part of a month, computed monthly. Our breakdown of tax penalties under the 2026 amendments sets out how those stack.

Then there's the consequence that lands hardest, because it hits your own return rather than just your cash flow. Section 10(2): "Where a person is allowed a deduction for a payment from which the person is required to withhold tax under Division II of Chapter VIII, the deduction shall not be allowed until the tax withheld has been paid to the Commissioner General."

Read the scope there. Not service fees. Division II, which runs from Section 83 to Section 89 and takes in employment, Advance Income Tax and service fees alike. So the rent you're claiming as a business expense, and the interest on that private loan, are both deductions that stay switched off until the withholding on them reaches the Commissioner-General.

Priyanka's Rs. 120,000 of monthly rent is an expense she fully intends to claim. Skip the Rs. 12,000 withholding and she doesn't just owe the Rs. 12,000. She loses the deduction on the Rs. 120,000 too, until she pays it.

Do I need to register as a withholding agent?

No, and that's precisely the problem.

There's no separate withholding-agent registration in the Act. The duty arises from the payment, and you carry it under the TIN you already hold. Section 102(1) requires every person liable to furnish a return of income to register with the Commissioner-General, and Section 102(4) assigns the TIN. Section 103(2) additionally lets the Commissioner-General assign a TIN to someone who isn't otherwise a taxpayer but who "makes payments which are subject to tax in the hands of the recipient."

So nothing external marks the moment you became an agent. If you don't hold a TIN at all, that's a separate exposure, and Section 177 attaches a penalty of up to Rs. 50,000 for failing to register. Our guide to getting a TIN covers the process.

What should I check before my next payment run?

Five questions, in order. They'll resolve almost every case.

1. Is this payment made in conducting a business? If you're an individual and the answer is no, Section 84(3)(b) and Section 85(3)(b) take you out of the Advance Income Tax and service-fee rules entirely. Employment is the exception and has no such filter.
2. Is it on the Section 84A(1A) list? Dividend, interest, discount, charge, natural resource payment, rent, royalty, premium. Then check the exclusions in Section 84(3), because bank interest and Treasury securities come straight back out.
3. Does it clear the threshold? Rs. 100,000 a month aggregate for rent to a resident, Rs. 100,000 a month for service fees under Section 85(1C), Rs. 150,000 a month before APIT bites under Table 01.
4. Do I have their TIN? You need it for the annual statement under Section 86(2)(b). Collect it when you sign the lease or the engagement, because chasing it later is genuinely hard.
5. What's my calendar? Remit by the 15th. Monthly certificates within thirty days. AIT quarterly statement within thirty days of the June, September and December quarter ends. Annual statement and employment certificates by 30 April.

None of this is difficult once you know it applies. The expensive part is the year you spend not knowing.