Sri Lanka is preparing to present its 2026 Budget under the theme of “Achieving a Productive Economy and Fostering the Engagement of Everyone in Economic Development.” Yet behind the hopeful message lies the hard truth of rising debt repayments, IMF programme conditions, and a fragile fiscal base that will force the government toward higher taxation and new levies.
The 2026 Appropriation Bill, approved by Cabinet and gazetted on September 20, is due for its first reading in Parliament on September 26, with the Budget Speech scheduled for early November. According to Treasury Secretary Dr. Harshana Suriyapperuma, ministries and provincial councils have been told to submit spending plans within strict fiscal limits, prioritising arrears settlement, the revival of stalled infrastructure, public transport upgrades, and digitalisation.
But financing these goals requires a sharper revenue drive. The IMF has repeatedly urged Colombo to broaden its tax base and reduce reliance on indirect taxes. “Sri Lanka cannot achieve debt sustainability without decisive tax reform,” a senior IMF mission official told local media recently, stressing the need for more progressive taxation.
For 2026, the government is drafting a restructured capital gains tax aimed at high-net-worth individuals, while reviving proposals to tax imputed rental income on owner-occupied and vacant properties. Certain tax exemptions for export-oriented services may also be trimmed. Value Added Tax (VAT) will expand to cover digital services supplied by foreign firms from April 2026, while higher corporate taxes are likely for liquor, tobacco, and gaming.
Economist Dr. Nishan de Mel of Verité Research noted that the government has little room for maneuver: “To raise the tax-to-GDP ratio to 14–15 percent by 2026, as agreed with the IMF, revenues must grow to Rs. 5,500–6,000 billion. Without widening the net to include wealth and property taxes, this will fall disproportionately on households through indirect levies.”
The Appropriation Bill sets total expenditure for 2026 at Rs. 4.54 trillion, up from Rs. 4.22 trillion this year, though the borrowing ceiling has been cut from Rs. 4 trillion to Rs. 3.8 trillion. Health and education receive significant boosts: the Ministry of Health’s recurrent budget rises to Rs. 449 billion from Rs. 412 billion, while education allocations climb to Rs. 231 billion from Rs. 206 billion. Defence spending remains steady, with Rs. 60 billion earmarked for capital projects, while transport and highways see capital allocations fall to Rs. 390 billion from Rs. 421 billion in 2025.
Despite the effort to tilt the balance toward direct taxes, analysts caution that indirect taxation will remain dominant. “When more than 80 percent of state revenue comes from indirect sources, it is the poor and middle classes who carry the heaviest burden,” warned senior tax expert and former Inland Revenue official Kalyani Dahanayake. “Unless wealth taxes and property-based levies are effectively implemented, inequality will deepen.”
The risks are clear. Expanding consumption taxes could stoke inflation, while politically sensitive measures like taxing property and capital gains may face stiff resistance from vested interests. Yet without them, the fiscal deficit could widen again, undermining recovery efforts.
Ultimately, Budget 2026 will be more than a spending plan it will be a test of Sri Lanka’s resolve to restructure its tax system, stabilize its economy, and meet IMF targets. As one Colombo-based investment analyst put it, “This Budget will show whether the government can push through reforms that shift the tax burden onto those best able to pay or whether it will buckle under political pressure and return to old patterns of borrowing and austerity.”
