Sri Lanka’s excise revenue protection system is confronting a combination of taxation disparities, institutional fragmentation, manpower shortages and weaknesses in monitoring illegal alcohol production, exposing serious vulnerabilities in the Government’s efforts to strengthen public finances.
An International Monetary Fund (IMF) Revenue Administration Diagnostic has highlighted shortcomings in the administration of alcohol taxation, warning that unequal excise treatment of imported and locally manufactured alcoholic beverages, combined with inadequate enforcement mechanisms, could undermine revenue collection and create opportunities for market manipulation.
One of the most striking findings is that imported alcoholic beverages currently attract a lower fixed excise rate per litre than domestically produced alcohol. The IMF described this arrangement as unusual, recommending a review under the Medium-Term Revenue Strategy to establish a more neutral taxation structure.
The disparity raises questions about the fairness of the tax regime and whether domestic manufacturers are being placed at a competitive disadvantage. More importantly, it challenges the effectiveness of a revenue system expected to maximise tax collection without creating distortions between competing products.
However, the IMF’s concerns extend beyond taxation rates to the institutional machinery responsible for collecting excise revenue.
The administration of excise duties is divided among Sri Lanka Excise, Sri Lanka Customs and the Ceylon Petroleum Corporation. The IMF believes this arrangement differs from common international practice and has recommended a time-bound assessment of closer integration between Customs and Excise, potentially through a unified administrative model.
Such fragmentation could complicate enforcement, information-sharing and the identification of tax evasion across different stages of production, importation and distribution.
The manpower situation adds another dimension to the problem. As at December 31, 2025, the Excise Department had 1,140 employees against an approved cadre of 1,649, leaving 509 vacancies.
The department also deploys personnel for non-revenue responsibilities, including the control of illegal narcotics. This raises questions about whether the existing workforce has sufficient capacity to undertake its core revenue-protection functions while managing wider enforcement responsibilities.
The IMF has also identified weaknesses in the security-sticker system, a critical mechanism for distinguishing legally manufactured alcoholic products from illicit or undeclared supplies.
The existing contract with Madras Security Printers expires in January 2027. Although bids for a replacement provider have been opened, the transition presents a potential vulnerability requiring careful supervision to prevent interruptions in verification and enforcement.
Meanwhile, the frequently cited estimate that illicit alcohol accounts for approximately 40% of the market has not been accepted by the Excise Department as sufficiently reliable. The department intends to commission an independent research study through a government university approved by the University Grants Commission.
Significantly, the IMF has refrained from quantifying potential revenue losses because reliable market estimates are unavailable.
The report nevertheless emphasises that illicit and under-declared alcohol sales reduce both excise and VAT collections, multiplying the fiscal damage.
A further concern is the slow modernisation of enforcement. The Revenue Administration System for the Excise Department (RASED), comprising 15 planned modules, was expected to begin with its first module in October 2026, with full implementation targeted for 2028.
Only two liquor manufacturing facilities are currently fully automated.
The IMF has questioned the effectiveness of permanently stationing resident officers at manufacturing premises, describing the arrangement as resource-intensive and potentially routine. It recommends gradually replacing such deployment with proportionate, technology-based monitoring as RASED becomes operational, without disrupting legitimate traditional production.
The central question is whether the Government can transform these recommendations into measurable improvements before further revenue leaks occur.
With 509 vacancies, an impending security-sticker contract transition, fragmented institutional responsibilities and an incomplete digital monitoring system, Sri Lanka faces a significant challenge in protecting one of its important excise revenue streams.
The IMF has identified the weaknesses. The responsibility now rests with the Government to demonstrate whether its promised revenue reforms can deliver effective enforcement, transparent taxation and measurable improvements in public revenue.
