Sri Lanka’s Tax Burden May Ease; But Only After Revenue Reaches a Safer Level

COLOMBO (News 1st); Sri Lanka will not reduce its high indirect taxes immediately, Deputy Minister of Finance and Planning Anil Jayantha Fernando has said, arguing that the country must first secure stronger revenue mobilisation before it can “reset” a tax structure he acknowledged is burdensome.

Fernando said the government remains committed to fiscal consolidation, but signalled that tax relief, including a possible reduction in the 18% Value Added Tax (VAT), could become possible once government revenue reaches a more sustainable share of the economy.

The Deputy Minister said the original plan was to raise government revenue to 15.4% of GDP by 2030 as part of the effort to move Sri Lanka out of what he described as an “economic abyss.”

However, he said the country had already exceeded that benchmark by the end of 2025, reaching 16.7% of GDP.

“Now, even at the end of 2025, we were able to achieve a target of 16.7%,” Fernando said.

He added that, despite budget ceilings now being governed under the Public Financial Management Act, the government has retained a target in the “15 point something” range for the current year, but believes it can meet or exceed it.

“However, it is very clear that we can easily reach that particular target or we can surpass this target,” he said.

Fernando said the government expects to raise revenue gradually towards around 18% of GDP by 2030.

That additional revenue, he argued, would create fiscal space for public investment while allowing the state to reconsider the current tax framework.

“So, we can increase our revenue mobilisation gradually. By 2030, we can reach somewhere around 18,” he said.

He said that would “create a kind of space for the government to spend money for much required public investments,” before the government could “think of strategies to reset the present tax structure.”

Fernando acknowledged concerns over the current tax burden, particularly the 18% VAT rate, as well as corporate income tax, individual income tax and taxes on dollar income.

“The present tax structure, there are some issues we understand,” he said.

But he was clear that the government cannot reduce indirect taxation at this stage without undermining revenue mobilisation.

“But, at this particular moment, we can't bring it down without damaging this revenue mobilisation,” he said, adding that a reduction would only become possible once the higher revenue level is reached.

He said any future changes would be guided by the basic principles of taxation: fairness, simplicity and convenience.

Looking ahead to next year’s budget, Fernando said the central challenge would be allocating sufficient funds to create a more conducive environment for economic activity.

He identified infrastructure, particularly roads, railways and rural connectivity, as priorities, along with logistics arrangements.

“At the same time, some money for social spending as well,” he said.

The remarks suggest the government is attempting to balance two competing demands: sustaining the revenue gains needed for fiscal stability, while responding to public pressure over the cost of living and the weight of indirect taxation.