By: Staff Writer
October 25, Colombo (LNW): Sri Lanka must move away from its heavy dependence on consumption taxes and make accumulated wealth, property and high incomes contribute more fairly to public revenue, the Institute of Policy Studies (IPS) has recommended, warning that premature tax cuts could undermine fiscal stability while further rate increases risk deepening economic and political pressures.
In its flagship Sri Lanka State of the Economy 2026 report, released in early October, the Colombo-based think tank argued that the Government’s revenue recovery since the 2022 economic crisis has relied predominantly on high tax rates rather than a sufficiently broad, efficient and equitable tax system.
The recommendation exposes a central dilemma confronting policymakers: how to protect government revenue and debt sustainability without imposing an excessive burden on households and businesses still recovering from the economic collapse.
Although higher taxes helped restore public finances, the IPS warned that maintaining elevated rates indefinitely could produce diminishing economic and political returns. High consumption taxes disproportionately affect lower-income households, particularly when real wages remain under pressure and household spending has yet to recover fully.
However, the report cautioned against reducing Value Added Tax (VAT) before the country establishes a stronger revenue base. Premature concessions could reverse fiscal gains and place additional pressure on debt repayment and the financing of essential public services.
The IPS noted that Sri Lanka’s tax-to-GDP ratio has improved substantially since 2022 but remains below that of many emerging Asian economies. Persistent informality, uneven compliance and numerous exemptions continue to restrict the Government’s ability to collect revenue.
Rather than introducing a comprehensive net wealth tax, the think tank advocates strengthening existing instruments targeting property ownership, capital gains, rental income and luxury assets. Such measures could gradually shift part of the tax burden away from consumption and productive economic activity towards accumulated assets.
Modernising property taxation would require updated valuations, digital land ownership registers and stronger enforcement. These reforms could help authorities identify properties whose taxable values have diverged significantly from outdated official assessments.
The report also highlights the potential for improving taxation of capital gains and rental earnings, particularly in land and real estate markets where substantial wealth can accumulate through rising asset prices.
Nevertheless, implementation will be critical. Outdated records, fragmented administrative systems, valuation disputes and weak enforcement could undermine any attempt to increase collections from wealthy asset holders.
The Government must therefore demonstrate that additional obligations will be applied consistently rather than selectively. Transparent valuation methods, accessible appeals procedures and safeguards against arbitrary assessments would be essential to maintain public confidence.
The IPS proposal represents more than a revenue-raising exercise. It challenges the sustainability of a fiscal model that depends heavily on taxing consumption while leaving opportunities to broaden direct taxation insufficiently exploited.
Whether the Government can translate this recommendation into measurable reform will determine if economic recovery produces a fairer distribution of the adjustment costs.
Without stronger compliance and a wider tax base, Sri Lanka risks remaining trapped between politically difficult tax rates and financially dangerous demands for relief
