By: Staff Writer
November 09, Colombo (LNW): Sri Lanka’s rapidly improving tax revenue figures conceal a serious weakness in the country’s public finance system: the Government is collecting more revenue, but substantial amounts of legally recoverable taxes remain unpaid, disputed or inadequately pursued.
The issue presents a major challenge for the National People’s Power Government as it prepares the 2027 Budget and attempts to demonstrate that the country’s fiscal recovery can continue without imposing additional tax increases.
According to figures cited in the latest revenue administration assessment, tax defaults had reached approximately Rs.2.1 trillion by December 31, 2025. Of this amount, approximately Rs.1.6 trillion was under dispute.
These figures raise important questions about the effectiveness of the Inland Revenue Department, the Customs Department and other institutions responsible for protecting government revenue.
The Government has defended its tax policy against Opposition allegations that recent measures have increased the burden on ordinary people and businesses.
Deputy Finance Minister Dr. Anil Jayantha Fernando has argued that several changes introduced by the Government were adjustments to existing tax arrangements rather than entirely new taxes.
He cited the January 2025 excise duty revision, customs duty restructuring, withholding tax changes, higher corporate taxes on alcohol and tobacco companies and the introduction of VAT on selected digital services.
However, the broader revenue administration figures suggest that the problem extends beyond the rates imposed on taxpayers.
Between 2025 and the first quarter of 2026, VAT non-filing reached 19.1 percent among non-large taxpayers and four percent among large taxpayers.
More seriously, income tax non-filing reached 52.7 percent for corporate income tax and 67.8 percent for individual income tax in 2025.
These figures indicate that a significant proportion of registered taxpayers are failing to meet filing requirements, undermining the Government’s efforts to broaden the tax base.
An International Monetary Fund Fiscal Affairs Department diagnostic, published by the Finance Ministry on October 30, 2026, identified weaknesses in the application of risk-based compliance methods and inconsistent enforcement of legally available penalties.
The assessment estimated that improving revenue administration capability could generate an illustrative additional 1.9 percentage points of GDP over five years.
This represents a potentially significant revenue opportunity without necessarily increasing existing tax rates.
However, the IMF has also identified an immediate technological vulnerability. The maintenance contract for the Inland Revenue Department’s core filing and payment platform is due to expire on January 31, 2027.
Any disruption or delay in securing reliable replacement arrangements could undermine the very digitisation strategy on which the Government is relying.
Meanwhile, proposals to recover revenue from approximately 300,000 illegal Direct-to-Home satellite connections could generate more than Rs.3.6 billion in formalised revenue and up to Rs.1.5 billion in direct tax recovery.
Other opportunities include enforcing VAT on foreign digital service providers, introducing a domestic minimum top-up tax for multinational enterprises and reforming cigarette excise taxation.
Restoring cigarette taxation to the World Health Organisation’s 75 percent benchmark could reportedly generate approximately Rs.17.3 billion annually.
The real test for the 2027 Budget is therefore whether the Government can transform these opportunities into actual collections.
Without stronger investigations, consistent penalties, effective digital systems and transparent recovery of outstanding taxes, further tax concessions could become difficult to sustain.
Sri Lanka cannot build lasting fiscal stability simply by announcing higher revenue targets. It must first demonstrate that existing revenue obligations are being enforced fairly and effectively.