For many years, widening the tax base has been rightly recognised as one of the most important priorities for Sri Lanka. A country cannot build a sustainable revenue system if a relatively small group of taxpayers continues to carry a large share of the burden. Bringing previously unregistered individuals and businesses into the formal tax system is therefore essential. The renewed public attention on Taxpayer Identification Number (TIN) registration and the expanding role of TINs in everyday economic transactions make this issue particularly relevant today. But there is another side of the equation that deserves much greater attention: taxpayer retention.
A tax administration should not measure success only by asking, ‘How many new taxpayers did we register this year?’ It should also ask, ‘How many taxpayers who entered the system are still actively connected, filing correctly and complying voluntarily?’ This is particularly relevant as Sri Lanka continues to modernise tax administration. The Inland Revenue Department’s 2025 Annual Performance Report highlights revenue performance, compliance, enforcement and taxpayer awareness as important areas of its work, while its current digital environment increasingly enables taxpayers to interact with the administration electronically.
The distinction is important because registration is not the same as compliance. A taxpayer can possess a Taxpayer Identification Number (TIN), but remain inactive. A business can enter the formal system but later stop filing. An individual can initially attempt to comply but become disengaged because the rules are difficult to understand, procedures are inconvenient or assistance is difficult to obtain. Therefore, widening the tax base without retaining taxpayers can resemble filling a bucket that has a leak. The challenge is not simply to keep filling the bucket, but to find and repair the leak.
Tax administration usually measures what taxpayers eventually do: whether they registered, filed, paid or accumulated arrears. But it should also measure how difficult it was for them to comply
From ‘Register and Wait’ to ‘Register and Guide’
Perhaps the tax administration needs to borrow an idea from the private sector: customer retention. Businesses understand that acquiring a new customer can be more difficult and costly than retaining an existing one. They therefore invest in onboarding, customer service, personalised communication and relationship management. Tax administration is obviously not a commercial business, and taxpayers are not customers in the ordinary sense. Nevertheless, there is a useful lesson here. Once a citizen enters the tax system, the administration should not simply record that entry; it should help the taxpayer successfully navigate the system.
This could begin with a ‘First 100 Days’ taxpayer journey. At the moment of registration, a taxpayer should not simply receive a number and a list of obligations. The taxpayer could receive a simple digital welcome package explaining what must be done, when it must be done, how it can be done and where assistance can be obtained. After registration, targeted reminders could be provided before important deadlines. A short digital check-in could ask whether the taxpayer understands the next obligation. This would turn registration from a one-time administrative event into the beginning of a taxpayer relationship.
This is particularly important for new entrepreneurs and small businesses. For a large company with accountants and tax advisers, a complicated tax requirement may be an inconvenience. For a small entrepreneur, the same requirement can become a barrier to remaining compliant. If a new entrepreneur does not understand a return, payment procedure or documentation requirement, the problem may not be a lack of willingness to comply. It may simply be a lack of capability. Sri Lanka’s tax system should therefore distinguish between inability to comply and unwillingness to comply.
This distinction could transform compliance management. A taxpayer who makes an honest mistake should not necessarily be approached in exactly the same way as a taxpayer who deliberately conceals income. One requires education and assistance; the other may require enforcement. A modern administration should have the analytical capacity to identify the difference.
This is also where risk-based administration becomes important. High-risk behaviour might include repeated underreporting of income, persistent failure to file despite reminders, unexplained inconsistencies between reported income and third-party information, or repeated patterns of non-compliance. A simple calculation error or an isolated late filing should not automatically be treated in the same way.
Measuring friction
Another practical innovation would be to create a Compliance Friction Index. Tax administration usually measures what taxpayers eventually do: whether they registered, filed, paid or accumulated arrears. But it should also measure how difficult it was for them to comply. After important interactions, taxpayers could be asked a few simple questions: Was the requirement easy to understand? Was the process easy to complete? Was assistance available? Did you know what to do next? Did you feel confident that you had complied correctly?
Sri Lanka should broaden the definition of the tax base. The tax base is not simply the number of people registered in a database. A stronger measure would consider how many taxpayers are registered, active, filing, paying, updating their information and remaining connected to the system over time. This suggests a new performance indicator for tax administration: Taxpayer Retention Rate
The results could identify the ‘pain points’ in the tax system. If thousands of taxpayers repeatedly encounter the same problem, the administration should not automatically conclude that thousands of taxpayers are failing. It should ask whether the system itself is creating unnecessary friction.
This leads to another important idea: the taxpayer complaint should become administrative intelligence. A complaint is not necessarily evidence of a difficult taxpayer. Sometimes it is evidence of a difficult process. If the same question is asked repeatedly, perhaps the communication is unclear. If the same form generates repeated errors, perhaps its design needs reconsideration. If taxpayers repeatedly visit offices for the same issue, perhaps the digital service or guidance needs improvement.
Taxpayer feedback can therefore become a continuous improvement mechanism. The administration could identify its top ten or twenty recurring compliance difficulties every quarter and systematically remove them. The objective would not merely be to answer complaints faster, but to reduce the number of complaints that need to arise in the first place.
There is also an opportunity to use data more intelligently. Not every taxpayer needs the same level of intervention. A taxpayer with a consistent history of timely filing and payment should not necessarily experience the same administrative intensity as a taxpayer showing repeated high-risk behaviour. Risk-based administration allows resources to be directed towards taxpayers and transactions where the revenue risk is greatest, while reliable taxpayers can enjoy a simpler compliance experience.
This creates an important principle: trust should produce simplicity.
A taxpayer who consistently demonstrates compliance could receive more personalised reminders, clearer pre-populated information where legally and technically possible, simpler digital communication and faster routine services. This is not about giving compliant taxpayers an unfair advantage. It is about allocating administrative resources intelligently. The more predictable a taxpayer’s compliance behaviour becomes, the more the administration should be able to shift from control towards facilitation.
However, technology alone cannot retain taxpayers. The deeper issue is trust. People are more likely to remain voluntarily compliant when they believe that the tax system is fair, predictable and respectful. A taxpayer should not feel that the relationship begins and ends with a demand for payment. The administration should communicate both sides of the relationship: the taxpayer’s obligations and the administration’s commitment to service, fairness and transparency.
This is where the Taxpayer Charter becomes important. A modern tax system should communicate a simple message: the taxpayer has responsibilities, but the administration also has responsibilities. Such a relationship can strengthen tax morale, the willingness to comply because compliance is viewed as legitimate and worthwhile, rather than merely because enforcement exists.
New engine for growth
Ultimately, Sri Lanka should broaden the definition of the tax base. The tax base is not simply the number of people registered in a database. A stronger measure would consider how many taxpayers are registered, active, filing, paying, updating their information and remaining connected to the system over time.
This suggests a new performance indicator for tax administration: Taxpayer Retention Rate. Alongside new registrations, the administration could monitor how many newly registered taxpayers remain active after one year, three years and five years. It could also examine why taxpayers become inactive. Such information could reveal weaknesses that a simple registration figure cannot show.
I would therefore suggest that the Ministry of Finance and the Inland Revenue Department consider formally adopting a Taxpayer Retention Rate as a complementary performance indicator for the coming fiscal year. It should not replace revenue collection, registration, filing or enforcement indicators. Rather, it should answer a different and equally important question: whether the taxpayers brought into the system remain economically active and connected to it over time.
Widening the tax base brings more people to the table. Retaining taxpayers ensures that they do not quietly walk away from it. For Sri Lanka, sustainable domestic revenue mobilisation will require both. A taxpayer retained is not merely a taxpayer who continues to pay. It is a taxpayer who continues to believe that participating in the tax system is worthwhile
The future tax administration of Sri Lanka therefore needs two engines, not one. The first engine widens the tax base by identifying and bringing new taxpayers into the system. The second engine retains the tax base by making continued compliance understandable, manageable and trustworthy.
The most important question may therefore no longer be, ‘How many taxpayers did we bring into the system?’
It should be:
‘How many taxpayers did we help to stay in the system?’
Widening the tax base brings more people to the table. Retaining taxpayers ensures that they do not quietly walk away from it. For Sri Lanka, sustainable domestic revenue mobilisation will require both.
And perhaps the most important lesson is this: a taxpayer retained is not merely a taxpayer who continues to pay. It is a taxpayer who continues to believe that participating in the tax system is worthwhile.