Understanding Payroll in Sri Lanka: What Global Companies Need to Know About Sri Lanka’s Payroll

Aug 2, 2018  | Topic: Country Payroll

Located just off the southernmost coast of India, Sri Lanka has a truly remarkable ecosystem that dazzles all five senses. The 61,000 square-foot island boasts the highest concentration of biodiversity in all of Asia and draws 2.1 million tourists to its shores every year. Reliant on tourism, foodstuffs, and textiles, Sri Lanka’s economy supports a population of 21 million and a GDP of $81.3 billion, having grown an average of nearly 6% per year since 2003.

In the last few years, Sri Lankan officials have been working hard to stamp out corruption and improve economic productivity. Sri Lanka's economy has grown substantially in recent years partially because the government has become more welcoming to businesses and startups from all around the globe. Payroll regulations are relatively easy to navigate, but there are a few special accounting rules that businesses will need to learn before setting up in Sri Lanka.

Getting Started

Businesses must begin with the online Registrar of Companies, where they can reserve the name of the company. Owners will need to have the director and company secretary sign a consent form and file the appropriate paperwork through the Registrar, including the Articles of Association. Organizations must also obtain a Tax Identification Number through the Taxpayer Services Unit, as well as give public notice of their company through daily newspapers and the Government Publications Bureau. In-country bank accounts are required and take about a day to set up. Companies also need an Employee Provident Fund number, which can be obtained from the Department of Labor. Startup time generally takes about 10 days if businesses have the appropriate paperwork. It's recommended that company representatives complete these tasks in person whenever possible.

Employment Law & Employee Rights

The workweek in Sri Lanka varies according to sector. For office and shop workers, the standard work week is up to 45 hours. For factory workers, the maximum is 48 hours. Overtime is generally compensated by at least 125% of the regular wage, with no more than 12 overtime hours worked by a single employee in any given week. Probationary periods are allowed, with the duration negotiated and agreed to by the employee and employer before work begins. Trial periods are usually set at six months but may extend an additional three months if necessary. Written employee contracts are not required. Collective bargaining is permitted for certain sectors, but Sri Lankan laws do not make it easy for unions to conduct business. In addition, it can be difficult to organize workers because of varying cultural norms and economic circumstances.

Compensation & Severance

The minimum wage in Sri Lanka is 10,000 Sri Lankan rupees per month, which equals approximately $62 or €53. Bonuses may be required for employees at state-run organizations but are typically not required for private enterprises. Employees and employers are encouraged to determine compensation expectations, including bonuses, prior to the employee beginning work. While the law may not encourage unions, Sri Lanka does provide employee protection when it comes to termination. Most businesses are required to get official approval from the Commissioner of Labour in order to lay off an employee for non-disciplinary reasons. The severance compensation model (also determined by the Commissioner) can run for up to 48 months of full salary after termination.

Tax Requirements & Withholding

The standard corporate tax rate in Sri Lanka is 28%; however rates of up to 40% can apply to profits depending on the type of business. Non-resident companies are taxed only on income generated in Sri Lanka. For employees, the progressive income tax rates range from 4% to 24%, typically withheld at the source through a pay-as-you-earn system. Both employees and employers contribute to two different social security programs, known as the Employees' Provident Fund and the Employees' Trust Fund. The rates at which each party contributes varies based on the fund, but is generally 8% for employees and 12% for employers. While the general tax code may be relatively straightforward, partnering with an experienced global payroll solution can help ensure all tax requirements are met and avoid any penalties.

Time Off & Unpaid Leave

Sri Lanka has 26 public holidays a year, though different sectors may decide which of these days to celebrate. For example, only eight public holidays are mandatory paid days off for shop and office employees. Workers receive 14 days of annual vacation after their first full year of employment and seven days of sick leave during the first year of employment. New mothers receive 84 days of paid leave for their first or second child, typically taken as 14 days before the due date and 70 days after the birth. Mothers receive 42 days of paid leave for each subsequent child born. Maternity leave is paid through social security, and there is currently no paternity leave option for new fathers.

A Smart Choice

Sri Lanka's current business economy and low cost of living make it a smart choice for multinational businesses looking to expand into Asia. Plus, the government is happy to welcome international companies and very helpful as representatives get set up in Sri Lanka. The Central Bank and Government Information Centre in particular have made it easier for companies to organize their finances and register their businesses. Yet, even with all the extra help available, an international payroll solution can make it easier to meet your obligations without the risk of either losing money or making a costly error.