By: Staff Writer
November 02, Colombo (LNW): Sri Lanka’s tax policy overhaul during the first two years of the National People’s Power (NPP) Government has raised serious questions about the distribution of the country’s economic recovery burden, with a new research report warning that twelve major tax reforms have placed mounting pressure on households, businesses and essential services.
The Sri Lankan Human Rights Center, in an economic research report, has highlighted the direct and indirect consequences of these measures, arguing that the cumulative taxation burden is affecting almost every segment of society. Food supplies, education, healthcare, transportation and online businesses are among the sectors experiencing the effects.
Executive Director Rajith Keerthi Thennakoon has warned that the tax changes have accelerated inflationary pressures, restricted market liquidity, deepened poverty and discouraged both domestic investment and foreign direct investment.
The twelve reforms introduced between January 2025 and July 2026 cover a wide range of economic activities. They include increased excise duties on alcohol, tobacco, sugary drinks and motor vehicles, higher taxation on electric vehicles, additional vehicle import duties, increased withholding tax on bank interest and expanded taxation of previously exempt export services, including information technology.
Further measures introduced in 2026 include revised customs import tax brackets, a 2.5% Social Security Contribution Levy on vehicle imports, additional vehicle taxation, higher profit taxes on individuals and partnerships, and a 30% tax on trusts and non-governmental organisations, compared with the previous 10%.
A proposed 18% VAT on foreign digital service providers, although still pending implementation according to the report, adds another dimension to the changing tax environment.
The most significant concern is not necessarily the individual tax increases but their cumulative effect on production, distribution and household expenditure. Businesses facing higher import costs, transport expenses and taxation may pass those additional costs to consumers. Consequently, even citizens who do not directly pay certain taxes can experience their effects through higher prices.
The vehicle taxation changes illustrate this chain reaction. Higher import duties and additional levies increase the cost of vehicles, while also affecting businesses dependent on transportation, logistics and distribution. These additional expenses can eventually influence the prices of food, construction materials and other essential commodities.
Similarly, the doubling of withholding tax on bank deposit interest from 5% to 10% affects savers dependent on interest income. Retired people and households relying on fixed deposits may find their disposable income reduced.
Numbers.lk identifies an increase in the annual personal income tax exemption threshold from Rs.1.2 million to Rs.1.8 million as the principal relief offered to taxpayers. However, the benefit must be considered alongside the numerous indirect and sector-specific tax increases.
The underlying policy question is whether revenue mobilisation is being achieved without undermining consumption, investment and employment.
Sri Lanka’s fiscal recovery requires sustainable revenue collection. Nevertheless, taxation that disproportionately burdens consumers and productive enterprises risks weakening the economic activity needed to generate future revenue.
The Government therefore faces the challenge of demonstrating that its tax programme is not simply increasing collections, but creating a fairer and more sustainable economic foundation.
