The national tax system is in a much healthier position than it was a few years ago. The most obvious headline item is that the ratio of government revenue to GDP, which reached the dangerously low level of 8.3 per cent in 2021, has since steadily risen to 16.7 per cent in 2025. This revenue growth principally reflects increases in tax rates, notably Value-Added Tax (VAT) and income tax.
From that perspective, taxpayers may not feel that there is much to celebrate. In reality, there is a great deal to be optimistic about. Over the past two years, many positive changes have been made in tax policy and in tax administration, especially within the Inland Revenue Department (IRD). The tax system is now better positioned to meet the government’s target of collecting 20 per cent of GDP – a figure which is reasonable and achievable for a country at Sri Lanka’s income level that is heavily involved in international trade.
This paper has two purposes. One is to summarise the recent changes in tax policy and administration. The second is to sound a mild warning: that the IRD, having previously long been a conservative organisation that had fallen well behind most other countries in reforming its practices and adopting new technologies, is now at some risk of going to the opposite extreme.
