Tax Digitisation in Sri Lanka | Sri Lanka is entering a crucial phase in its economic reform journey. Among the many measures rolled out to increase state revenue, the digitisation of the tax system is one of the most ambitious. The Inland Revenue Department (IRD) has pushed forward with online filing, e-payments, and digital platforms to streamline tax administration. At a time when the government urgently needs to boost collections to meet debt obligations, the question is clear: can digitisation deliver meaningful results, or will it stumble against Sri Lanka’s ground realities?
Why Tax Digitisation Matters
Tax collection has always been one of Sri Lanka’s weakest links in public finance. With one of the lowest tax-to-GDP ratios in Asia, the country struggles to generate enough revenue to fund essential services. The 2022–2023 crisis made this painfully obvious. While tax hikes and new VAT measures have been introduced, improving compliance and efficiency is just as important.
Digitisation is presented as a solution that can:
- Reduce leakages by limiting opportunities for corruption and manual interference.
- Widen the tax net by making it easier to track economic activity.
- Improve compliance by offering convenient, standardised systems for filing.
- Provide real-time data for policymakers to forecast and manage revenue more effectively.
- In principle, a well-run digital system should help Sri Lanka overcome decades of inefficiency.
The Current Progress
The IRD has already launched an e-filing portal, encouraging taxpayers to submit returns online rather than in person. Digital payment options through banks are now integrated, cutting down on queues at tax offices. Some state institutions are also sharing data digitally with the IRD, allowing cross-checks that reduce evasion.
For corporates and larger businesses, digitisation has been a welcome change. Filing returns is faster, payment processing is smoother, and record-keeping is simpler. This aligns Sri Lanka more closely with international standards, particularly for investors used to efficient systems abroad. However, beyond the corporate sector, the rollout faces significant hurdles.
Challenges on the Ground
1. Digital Literacy Gaps
Many small and medium enterprises (SMEs), traders, and self-employed individuals still lack the digital skills to navigate e-filing systems. Without training and awareness, these groups risk falling out of compliance simply due to technological barriers.
2. System Reliability
Frequent downtime, slow servers, and poor user interface design have created frustration among early users. A tax system is only as good as its reliability. If taxpayers encounter repeated errors, confidence erodes.
3. Trust and Transparency
Citizens often distrust government systems, fearing data misuse or arbitrary enforcement. Without guarantees of privacy and fair treatment, digital systems can feel like new instruments of control rather than tools of efficiency.
4. Informal Economy
A significant share of Sri Lanka’s economic activity remains informal and cash-based. Digitisation, while useful, cannot on its own bring these transactions into the tax net. Structural reforms are needed alongside digital tools.
5. Cost of Transition
For smaller businesses, compliance costs are rising. Buying new software, hiring accountants familiar with e-filing, or spending time learning the system all add to the burden, especially when margins are thin.
Lessons from Abroad
Digitisation is not new in tax administration. Countries in the region have experimented and achieved varying degrees of success.
- India: The Goods and Services Tax (GST) system forced businesses into digital compliance, but early years saw chaos due to system crashes and confusing requirements. Gradual improvements, however, made GST filings routine and improved transparency.
- Singapore: The Inland Revenue Authority of Singapore (IRAS) operates one of the smoothest e-tax systems in the world, combining user-friendly platforms with strict enforcement. The key lies in consistent investment in technology and taxpayer education.
- Estonia: A global leader in e-governance, Estonia showcases how digital tax filing can be completed in minutes, supported by strong cyber laws and digital ID systems.
Sri Lanka’s challenge is that it cannot simply copy-paste these models. It must adapt them to a context where infrastructure and trust are limited.
The Policy Gap
Digitisation is not a magic wand. Sri Lanka’s tax problem is not only administrative but also structural. The tax base is narrow, heavily reliant on indirect taxes like VAT, while direct taxes lag behind. Only a small proportion of the workforce pays income tax. Digitisation may improve compliance among those already in the net but does little to capture the broader informal economy.
Furthermore, without simultaneous reforms in enforcement, public financial management, and accountability, digital tools risk becoming superficial upgrades to a fundamentally weak system.
The Way Forward
For digitisation to work, Sri Lanka needs a comprehensive strategy:
- Taxpayer Training: Launch structured awareness and training programmes, especially targeting SMEs and rural taxpayers. Practical workshops, step-by-step guides, and multilingual helplines can reduce fear of the new system.
- Improve System Reliability: Invest in robust servers, responsive customer support, and streamlined design. Technical hiccups must be addressed rapidly to maintain trust.
- Phased Rollout: Rather than rushing full-scale implementation, introduce digitisation in stages with pilot programmes, gradually scaling up as feedback is incorporated.
- Cybersecurity and Privacy: Build confidence through clear legal frameworks on data protection. Citizens need to know their information is safe and used fairly.
- Integration with Broader Reform: Connect digital tax tools with banking systems, trade data, and digital ID to ensure comprehensive coverage. At the same time, incentivise formalisation of small businesses to expand the tax base.
- Public Engagement: Communicate benefits transparently, showing how tax revenue funds public goods. Without this link, compliance feels like a burden rather than civic duty.
Conclusion
Sri Lanka’s move to digitise tax collection is timely and necessary. It signals a modernising state trying to align with international standards and strengthen its fiscal position. But digitisation is not a silver bullet. Without addressing literacy gaps, trust issues, system reliability, and the narrow tax base, reforms risk stalling.
The road ahead is about balance: adopting technology while grounding it in local realities. Done right, digitisation could mark a turning point in Sri Lanka’s tax history. Done poorly, it could deepen frustration and push compliance further away.
Sri Lanka stands at that fork in the road today.
Check the topic “The Informal Economy’s Silent Power: How Sri Lanka’s Shadow Workforce Shapes Growth and Inequality“, here.
