COLOMBO, November 13, 2026 – Sri Lanka granted tax concessions worth an estimated Rs. 461.49 billion during the first six months of 2026, with VAT exemptions accounting for more than half the total. The figures raise an important question about how much economic benefit the country receives in return for revenue it chooses not to collect.
Governments offer tax exemptions and concessions to encourage investment, support industries and promote economic growth. Such incentives can help businesses expand, attract foreign investors and stimulate domestic production.
Yet these benefits come at a financial cost.
When the government exempts an individual, business or industry from a tax that would otherwise apply, the Treasury gives up potential revenue that could have been used to finance public services, infrastructure and other national priorities.
A recent report by the Ministry of Finance, Planning and Economic Development reveals that Sri Lanka granted concessions worth an estimated Rs. 461.49 billion across four major indirect taxes during the first half of 2026.
The findings are contained in the Ministry’s Tax Expenditure Statement 2025/2026, which examines the financial implications of preferential tax treatment.
The figure represents estimated revenue forgone through exemptions and other concessions, not money previously collected and subsequently lost.
Understanding the scale and purpose of these exemptions is important because their success must ultimately be measured against the economic and social benefits they provide.
The findings can be examined through three questions.
1. Which Taxes Accounted for the Rs. 461 Billion?
The estimated Rs. 461.49 billion in revenue forgone arose from concessions granted under four indirect taxes.
Indirect taxes are generally imposed on goods, services, imports and certain transactions. They are often reflected in the prices consumers and businesses pay.
According to the Finance Ministry, the estimated revenue forgone between January and June 2026 was distributed as follows:
Value Added Tax (VAT): Rs. 242.95 Billion
VAT accounted for the largest share of the total, with concessions estimated at Rs. 242.95 billion.
The figure represents approximately 52.6% of the revenue forgone across the four indirect taxes.
VAT is imposed on many goods and services, although certain transactions, products and activities may qualify for exemptions or other preferential treatment.
These arrangements reduce the amount of VAT that would otherwise be collected under the standard tax framework.
Social Security Contribution Levy (SSCL): Rs. 135.27 Billion
Concessions under the Social Security Contribution Levy accounted for an estimated Rs. 135.27 billion in forgone revenue.
The SSCL applies to specified business activities, including the importation, manufacturing and supply of goods and the provision of services, subject to applicable exemptions and thresholds.
Tax relief under this category accounted for approximately 29.3% of the four-tax total.
Customs Import Duty: Rs. 74.25 Billion
Customs Import Duty concessions resulted in an estimated revenue reduction of Rs. 74.25 billion.
Of this amount, 89.8% was attributed to exemptions granted under Section 19(A) of the Customs Ordinance.
These concessions were provided for special projects and general purposes.
Import-duty exemptions may be used to reduce the cost of capital equipment, project materials and other imported goods intended to support economic activity.
Their value to the country depends on whether the resulting investments and activities deliver the intended benefits.
Excise Duty (Special Provisions): Rs. 9.02 Billion
Concessions granted under Excise Duty (Special Provisions) accounted for a further Rs. 9.02 billion in estimated revenue forgone.
Although this was the smallest of the four categories, the Finance Ministry’s figures reveal that nearly the entire amount was associated with one industry: domestic vehicle assembly.
Together, the four categories accounted for approximately Rs. 461.49 billion in estimated tax expenditure during the six-month period.
2. What Happened With Vehicle Assembly and Direct Tax Relief?
Vehicle Assembly Received 99.8% of Excise Duty Concessions
The domestic vehicle assembly industry accounted for almost the entire amount of revenue forgone under Excise Duty (Special Provisions).
Of the Rs. 9.02 billion recorded in this category, approximately Rs. 9.005 billion, or 99.8%, related to exemptions granted to locally assembled vehicles.
The concentration of concessions in this industry highlights the government’s use of tax incentives to encourage domestic manufacturing.
Such measures can potentially support employment, industrial development and investment.
However, the financial benefits must be examined alongside the revenue surrendered.
For example, evaluating concessions granted to vehicle assemblers requires consideration of local value addition, employment generation, investment and the long-term contribution to the economy.
Corporate Income Tax Relief Increased by 56%
The report also identifies a substantial increase in revenue forgone through direct tax concessions.
Unlike indirect taxes, direct taxes are imposed on income or profits earned by individuals and companies.
Estimated revenue forgone through Corporate Income Tax concessions increased from Rs. 119.29 billion in the 2023/24 assessment year to Rs. 186.07 billion in 2024/25.
This represents an increase of approximately 56%.
Corporate tax concessions can be used to encourage investment, expand productive industries and improve the attractiveness of a country as a business destination.
Nevertheless, an increase in their financial value makes it particularly important to establish whether the incentives generate measurable economic returns.
Personal Income Tax Relief Increased by 246.8%
An even larger percentage increase was recorded in concessions relating to Personal Income Tax.
The estimated revenue forgone rose from Rs. 10.46 billion in the 2023/24 assessment year to Rs. 36.28 billion in 2024/25.
This represents an increase of approximately 246.8%.
The substantial rise demonstrates how changes in tax exemptions, allowances and other concessions can affect the revenue the government would otherwise receive.
The corporate and personal income tax figures relate to separate assessment years and should not be added to the Rs. 461.49 billion recorded for indirect taxes during January to June 2026.
They nevertheless illustrate the broader financial significance of tax concessions across Sri Lanka’s revenue system.
3. Why Does the Government Grant Tax Relief, and Does the Country Benefit?
Tax relief is not necessarily evidence of poor financial management.
Governments deliberately use the tax system to support economic and social objectives that may not be achievable through direct government spending alone.
According to the Ministry of Finance, Sri Lanka’s tax concessions are intended to serve several policy objectives, including:
- Attracting foreign investment into the country.
- Developing and strengthening export-oriented industries.
- Encouraging domestic production and industrial expansion.
- Stimulating economic growth and business activity.
- Supporting social protection and other public policy priorities.
These objectives can provide legitimate reasons for granting exemptions.
For example, a tax incentive that attracts a substantial investment may contribute to employment, production and economic activity that would otherwise not have occurred.
Similarly, concessions aimed at social protection can help reduce costs for selected groups or support access to essential goods and services.
However, the existence of a policy objective does not automatically establish that a tax concession has achieved it.
The Ministry acknowledges that preferential tax treatment reduces or delays revenue the government would otherwise receive.
It therefore emphasises the importance of continuously assessing whether exemptions and concessions deliver sufficient economic and social benefits to justify their financial cost.
That assessment requires more than identifying how much revenue was forgone.
It must consider the activities encouraged by the concessions, the beneficiaries receiving preferential treatment and the extent to which the intended objectives were achieved.
A concession that encourages productive investment and generates lasting employment may have a different economic value from one that provides financial advantages without delivering meaningful additional activity.
The Rs. 461.49 billion figure is consequently more than a measure of estimated tax revenue forgone.
It shows the scale of public resources being directed towards economic and social objectives through the tax system rather than through direct Budget expenditure.
The central question is whether those resources are producing the intended results.
Sri Lanka’s challenge is not simply to increase tax collections or eliminate exemptions. It is to ensure that every significant concession has a clear purpose, a measurable benefit and a justification that can withstand public scrutiny.
The Finance Ministry’s findings provide a basis for that examination. The next step is to determine which concessions are delivering value to the country and which may require reconsideration.
