Sri Lanka’s record-breaking tax collections in 2024 tell a story of impressive revenue gains but conceal deeper structural flaws. Behind the headlines lies a fragile fiscal framework that depends too heavily on regressive Value Added Tax (VAT), weak compliance with income tax, and a struggling Inland Revenue Department (IRD) that urgently requires reform. The imbalance between direct and indirect taxation, coupled with outdated administrative practices, has created a system that generates cash but fails to deliver fairness or long-term sustainability.
The eagerly awaited Performance Report of the Inland Revenue Department (IRD) for 2024 was recently released, providing some transparency on how tax revenues were raised. The report showcases record growth, but it also exposes fundamental weaknesses. Observers note that the timing of such reports should be improved. While corporations listed on the Colombo Stock Exchange release their annual reports within two months of the financial year’s close, the IRD’s disclosure lags behind. Better timeliness and detail would build trust and accountability.
Record Collections but Growing Inequality
The performance report shows that Sri Lanka collected Rs. 2.6 trillion in 2024, up from Rs. 1.8 trillion in 2023—a striking 44 percent increase year-on-year. On the surface, this surge reflects success. Yet, when examined closely, the growth is skewed and highlights structural imbalance.
The vast majority of gains came from indirect taxation, particularly VAT, which surged by almost 89 percent. The direct-to-indirect tax ratio, which had improved slightly to 50:50 in 2023, slid back to 40:60 in 2024. This shift underlines the widening gap between fair taxation based on income and regressive taxation that disproportionately impacts ordinary citizens.
VAT reforms helped expand collections, with the rate raised from 15 percent to 18 percent and the registration threshold lowered from Rs. 80 million to Rs. 60 million annually. This pushed the number of VAT-registered establishments up by 53 percent to 21,227. While such measures filled the state coffers, they also entrenched inequities, as indirect taxes weigh more heavily on low- and middle-income households compared to the wealthy.
Income tax, by contrast, lags behind. Although Rs. 1 trillion was collected, representing a 13 percent increase, it still reveals systemic weakness. Out of a workforce of over 8 million, fewer than 1 million individuals are part of the tax net. Moreover, a tiny fraction of high-income earners bears most of the personal income tax burden, exposing a narrow base and poor compliance.
This situation is both socially unjust and economically unsustainable. Reliance on VAT not only increases inequality but also makes the economy vulnerable, as it leans on consumption rather than productive growth.
Narrow and Unequal Direct Tax Base
The IRD report breaks down income tax collections and exposes the narrowness of Sri Lanka’s direct tax system:
- Corporate income tax amounted to Rs. 582 billion, contributed by 100,049 companies. This marks only a 5 percent increase over 2023, suggesting limited growth in compliance or profitability.
- Personal and partnership income tax reached Rs. 442 billion, contributed by 976,498 individuals and 16,227 partnerships. While this marks a 26 percent increase over 2023, it is heavily concentrated among a very small group of high earners.
A total of 456,035 new taxpayers were reportedly added in 2024, mostly individuals. Yet, the report fails to disclose how much revenue they actually contributed. Without this information, suspicions grow that the same taxpayers are being squeezed repeatedly rather than genuinely broadening the tax base.
Transparency would also benefit from disclosure of how many of the registered companies actually pay corporate tax. In many cases, registration does not translate into meaningful contributions.
Breakdown of Personal Income Tax
The Rs. 442 billion collected as personal income tax includes several components:
- Advance Personal Income Tax (APIT) from private sector employees: Rs. 198 billion
- Advance Income Tax on bank interest payments: Rs. 66 billion
- Advance Income Tax from specified fees and others: Rs. 98 billion
APIT collections from private sector employees rose by Rs. 53 billion compared to 2023, a 36 percent increase. Yet, there remains a significant shortfall of Rs. 81 billion in non-corporate income tax, a gap not addressed in the report.
The performance report also sheds light on Advance Personal Income Tax (APIT) by income brackets, showing a stark concentration of the tax burden:
Private Sector Advance Personal Income Tax Data
| Range of Income | Total Gross Remuneration (Rs.) | No. of Employees | Tax Under APIT (Rs.) | % of Total Tax |
|---|---|---|---|---|
| Below 1,200,000 – No Tax deducted | 909,598,662,000 | 1,719,308 | Nil | – |
| Below 1,200,000 – Tax deducted | 95,579,159,585 | 134,271 | 2,115,505,606 | 1.4% |
| 1,200,000 to 1,700,000 | 197,973,118,819 | 140,991 | 3,342,201,597 | 2.2% |
| 1,700,000 to 2,200,000 | 138,509,744,509 | 72,456 | 5,235,948,597 | 3.4% |
| 2,200,000 to 2,700,000 | 121,774,759,470 | 50,630 | 7,518,545,045 | 4.9% |
| 2,700,000 to 3,200,000 | 91,930,053,722 | 32,252 | 8,020,774,818 | 5.2% |
| 3,200,000 to 3,700,000 | 73,012,748,681 | 21,364 | 8,529,520,168 | 5.5% |
| Above 3,700,000 | 475,152,300,426 | 61,293 | 119,634,198,615 | 77.4% |
| Total | 2,103,530,538,212 | 2,232,565 | 154,396,694,645 | 100% |
Source: IRD Performance Report 2024, based on employer-submitted returns for 2023/24
This table underlines three critical realities:
- Even within the formal private sector, 77 percent of employees pay no income tax because their earnings fall below the threshold.
- A very small group—just 61,293 individuals—account for more than three-quarters of APIT paid.
- With the tax-free threshold set to rise to Rs. 1.8 million in 2025, around 275,000 employees will exit the tax net, narrowing it even further.
This raises urgent questions about the equity and sustainability of Sri Lanka’s tax system.
Compliance and Enforcement Gaps
Tax return compliance remains a chronic weakness. While the law requires all liable taxpayers to file returns by 30 November each year, very few do so on time.
- Among large corporate taxpayers, numbering 621, compliance stood at 93 percent.
- Out of 91,183 other companies, only 26,241 submitted on time—a compliance rate of just 29 percent.
- Among individual taxpayers, compliance is even lower. Out of 792,530 individuals, only 110,240 submitted returns on time, translating to a mere 24 percent.
This dismal performance not only undermines revenue collection but also highlights a culture of weak enforcement and accountability.
The World Bank’s Alarming Assessment
The World Bank’s Public Finance Review 2025 underscores the fragility of Sri Lanka’s revenue model. Key findings include:
- 75 percent of revenue gains since 2022 came from indirect taxes such as VAT, Social Security Contribution Levy (SSCL), and excise duties.
- Regressive impact: VAT consumes 5.5 percent of pre-fiscal income for the poorest decile, compared to 3.3 percent for the richest.
- Poverty impact: The 2024 VAT hike alone increased poverty levels by 2.2 percentage points.
- Sustainability concerns: Over-reliance on indirect taxation is not only unjust but also fiscally unsustainable.
The World Bank calls for digitisation, better sequencing of reforms, enhanced HR capability, and comprehensive restructuring of the IRD. It warns against the “easy option” of squeezing a narrow taxpayer base and stresses the importance of structural reforms.
Professor Mick Moore’s Perspective
Professor Mick Moore, a respected political economist, paints a stark picture of Sri Lanka’s tax administration. He argues that the IRD is as outdated as the Customs Department, lagging 20 years behind even many African countries. His criticisms include:
- Low compliance: For example, only 20,000 out of 110,000 businesses in Colombo pay local property tax.
- Outdated practices: Heavy reliance on manual processes, weak data integration, and lack of digitisation.
- Poor HR systems: Minimal training, lack of skilled recruits, and outdated promotion policies.
Moore stresses that enforcement should target large businesses and wealthy taxpayers, rather than burdening small informal operators who contribute little to revenue. Without skilled staff, modern audits, and investment in IT and data analytics, Sri Lanka cannot hope to close its revenue gap.
Institutional and Human Resource Challenges
The IRD’s own performance report presents an equally grim picture of capacity. With an approved cadre of 1,639 officers, vacancies stand at 227 (14 percent). The workforce is ageing, with 33 percent of staff aged between 51 and 60, most having served over 15 years.
Promotion bottlenecks are common, with dozens of senior positions stuck in “acting” status due to Public Service Commission delays. This has led to staff demotivation and institutional stagnation.
Compounding the problem, trade union pressure halted officer-level recruitment, resulting in the discontinuation of Tax Officer and Assessor posts. Instead, new recruits are appointed directly as Assistant or Deputy Commissioners, undermining knowledge transfer and institutional memory. Between 2007 and 2017, there were no new recruitments to the officer cadre at all.
The lack of skilled professionals in IT, data science, and financial analysis has left the IRD unprepared for digitisation and modern enforcement.
Policy Implications and Reform Agenda
Experts agree that Sri Lanka cannot continue to rely on VAT hikes and indirect taxation to fund its budget. Urgent reforms are needed across several dimensions:
- Digitisation and Data Integration
- Build a unified tax administration platform integrating VAT, income, excise, and customs data.
- Use third-party data from banks, utilities, and property registries to cross-check declarations.
- Broadening the Tax Base
- Enforce compliance among high-income professionals and self-employed groups.
- Strengthen property taxation by aligning municipal and IRD databases.
- Human Resource Overhaul
- Recruit IT specialists, data analysts, and forensic accountants.
- Reform promotions to be performance-based.
- Resolve acting appointments to restore morale.
- Targeted Enforcement
- Focus audits on large businesses, high-net-worth individuals, and multinationals.
- Avoid excessive harassment of small informal operators.
- Institutional Independence and Governance
- Strengthen the autonomy of the IRD from political interference.
- Ensure stable leadership and merit-based recruitment.
A System at a Crossroads
The 2024 IRD performance report highlights both achievements and vulnerabilities. The Rs. 800 billion revenue increase over 2023 is genuine, but its foundations are fragile, relying too much on regressive taxation. With fewer than 12 percent of the workforce contributing directly to income tax, the system is inequitable, discourages compliance, and hampers social fairness.
The warning from the World Bank and Professor Moore is clear: without urgent structural reforms, Sri Lanka’s tax system will continue squeezing a narrow group of taxpayers while leaving most outside the net.
Years of failure to strengthen the IRD have cost the country dearly in lost revenue and fiscal instability. The path forward is not simply about collecting more but about collecting better. A fairer, broader, and modern tax system is essential for building public trust, reducing inequality, and securing sustainable growth.
Sri Lanka now faces a choice: to continue depending on regressive VAT and short-term fixes, or to embrace comprehensive reform that creates a just and competitive economy. The stakes are high, and the future of the country’s fiscal stability depends on bold action.
