Despite reforms, Sri Lanka faces several ongoing tax challenges:
- Low Tax-to-GDP Ratio
Sri Lanka’s tax-to-GDP ratio hovers around 8% to 9%, one of the lowest in South Asia. This limits the government’s ability to fund infrastructure, education, healthcare, and social welfare programs.
- Tax Avoidance & Evasion
Many high-income earners and businesses underreport earnings. A lack of enforcement, coupled with loopholes in tax law, has allowed tax evasion to flourish, especially among professionals in sectors like medicine, law, and construction.
- Public Distrust
There is widespread public skepticism about how tax revenue is utilized. Without visible returns in public services or infrastructure, compliance remains low, and voluntary declaration of income is rare.
- Complexity of the Tax System
For many small businesses and individual taxpayers, the system remains bureaucratic and hard to navigate, discouraging proper registration and filing.
The Way Forward: Recommendations for a Fairer Tax System
For Sri Lanka to build a resilient, equitable economy, its tax system must undergo further reforms:
Simplify tax processes and improve taxpayer services to promote compliance.
Introduce incentives for timely and accurate tax filings, especially for SMEs and self-employed individuals.
Strengthen enforcement mechanisms and use data analytics to track non-compliant taxpayers.
Increase transparency on public spending, so taxpayers see a return on their contribution.
Promote tax education and awareness, especially among youth, informal workers, and freelancers.
Encourage digital payment systems, which reduce tax leakage and increase traceability.
Looking Ahead: Taxes & Economic Recovery
In the context of post-crisis economic recovery and Sri Lanka’s agreement with the International Monetary Fund (IMF), tax revenue targets are a core condition for sustained debt sustainability and economic growth.
With inflation gradually stabilizing and the rupee gaining strength, a more efficient tax regime can foster investor confidence and contribute to long-term national development.
However, taxation must strike a balance between government needs and citizen affordability. Excessive burdens on the middle class or over-taxation of essentials could result in economic stagnation and public backlash.
Final Thoughts
As Sri Lanka navigates economic recovery in 2025, taxation remains both a challenge and a tool for transformation. The country needs a broad, inclusive, transparent, and fair tax system—not just to increase revenue, but to build public trust and a more equitable society.
At Ceylon Public Affairs, we will continue to monitor developments and offer insights into how tax policy impacts the everyday lives of Sri Lankans.
