Sri Lanka’s Tax Conundrum - 2025

lhe eagerly awaited Performance Tier of the Inland Revenue Department (IRD) for 2024 has recently been published. It offers some context regarding the IRD's tax collections. There is room for wider disclosure that would improve transparency. The timeliness of the report's release could also be considerably enhanced. After all, most large corporations listed on the Colombo Stock Exchange publish their Annual Reports within two months of the financial year’s end.

- By SANJEEWA JAYAWEERA

Sri Lanka’s fiscal challenges remain pressing, despite the strong headline growth in Inland Revenue Department (IRD) collections for 2024. The performance report shows an impressive 44% increase in collections, reaching Rs. 2.6 trillion compared to Rs. 1.8 trillion in 2023.

However, this growth has been heavily skewed towards indirect taxes, particularly Value Added Tax (VAT), whose collections increased by nearly 89%. The structural imbalance between direct and indirect taxes has widened once again, with the ratio shifting from 50:50 in 2023 to 40:60 in 2024.

While VAT reforms, including higher rates and lower registration thresholds, have expanded collections, income tax performance remains weak. The Rs. 1 trillion collected from income taxes conceals significant inequities: fewer than 1 million individuals out of a workforce of over 8 million are within the tax net, and a very small segment of highincome earners shoulder a disproportionate share of the personal income tax burden. This situation is both socially and economically unsustainable.

Recent reports, including the World Bank’s Public Finance Review and commentary from international experts such as Professor Mick Moore, highlight systemic weaknesses in Sri Lanka's tax administration. Outdated methods, inadequate human resource planning, and governance failures at the IRD undermine enforcement and modernization. Structural reforms, particularly digitization, improved compliance enforcement, and the recruitment of skilled professionals, are essential to move away from reliance on regressive indirect taxation.

Revenue Performance: Headline Gains but Fragile Foundations