October 16, Colombo (LNW): A new report has raised serious concerns about Sri Lanka’s taxation system, arguing that decades of low revenue collection and preferential treatment for businesses and the wealthy have undermined vital public services and contributed to the country’s economic collapse in 2022.
The study highlights how successive policy choices, stretching back several decades, have eroded state capacity—particularly in education—while disproportionately burdening lower-income citizens.
The 101-page report, published by Human Rights Watch, draws a sharp connection between the island’s long-standing fiscal choices and the erosion of its social infrastructure. It contends that Sri Lanka’s tax system, shaped by waves of deregulation and generous exemptions, has failed to generate the necessary revenue to sustain equitable development.
While GDP figures have often painted a picture of growth, public investment—especially in education—has been allowed to stagnate, leaving behind a legacy of inequality and missed opportunity.
One of the central arguments of the report is that a narrow tax base, skewed in favour of indirect taxes such as VAT and other consumption levies, has placed a heavier burden on the country’s poorest communities. It notes that in recent years, nearly 80 percent of all tax revenue has come from goods and services, while collections from personal income and wealth remain strikingly low.
As a result, citizens with the fewest means are paying a disproportionately high share of national taxes.
At the same time, vast corporate tax exemptions—often granted without transparency—have continued to drain state finances. In 2022 alone, these exemptions were estimated to cost the equivalent of over half of the government’s total revenue, nearly triple what was allocated to education that year.
The study paints a stark picture of the toll these policies have taken on Sri Lanka’s education system. Once a leader in the developing world for access to free education, the country has seen its public education spending drop from between 3 to 5 percent of GDP in the decades following independence to just 1.5 percent in 2022—now among the lowest in the world. This has led to public schools increasingly charging fees for basic materials and resources, compounding financial pressure on low-income families.
Field interviews included in the report detail the lived reality of these pressures. One woman, a domestic worker in the central hill country, spoke of earning a modest income of around Rs.14,000 a month while struggling to pay monthly school fees and tuition expenses for her two children.
“When teachers ask for books or school supplies, I often cannot provide them,” she said, noting that the economic strain has even affected her ability to provide nutritious meals for her children.
Sri Lanka’s recent history of economic mismanagement came to a head in April 2022, when the country defaulted on its foreign debt for the first time. The default triggered widespread hardship, fuel shortages, and a spike in the cost of living. Although a bailout package from the International Monetary Fund was secured in 2023, the government continues to dedicate a large share of its revenue—over half in 2024—to debt servicing, leaving limited fiscal room for investment in public welfare.
In January 2025, the National People’s Power (NPP) coalition led by President Anura Kumara Dissanayake came to power on a promise to overhaul the economy, reduce inequality, and re-invest in public services. Since then, some modest steps have been taken, including the introduction of a bursary for families with school-aged children. However, education spending remains well below international targets, and structural reforms have only just begun.
The report urges the government to take bolder action, including phasing out costly and ineffective corporate tax holidays, enhancing tax administration capacity, and introducing more progressive tax instruments such as a wealth tax. These measures, it argues, are essential not just for economic stability but to meet Sri Lanka’s obligations under international human rights law, which requires states to use their resources to progressively realise rights to education, health, and a decent standard of living.
The findings also resonate more broadly, reflecting challenges faced by many low- and middle-income countries in a global tax environment that encourages competition for foreign investment at the expense of social development. The report supports ongoing efforts to create a new international tax agreement under the United Nations framework, which would aim to promote fairer and more transparent tax practices across borders.
Human Rights Watch concludes that economic growth alone is not a sufficient condition for social progress. Without a fair and effective tax system, it warns, governments risk deepening inequality and undermining the very rights they are bound to uphold.
