By The Pulseline News Desk
Sri Lanka’s outstanding tax arrears has reached nearly Rs.2.1 trillion by the end of 2025, with approximately three-quarters of the total involving tax assessments subject to appeals or other disputes, according to a new International Monetary Fund (IMF) technical assistance report.
According to media reports, the report has revealed that of the Rs.2.1 trillion in outstanding tax liabilities recorded by the Inland Revenue Department (IRD), nearly Rs.1.6 trillion related to assessments being challenged through appeals or other dispute resolution processes.
The findings highlight persistent weaknesses in Sri Lanka’s tax collection system, with lengthy disputes, administrative constraints and inadequate recovery mechanisms limiting the Government’s ability to collect revenue already assessed.
The scale of the arrears has also increased considerably compared with the previous year. Total outstanding tax arrears reportedly stood at approximately Rs.1.1 trillion at the end of 2024, of which around Rs.947 billion was subject to appeals or other disputes.
This means the total stock of outstanding tax arrears almost doubled within a year, while the disputed component also increased substantially.
The IMF has identified appeals and disputes as the largest obstacle to recovering outstanding tax revenue, noting that the significant proportion of contested assessments complicates collection efforts.
However, the report has also raised concerns over the recovery of undisputed tax debts, which continue to remain unpaid for extended periods despite there being no formal challenge to the assessments.
Weak recovery mechanisms
According to the IMF, the IRD faces staffing constraints, weaknesses in prioritising recovery cases and the absence of a comprehensive risk-based framework to distinguish between different categories of outstanding tax debts.
The report has noted that the department does not adequately differentiate between debts that are readily recoverable, low-value arrears, disputed assessments and amounts with little prospect of collection.
As a result, recovery resources may not be directed towards cases where collection is most likely, while older and potentially unrecoverable debts continue to remain on the department’s records.
The IMF has also highlighted that adequate recovery action had not been taken in certain cases involving tax arrears outstanding for more than five years, including debts that were not subject to appeals or other disputes.
The findings raise questions about the effectiveness of existing enforcement mechanisms, particularly at a time when the Government is under pressure to strengthen domestic revenue mobilisation.
Sri Lanka’s tax revenue performance is a central component of its economic recovery programme supported by the IMF, with higher revenue collection considered essential for maintaining fiscal discipline, financing public expenditure and meeting debt sustainability targets.
No direct authority to write off bad debts
Another issue identified by the IMF concerns the legal restrictions governing the removal of unrecoverable tax debts from the IRD’s records.
Under the Inland Revenue Act and the Value Added Tax Act, the department does not have the authority to directly write off tax debts considered unrecoverable.
Instead, requests for such write-offs must be submitted to the Ministry of Finance.
The IMF has noted that this arrangement complicates the management of the arrears portfolio, particularly where debts have little prospect of recovery or where the administrative cost of pursuing them exceeds the potential revenue.
Without an effective mechanism to distinguish collectible debts from those that are unlikely to be recovered, the department risks continuing to allocate administrative resources to cases that may not generate meaningful revenue.
IMF recommends risk-based recovery system
To address these weaknesses, the IMF has recommended introducing a comprehensive, risk-based tax arrears management system.
Under the proposed approach, outstanding tax debts would be classified according to how long they have remained unpaid, whether they are subject to appeals or other disputes, their likelihood of recovery and the administrative costs involved in pursuing collection.
This would allow the IRD to prioritise recoverable debts and direct enforcement resources towards taxpayers and cases offering a higher likelihood of successful collection. Low-value arrears, disputed assessments and debts with limited recovery prospects could be managed separately under appropriate procedures.
The proposed reforms would also help the department identify long-standing arrears requiring stronger enforcement action while improving the accuracy and usefulness of its outstanding tax records.
The findings come as Sri Lanka seeks to strengthen its domestic revenue base under the IMF programme, following years of fiscal deficits, tax policy changes and the economic crisis.
Although the Government has emphasised the importance of improving revenue collection without imposing additional taxes, the IMF findings have suggested that recovering existing tax liabilities could represent a significant component of efforts to improve public finances.
However, the extent to which the Rs.2.1 trillion can actually be collected remains uncertain, particularly given the large disputed component and the administrative challenges identified by the IMF.
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