Taxation in Sri Lanka

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Taxation in Sri Lanka mainly includes excise duties, value added tax, income tax and tariffs.^[1] Tax revenue is a primary constituent of the government's fiscal policy. The Government of Sri Lanka imposes taxes mainly of two types in the forms of direct taxes and indirect taxes. As of 2018 CBSL report, taxes are the most important revenue source for the government, contributing 89% of the revenue. The tax revenue to GDP ratio is just about 11.6 percent as of 2018, which is one of the lowest rates among the upper-middle income earning countries.^[2] At present, the government of Sri Lanka also face major challenges regarding the continuous budget deficits where government expenditures have exceeded the government tax revenue.^[3]

Indirect taxes in the forms of excise duties, VAT and tariffs are the key contributors to the government tax revenue with 74% while direct taxes including income tax, Pay-as-you-earn tax and Economic Service Charge contribute only around 9%.^[4]

However the tax regime is expected to witness major changes following the 2019 Sri Lankan presidential election which took place on 16 November 2019.^[5][6] The Maithripala Sirisena led government also announced that the carbon tax will be removed with immediate effect as of 1 December 2019.^[7] In November 2019, newly elected President Gotabaya Rajapaksa approved mandate to abolish taxes such as PAYE, NBT, Withholding tax, Capital Gain tax, Bank Debit tax and to reduce VAT tax rate from 15% to 8%.^[8][9] Tax evasion is a rampant and prevalent issue in Sri Lanka.^[10]