Sri Lanka tax compliance costs are rising as revenue reforms lift collections, while manual systems, delayed refunds and privacy concerns persist.
The Sri Lanka tax compliance burden is attracting greater scrutiny as stronger revenue reforms help restore public finances but create new challenges for taxpayers.
Sri Lanka’s tax reforms have transformed the country’s fiscal position after years of declining Government revenue. They have also supported broader efforts to stabilise the economy.
However, tax collections continue to rise while the Inland Revenue Department, known as the IRD, still faces operational weaknesses. This has raised questions about whether taxpayers must shoulder excessive administrative costs.
Government revenue reached 16.7% of GDP in 2025, compared with 8.3% in 2021. Higher tax rates, a wider tax base and stronger enforcement drove the increase.
International lenders and fiscal policymakers have welcomed this recovery. However, analysts say Sri Lanka must now build a more efficient and taxpayer-friendly revenue administration to sustain those gains.
Sri Lanka Tax Compliance Systems Remain Labour-Intensive
A new policy brief from Arutha Research says tax reforms have significantly increased collections. However, the IRD has not yet fully modernised its administrative systems.
Many procedures remain labour-intensive. As a result, both taxpayers and the Department face additional costs.
Businesses still encounter manual processes despite improvements to the Revenue Administration Management Information System, known as RAMIS.
The Value Added Tax refund process remains one example. The abolition of the Simplified VAT scheme represented a major reform. However, dozens of IRD officers still manually verify the final stage of VAT refunds.
This limits efficiency and increases the possibility of delays.
Exporters and manufacturers rely on timely refunds to protect cash flow. Therefore, prolonged delays may affect investment decisions, production schedules and working capital requirements.
Traditional Audits Increase Pressure on Compliant Taxpayers
Arutha Research also warns that taxpayers may face greater scrutiny without matching improvements in compliance systems.
Sri Lanka’s tax administration still relies heavily on conventional audit practices. Many modern revenue authorities instead use sophisticated risk-based assessments.
Under the current system, compliant taxpayers may continue facing routine verification. Meanwhile, high-risk tax evasion cases require more focused investigative attention.
Analysts argue that stronger data analytics could reduce unnecessary Sri Lanka tax compliance costs. It could also help the IRD identify deliberate avoidance more effectively.
Another concern involves the Government’s plan to widen the IRD’s access to third-party financial information.
Greater information sharing could improve compliance. However, Arutha warns that Sri Lanka has not yet established comprehensive privacy and data governance protections needed to maintain public confidence.
Field Inspections and Privilege Card Raise Questions
The report questions recent field operations targeting unregistered businesses through street-level inspections in Colombo.
The campaign reflects a more active enforcement strategy. However, international experience suggests such operations often generate modest revenue while consuming substantial staff resources.
Those officials could instead focus on larger and more complex tax evasion investigations.
The proposed Privilege Card scheme has also prompted fairness concerns. Critics say rewarding taxpayers who increase future declarations may unintentionally benefit people who previously underreported income.
Meanwhile, the scheme may provide little recognition for individuals and businesses that have consistently fulfilled their tax obligations.
IRD Reform Must Build Taxpayer Trust
Despite these shortcomings, Arutha acknowledges that the IRD has undergone its most significant transformation in decades.
New recruitment, improved digital infrastructure, specialised investigation units and stronger cooperation with Customs have increased the Department’s capacity.
However, maintaining higher revenue will require more than tougher enforcement. Analysts say the Government must build taxpayer trust through transparent, predictable and efficient administration.
Sri Lanka aims to raise Government revenue to 20% of GDP. Reaching that target will depend on collections, but future reform success may also rest on taxpayer confidence and a fairer Sri Lanka tax compliance system.
