Tax for poverty alleviation or elevation

Sri Lanka, as a country now in the midst of an IMF (International Monetary Fund) programme, has largely achieved macroeconomic stability.

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The latest World Bank report titled “Sri Lanka Public Finance Review: Towards a Balanced Fiscal Adjustment,” acknowledged it.

The revenue adjustment since 2022 has been significant, with a near 5-percentage-point increase in tax-to-GDP to 12.3 percent in 2024. This was driven by sharp increases in tax rates from a low base, the report said.

The government aims to raise it to 15 percent. Yet the same World Bank report sheds light on a stark reality: the revenue target has been met, but at what cost?

Sri Lanka’s aggressive Value-Added Tax (VAT) reforms in 2024, a key component of its post-crisis fiscal stabilisation, has single-handedly contributed to a 2.2 percentage point increase in the nation’s poverty rate, the report says.

Sri Lanka’s poverty rate continued to rise for the fourth year in a row, with an estimated 25.9 percent of Sri Lankans living below the poverty line in 2023. That is the end result of the economic crisis, the worst ever in post-independence Sri Lanka. In the recent report, the World Bank is critical of 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.