Is tax burden or responsibility? – I

From loopholes to leadership: Can Sri Lanka learn from smarter tax nations?

- By C. A. Saliya

Tax systems are the backbone of a nation's fiscal policy, enabling governments to fund public services, redistribute wealth, and stabilise macroeconomic environments.

However, in many developing economies, including Sri Lanka, tax compliance and revenue mobilisation remain critical challenges. The recent initiative by Sri Lanka's Inland Revenue Department (IRD), backed by the Customs and Excise Department, to recover approximately LKR 780 billion in collectible tax arrears—alongside launching a “National Tax Week”—marks a significant policy push to improve tax governance and voluntary compliance.

In 2022, Sri Lanka's tax-to-GDP ratio was 7.4%, which is below the Asia and Pacific average of 19.3% and the OECD average of 34.0%. In 2023, the tax revenue (% of GDP) was reported at 9.85%, according to the World Bank. In 2024, Sri Lanka's tax revenue as a percentage of GDP reached 13.1% in September, up from 12.9% in June, according to CEIC Data. Structural weaknesses, such as a narrow tax base, heavy dependence on indirect taxation, and pervasive tax avoidance and evasion, undermine fiscal stability.

However, in light of Sri Lanka's historically low tax-to-GDP ratio and narrow tax base, the 2023 revenue performance presents an interesting contrast. The revenue estimate for 2023 was LKR 1,761,984 million, while the actual Inland Revenue Department (IRD) collection reached LKR 1,842,315 million, achieving 104.56% of the estimate.

A Deliberate Strategy?

Setting mediocre or conservative revenue targets can be a deliberate strategy to overshadow structural weaknesses and create the illusion of performance success. When actual collections exceed modest projections—as in Sri Lanka's case in 2023 (104.56% collection rate)—it may appear that the tax system is performing well. However, this often masks deeper systemic issues.

Here's why this approach can be problematic: