The Inland Revenue Department (IRD) of Sri Lanka has announced a significant tightening of quarterly tax reporting rules for banks and financial institutions, a move expected to reshape compliance practices and improve government revenue collection.
Starting from the second quarter of the 2024/25 assessment year, licensed commercial banks, specialised banks, and finance companies must file detailed, audited quarterly income tax computations, complete with supporting schedules certified by an external auditor.
This marks a major shift away from the previous system, where quarterly tax payments were generally based on unaudited management accounts, with final adjustments made at year-end.
“This directive reflects our commitment to strengthening the integrity of the tax system,” an IRD official told Lanka Biz News. “We want to ensure quarterly payments are accurate and reduce the room for under-reporting or deferral.”
Why the Change? A Drive for Revenue Transparency
The banking sector is one of Sri Lanka’s most profitable and heavily scrutinised industries. It contributes significantly to government revenue through corporate income tax, financial VAT, and various fees.
However, the IRD has identified longstanding issues with how quarterly advance payments are calculated. Without mandatory external auditing, interim payments often rely on management estimates that can understate true profits—leading to lower-than-expected collections and last-minute adjustments at year-end.
“It’s about revenue certainty,” explains economic analyst Ruwan Jayasinghe. “Sri Lanka is under enormous pressure to meet IMF-backed fiscal targets. This is part of ensuring big, profitable sectors are paying taxes accurately throughout the year—not deferring their obligations.”
What the Directive Requires
Under the new rules:
Banks must prepare detailed quarterly tax computations covering their taxable income, deductions, and tax payable.
An external auditor must certify the accuracy of these computations and any supporting schedules.
The certified package must be submitted along with the quarterly advance tax payment.
Failure to comply will be treated as non-submission of a return under the Inland Revenue Act, exposing institutions to penalties and legal action.
The IRD’s official circular, already distributed to all licensed financial institutions, sets out clear templates and guidance for these filings.
Aligning with Global Standards
Sri Lanka’s move brings its tax compliance rules closer to those of many advanced economies, where large corporations—including banks—are expected to provide robust, audit-backed quarterly estimates.
“In many markets, quarterly tax estimates are a serious obligation, subject to regulatory review and audit,” says tax consultant Nadeesha Perera. “Sri Lanka’s previous approach was relatively lax in comparison.”
The government hopes this alignment will not only boost revenue but also reassure international partners—including the IMF—that Sri Lanka is committed to modernising its tax administration.
The Broader Fiscal Context
Sri Lanka is under an IMF-backed programme requiring ambitious fiscal consolidation. The government has pledged to increase revenue collection as a share of GDP, with the IMF emphasising the need to widen the tax base and reduce exemptions.
In this context, banks and financial institutions are a natural target. The sector remains resilient and profitable even during broader economic downturns. By tightening quarterly compliance, the government expects to:
Improve revenue predictability.
Reduce the need for large year-end corrections.
Deter intentional under-reporting.
Build trust with international creditors.
Industry Reaction: Mixed but Largely Pragmatic
Banking sector sources acknowledge that compliance costs will rise. Preparing quarterly audited returns requires more time, resources, and coordination with external auditors.
“It’s not cheap,” said one senior bank executive, who asked not to be named. “But from a governance perspective, it’s hard to argue against it. Regulators want certainty about revenue, and frankly, we need to demonstrate transparency.”
Others point out that the move may reduce conflicts with the IRD over year-end tax reconciliations. By certifying quarterly filings, banks can reduce the risk of big, unexpected tax bills later.
“In the long run, it might actually be easier for the industry if everyone plays by the same rules upfront,” says Perera.
Enforcement and Penalties
The IRD has also made clear that non-compliance won’t be taken lightly. Failure to submit the certified quarterly return will be treated as equivalent to non-submission under the Inland Revenue Act, triggering:
Monetary penalties.
Potential legal proceedings.
Damage to reputation.
Analysts say this tougher stance is in line with a broader shift in Sri Lanka’s tax culture—from one of voluntary self-estimation with limited enforcement to a stricter, rules-based approach.
Challenges Ahead
While the policy is clear, practical questions remain:
Will there be enough qualified auditors to handle quarterly reviews for dozens of financial institutions?
Can smaller finance companies manage the cost and process burden?
How effectively will the IRD enforce the new rules?
Banks are reportedly reviewing their internal systems to ensure smooth compliance before Q2 filings are due.
A Step Toward Modernising Tax Administration
For the government, the directive is part of a wider strategy to modernise and digitalise tax administration. Recent reforms include electronic tax filing systems, better data sharing between agencies, and plans to expand real-time tax monitoring.
“If Sri Lanka is serious about fiscal reform, these kinds of measures are unavoidable,” says Jayasinghe. “You can’t rely on outdated, paper-based, self-reported estimates and expect to fund public services properly.”
Conclusion
Sri Lanka’s move to require externally audited quarterly tax returns for banks is both ambitious and necessary. While it will raise compliance costs in the short term, the promise of greater transparency, predictable revenue, and fairer enforcement may benefit the entire economy.
As the country works through economic recovery, debt restructuring, and IMF-backed reforms, policies like these will be key to restoring credibility and ensuring that profitable sectors pay their fair share.
