In a major shift toward progressive taxation, the Sri Lankan government is preparing to implement sweeping reforms to its tax system that will place a greater burden on wealth and property, aligning with International Monetary Fund (IMF) recommendations. The move is aimed at easing pressure on lower-income citizens and improving revenue collection from high-income earners.
According to the IMF’s Fourth Review under the Extended Fund Facility (EFF), the government has committed to introducing a range of wealth and property-related taxes, with the goal of strengthening fiscal stability and fostering economic equity. These measures include a property tax expected by mid-2027, a wealth transfer tax, and a reformed capital gains tax regime.
Central to these reforms is the introduction of an Imputed Rental Income Tax (IRIT) by 2025, which will apply to residential properties exceeding a specific value threshold. The IMF also recommends replacing the current exemption for the sale of a first home with a value-based threshold, broadening the tax base.
Another key element is the revamp of the capital gains tax (CGT). The IMF proposes removing the existing CGT exemption for listed companies and revising value-added tax (VAT) treatment for owner-occupied housing. This would include taxing the first sale of residential properties and harmonizing the tax structure with international norms.
To support local government finances, property taxes at the municipal and provincial levels will also be updated. The outdated annual value (AV) assessment method will be replaced with more responsive and market-based valuations. A gradual approach will be adopted to prevent excessive tax burdens, and hardship relief mechanisms will be introduced for vulnerable property owners.
As part of the 2025 national budget proposals, the government also plans to raise stamp duties on land leases and introduce a new electricity usage tax. These measures are intended to expand the revenue base while promoting greater fiscal autonomy for local authorities.
To facilitate accurate and fair tax assessments, Sri Lanka is developing a national property database supported by a digital Sales Price and Rents Register (SPRR). This system will collect and digitize valuation data starting with records from Municipal Councils. The first phase of digitization is expected to be completed by the end of 2025.
The final SPRR, essential for determining property values and implementing various taxes, is due to be fully operational by September 2025. It will feed into the broader property database, scheduled for completion by June 2026. By September 2026, the Inland Revenue Department, Valuation Department, Land Registry, and the general public will have access to this comprehensive system.
This strategy, endorsed in a letter of intent sent to IMF Managing Director Kristalina Georgieva, underscores the government’s intention to shift more tax responsibility to high-net-worth individuals. The broader objective is to create a fairer, more transparent tax system that enables better-targeted welfare programs and supports long-term economic resilience.
