The Government on Friday said it will look to stronger tax administration and compliance, rather than new or higher tax rates, for its near-term revenue gains as it targets tax revenue of at least 17% of GDP by 2031.
This is according to a new report released by the Finance, Planning and Economic Development Ministry.
‘In the near term, emphasis should be placed on increasing the productivity of existing taxes through stronger administration, rather than relying primarily on new or higher tax rates,’ the Ministry said in the objectives of Sri Lanka’s Medium-Term Revenue Strategy (MTRS) 2027-2031, published on Friday.
Tax-policy measures will be phased in later, in line with implementation capacity, economic conditions and the need to maintain predictability. The tax system will be broadened and simplified so that revenue is raised from wider and more neutral bases, rather than through repeated increases in statutory rates or reliance on distortionary levies.
The objectives were published to fulfil a structural benchmark under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF). A detailed strategy and time-bound implementation plan will follow.
The Medium-Term Fiscal Framework (MTFF) in the Fiscal Strategy Statement (FSS) 2027 projects total revenue of about 15.5% of GDP and tax revenue of about 14.2% over 2027-2031. The Ministry said the tax-to-GDP ratio had nearly doubled between 2022 and 2025, and the next phase would move from crisis-era revenue mobilisation to a durable, equitable and predictable system.
‘A clear medium-term plan for revenue system reform allows taxpayers and investors to plan their activities with greater confidence, while giving administrators and policymakers a shared understanding of the sequence and timing of upcoming reforms,’ the Ministry said.
Driving the near-term push, the Inland Revenue Department (IRD), Sri Lanka Customs (SLC) and the Excise Department will operate under a single administration model built on compliance risk management, which directs enforcement according to the risk each taxpayer poses. Wider use of the Taxpayer Identification Number (TIN), third-party reporting and data matching will support specialised compliance for large taxpayers, high-wealth individuals, professionals and the self-employed. Customs controls over Board of Investment (BOI) and Special Economic Zone (SEZ) activities will be tightened, and the reliability of critical systems, including the Revenue Administration Management Information System (RAMIS), ensured.
Over the medium term, the strategy rests on four priority commitments. New corporate income tax incentives will be limited to exceptional, narrowly defined cases, subject to an assessment of additionality, meaning whether the investment would have happened without the incentive, as well as fiscal cost and economic benefits. VAT exemptions will be retained only where they effectively protect poor and vulnerable households, following an assessment of who bears the burden of the tax. Personal income tax will be reviewed to tax high-income individuals more effectively. Para-tariffs, the additional levies on imports over and above customs duty, will be phased out, with replacement measures where needed.
Exemptions and concessions across VAT, income tax, customs and investment regimes will be retained only where there is a clear economic or social justification. Existing investment incentives will be reviewed against measurable outcomes, and transfer-pricing rules, which govern pricing between related companies, tightened. The VAT base will be broadened through periodic review of exemptions, registration thresholds aligned with administrative capacity, and destination-based rules for services and intangibles, under which tax is levied where consumption takes place. Informal and digital activity will be progressively brought into the tax net.
The taxation of property, capital gains and high-value transactions will be strengthened, with any property tax framework required to be administratively feasible and to protect vulnerable households. Excises on alcohol, vehicles and other goods will be reviewed, including indexation of specific rates.
On equity, the Ministry said taxpayers in comparable circumstances would be treated consistently and those with greater capacity to pay would contribute more. Distributional analysis will be applied to VAT exemptions, retirement-income provisions and excises, with targeted social protection preferred over broad tax exemptions where feasible.
The full MTRS will include a net revenue bridge from the MTFF baseline, accounting for interactions between measures, timing and the cost of the para-tariff phase-out, rather than simply adding up expected yields.
‘Where material revenue shortfalls arise, compensating measures will be identified and implemented by the Government consistent with its fiscal and debt-sustainability objectives,’ the Ministry said.
Oversight will rest with the Revenue Management Committee, and performance against the strategy will be published in an annual review. The Ministry also committed to announcing major reforms well in advance, consulting affected taxpayers, and strengthening taxpayer rights, dispute resolution and refund timeliness.
‘Changes in the direct-to-indirect tax composition should be treated as a structural outcome of these reforms rather than as a mechanical annual target, since the appropriate composition will also depend on economic growth, imports, inflation, compliance performance and reform sequencing,’ it added.