By: Staff Writer
December 12, Colombo (LNW): Sri Lanka’s efforts to stabilize the economy are being undermined by the persistent growth of tax exemptions, which continue to erode government revenue and weaken fiscal discipline.
The Ministry of Finance’s Tax Expenditure Statement for November 2025 reveals that exemptions reached Rs. 285.7 billion in the first half of the year, a figure that represents more than half of all tax reliefs granted since April 2023.
These concessions, totaling Rs. 787.1 billion over the past two years, cover income taxes, VAT, excise duties, customs, and other indirect levies.
While designed to stimulate investment and protect essential sectors, their scale raises questions about efficiency and equity.
Income tax exemptions for 2023/24 alone accounted for Rs. 131.5 billion, including corporate concessions under legacy frameworks. Consumption and trade tax exemptions in 2024 totaled Rs. 369.9 billion, largely driven by VAT reliefs for essential goods and priority sectors.
Experts argue that the ongoing reliance on exemptions has unintended consequences. Although these reliefs aim to shield consumers from high prices and encourage investment, they have contributed to widening fiscal deficits,
Limiting the government’s capacity to fund public services. VAT remains the largest component of exemptions, signaling that structural reforms to broaden the tax base have yet to achieve meaningful results.
Social Security Contribution Levy exemptions, amounting to Rs. 61.7 billion in the first half of 2025, primarily target electricity, water, fuel, and healthcare sectors, reflecting a policy choice to maintain affordability.
Customs and excise duty reliefs, meanwhile, support strategic sectors such as agriculture, energy, and construction, but the aggregate fiscal cost remains substantial. Recovery actions for luxury vehicle tax exemptions may partially offset losses, though the overall burden persists.
The continuation of high exemptions poses risks to Sri Lanka’s IMF-backed medium-term revenue strategy, which relies on higher VAT, improved income tax collections, and better administration of the Social Security levy.
Analysts caution that unless exemptions are carefully scrutinized and aligned with fiscal objectives, the country could face growing deficits and reduced public investment capacity.
The Finance Ministry plans to integrate tax expenditure reporting into the budget cycle, providing clearer benchmarks, regular reviews of high-cost concessions, and sector-specific impact analysis.
By distinguishing between policy-driven reliefs for essential sectors and legacy exemptions from outdated regimes, policymakers hope to optimize revenue without stifling economic growth. Still, with exemptions already at record levels, reforming the system will require decisive measures to balance fiscal stability and public benefits.
