February 17, Colombo (LNW): Sri Lanka’s economic reform agenda is centred around bolstering fiscal discipline, with a strong focus on revenue-based consolidation.
This strategy arises from the nation’s historically low tax revenue levels, which stood at just 7.3 per cent of GDP in 2022, one of the lowest in the world.
The government is determined to address this gap and ensure a more sustainable fiscal future.
One of the key measures contributing to the country’s revenue growth is the liberalisation of motor vehicle imports, which took effect on 1st February 2025.
This significant policy shift is being closely monitored to ensure it does not have negative repercussions on the nation’s external economic stability.
Whilst the government anticipates substantial revenue from this move, it remains vigilant about the broader impacts.
Additional fiscal measures, which were unveiled in Parliament in December 2024, aim to ease the tax burden on lower-income groups while enhancing overall revenue intake.
Amongst these measures is an increase in the tax-free threshold for personal income tax, changes to the second income tax bracket, and the removal of VAT on fresh milk and yoghurt, all of which are designed to create a fairer tax system for citizens.
Furthermore, the government decided to abandon the controversial Imputed Rental Income Tax, a proposal from the previous administration, for this year.
To offset potential revenue shortfalls from these adjustments, the government introduced alternative measures, including VAT on digital services, corporate income tax on exported services, and an increase in taxes on cigarettes, alcohol, and gaming.
Together, these initiatives are expected to help the country achieve its target of raising tax revenues to 15.1 per cent of GDP by the end of 2025. However, the government is not only focusing on policy changes; there is a parallel effort to overhaul tax administration and improve compliance.
Enhancing the institutional framework, strengthening digital systems, and adopting robust monitoring mechanisms are critical components of the government’s strategy to build fiscal sustainability.
A major part of this plan is Sri Lanka’s push towards a cashless economy, in line with its broader digitalisation goals. The adoption of Point-of-Sale (POS) machines, particularly in VAT-registered businesses, will facilitate digital transactions, reduce reliance on cash, and help formalise the economy.
This transition is expected to not only curb tax evasion but also mitigate illicit financial activities, contributing to greater fiscal transparency and efficiency.
The drive for a fully digital economy, encompassing both revenue agencies and broader economic activities, is expected to be a game-changer in improving tax collection.
By reducing manual processes and increasing the use of technology, the government is optimistic that these efforts will lead to higher revenues, which in turn will support long-term economic stability and growth for Sri Lanka.
