By The Pulseline News Desk
Sri Lanka aims to increase tax revenue to 17% of Gross Domestic Product (GDP) by 2031 under a new Medium-Term Revenue Strategy (MTRS) for 2027-2031, outlining a series of reforms to broaden the tax base, improve compliance and strengthen the country’s long-term fiscal sustainability.
The strategy, published by the Ministry of Finance, Planning and Economic Development, has set out five key policy objectives to guide the Government’s tax reforms over the next five years, in line with commitments under the International Monetary Fund (IMF)-supported programme.
According to the document, Sri Lanka has made significant progress in fiscal consolidation since 2022, with the tax-to-GDP ratio nearly doubling by 2025. However, the Government has acknowledged the need for further reforms to establish a revenue system that is efficient, equitable, simple and predictable.
The Government’s target of raising tax revenue to 17% of GDP by 2031 is higher than the approximately 14.2% projected under the Medium-Term Fiscal Framework for the 2027-2031 period.
The strategy has identified five priorities: modernising revenue administration, improving the efficiency and competitiveness of the tax system, enhancing equity and fairness, strengthening governance and accountability, and sustaining revenue mobilisation.
A key policy direction will be to restrict the introduction of new corporate income tax incentives to exceptional circumstances while reviewing the personal income tax system to ensure that high-income earners are appropriately captured within the tax net.
The Government has also planned to assess the impact of Value Added Tax (VAT) on different income groups and gradually phase out para-tariffs, while introducing alternative measures where necessary.
Widening the tax net
A major component of the strategy will be expanding the tax base by reviewing existing exemptions and concessions and improving the taxation of professionals and businesses.
The Government has intended to bring more informal and digitally enabled economic activities into the tax system while strengthening taxation relating to property, capital gains and high-value transactions.
Authorities will also seek to improve taxpayer registration and information matching to identify individuals and businesses operating outside the formal tax system.
Particular attention will be given to large taxpayers, professionals, high-wealth individuals and self-employed persons, with risk-based compliance mechanisms used to identify potential tax evasion and non-compliance.
Digitalisation and accountability
The strategy places significant emphasis on modernising tax administration through digital systems, improved data sharing and better taxpayer services.
The Inland Revenue Department, Sri Lanka Customs and the Excise Department are expected to strengthen coordination and information-sharing mechanisms to improve revenue collection and enforcement.
The Government has also planned to introduce stronger monitoring and accountability arrangements, including regular assessments of tax reform implementation, annual reviews of revenue performance and improved reporting mechanisms.
Where revenue targets are not achieved, compensating measures will be introduced to ensure that fiscal and debt sustainability objectives remain on track.
Balancing revenue and equity
The MTRS has also sought to address concerns over the fairness of the tax system by ensuring that taxpayers with similar economic circumstances are treated consistently.
Improving the taxation of high-income and high-wealth individuals will be a central part of this effort, while social protection measures are expected to help minimise the impact of tax reforms on vulnerable households.
The strategy has also signaled a shift away from poorly targeted tax exemptions and concessions that reduce government revenue without necessarily delivering broader economic benefits.
According to the document, stronger tax administration and improved compliance are expected to generate much of the revenue gains in the near term, while longer-term increases will depend on carefully sequenced tax policy reforms.
The success of the five-year strategy will be critical to Sri Lanka’s efforts to maintain fiscal discipline, meet its debt sustainability commitments and reduce its reliance on borrowing to finance government expenditure.
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