Sri Lanka's VAT reforms pushed 2.2% more into poverty - World Bank

Sri Lanka's aggressive Value-Added Tax (VAT) reforms in 2024, a key component of its post-crisis fiscal stabilisation, single-handedly contributed to a 2.2 percentage point increase in the nation's poverty rate, a stark new report from the World Bank reveals.

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The report, titled “Sri Lanka Public Finance Review: Towards a Balanced Fiscal Adjustment,” criticizes the country’s heavy and “regressive” reliance on indirect taxes and tables urgent proposals for a fundamental shift towards a more equitable system of direct taxation to ensure a sustainable and fair economic recovery.

The findings highlight the severe social cost of the government's revenue-led fiscal adjustment. Over 75 percent of this adjustment has been derived from indirect taxes that disproportionately burden the poor. Following the 2024 reforms, VAT now consumes 5.3 percent of the pre-fiscal income of households in the poorest decile, compared to just 3.3 percent for those in the richest decile.