Treasury says next phase of IMF-backed tax reforms to focus on administration

CoPF Chairman MP Dr. Harsha de SilvaTreasury officials on Tuesday (14) signalled that Sri Lanka’s next phase of International Monetary Fund (IMF)-backed fiscal reforms will shift from raising taxes to modernising tax administration, with officials revealing that a Medium-Term Revenue Strategy (MTRS) is being prepared to improve compliance, broaden the tax base, and support growth without increasing tax rates.Appearing before the Parliamentary Committee on Public Finance (CoPF), Treasury officials said the strategy is being developed with IMF technical assistance following the completion of revenue-based fiscal consolidation, which substantially increased Government revenue through higher taxes, a broader tax base, and reduced exemptions. Officials said the next stage of reforms would focus on improving tax administration and compliance, estimating that stronger administration alone could generate additional revenue equivalent to 1.9% of GDP. “At present, we are going to prepare a MTRS. We had IMF technical assistance over the past few weeks and they have submitted a report after assessing the current tax system and proposing reforms that would be growth-friendly and help small and medium enterprises (SMEs). That’s our next step,” a senior Treasury official told the CoPF. He acknowledged that Sri Lanka’s tax system continues to suffer from weak compliance despite the higher tax effort. “When we look at the tax system, we mainly see that there is a low compliance rate. We estimate that we can collect 1.9% of GDP through improvements in tax administration without burdening taxpayers through higher tax rates,” he said. Calls for tax administration reform have intensified in recent months as taxpayers, tax practitioners, and businesses increasingly criticised what they describe as a one-sided reform agenda focused on raising revenue while neglecting the administrative shortcomings of the Inland Revenue Department (IRD). At the CA Sri Lanka Annual Economic and Tax Symposium, leading tax professionals argued that future reforms should prioritise stronger governance, greater transparency, consistent interpretation of tax laws, faster refunds, improved taxpayer services, and modernisation of the IRD, warning that unpredictable administration and excessive compliance burdens risk undermining voluntary compliance, investment, and long-term economic growth despite record tax collections (https://www.ft.lk/top-story/IRD-on-dangerous-and-scary-path/26-794269). The discussion at the CoPF ensued after Chairman MP Dr. Harsha de Silva questioned the composition of Sri Lanka’s recent economic growth, highlighting that under the production-based method of measuring GDP, taxes had become the second-largest contributor after construction. Dr. de Silva argued that while stronger tax collection had helped restore fiscal stability, long-term growth should increasingly come from manufacturing and productive sectors rather than tax receipts. “If the second-highest contributing factor is taxes collected by the State, what does it really mean? We are having GDP growth, but it is coming because of taxes. Growth explained by taxes is really not very meaningful,” he said. Treasury officials agreed that the current contribution from taxes reflected the Government’s revenue-based fiscal consolidation following the 2022 economic crisis, noting that taxes less subsidies had risen to around 12.4% compared with about 4-5% previously. “Over the medium term, we have to have a proper mechanism to generate value addition through manufacturing, construction, and services. In terms of taxes, there should be a lower contribution over the medium term for sustained economic growth,” officials said. They said the contribution of taxes to GDP should gradually decline as structural reforms stimulate investment and private sector-led growth. Committee members agreed that Sri Lanka was moving into a new phase of the IMF-supported reform program. “We have gone through revenue consolidation. Now we have stabilised. Now we are going to the growth phase. We can’t carry this tax structure into the growth phase. That’s what we need to think about now,” CoPF Member Industry and Entrepreneurship Development Deputy Minister Chathuranga Abeysinghe said. “By 2027, the major structural reforms would have been introduced, which will enable us to then focus on tax administration and ease tax rates so businesses can focus on growth,” he said. MP Ravi Karunanayake observed that the current tax regime benefitted large corporations. “It is skewered. The big are getting bigger and small businesses are evaporating,” he said. Treasury officials said fiscal performance continued to exceed expectations despite external shocks. They noted that public debt declined to 98.3% of GDP in 2025, with projections showing a further decline to around 86.7% by 2032. The Budget deficit narrowed to 2.3% of GDP in 2025, the lowest since 1956, while the primary surplus reached 5.4% of GDP and the tax-to-GDP ratio increased to 15.4%, the highest since 1997. Revenue is expected to stabilise around 15.5% of GDP over the medium term, while the primary surplus is projected to remain at 2.6% of GDP from 2027 onwards. Officials also told the Committee that total revenue and grants increased 34.6% during the first four months of 2026, generating a primary surplus of Rs. 863 billion against a full-year target of Rs. 360 billion and an overall Budget surplus of Rs. 105 billion, although capital expenditure execution remained low at 9.8% during the period. The Committee also examined the Treasury’s latest Fiscal Risk Statement, which for the first time identified climate change and natural disasters among the highest fiscal risks facing the country, alongside macroeconomic uncertainties. Officials said future Budgets would need to incorporate greater fiscal preparedness, institutional resilience, and disaster-risk financing to mitigate the growing risks.

Treasury says next phase of IMF-backed tax reforms to focus on administration | Daily FT