Business

Could the government motivate taxpayers?

Published

8 months ago

2025/08/15

Indrajith Karunarathna

Sri Lanka has been struggling with a number of economic complications pertaining to the country’s tax system. However, this characteristic of taxation has been challenging as it does not deliver the potential tax revenue while maintaining a satisfactory level of tax compliance. In recent years, this issue in taxation has been focused on with much debate among politicians, academic researchers, policymakers and practitioners. Yet, every government has been compelled to experience this challenge that is detrimental to the fiscal operation of the government, fairness of income distribution, efficiency, smooth economic stability and transparency.

It’s said that still there are only a few taxpayers registered in Sri Lanka, which is a minimum percentage of the entire population. This is actually a disaster. It indicates the government is now dealing only with a few individual taxpayers whilst imposing and increasing the tax rates to that very limited section. Someone could argue that the problem does not relate to the tax rates whereas it relates to tax administration. Of course, the government is supposed to rescrutinize the composition of the Inland Revenue Department (IRD) and whether they are capable of administering the tax files or whether they have enough resources to accommodate the requirements.

Normally people are reluctant to pay taxes. It’s an inherent limitation in any tax system. Especially with these adverse economic conditions in Sri Lanka, the power of purchasing has dramatically deteriorated. It also doesn’t provide a good sign or indication even for the active taxpayers.

How should the government raise the tax base? The answer for this will not be a popular decision for any government. However as per the provisions of the Inland Revenue Act No. 24 of 2017, every person who has a taxable income shall file a ‘return of income’. Nevertheless, a resident individual who only has income from employment that is subject to PAYE will not be required to file a return for that year of assessment (section 94(1)(a)(ii).

Here the tax law is talking about filling a return of income. Not about registering a person as a taxpayer. The government should focus on registering more people as taxpayers whilst giving them Taxpayer Identification (TIN) numbers the way people are given National Identity Card (NIC) numbers. That’s very important at this juncture where Sri Lanka is at a critical stage. Then only the Inland Revenue Department will be able to keep a track record of the taxpayers and follow them up for getting the expected tax revenue.

At the same time, as we know in the case of a person who is employed either in the private or public sector, it is compulsory for the employer to get their employees registered for the Employee Provident Fund (EPF) and Employee Trust Fund (ETF). As such, the new regulations can be introduced to make it mandatory to register the employees in IRD by granting them Taxpayer Identification Numbers. However, the government has taken a huge step and imposed the rule stating that ‘With effect from January 01, 2024, any individual who is at the age 18 years or more, or who attains the age of 18 years on or after January 01, 2024, it is mandatory to register with the Inland Revenue Department and obtain a TIN (Taxpayer Identification Number)’.

Then again, the government should simultaneously rethink developing the infrastructure for the IRD by providing them with adequate resources to cater to this additional requirement. Of course, Information Technology (IT) plays a major role at this stage. For example; the QR code system has recently been introduced by the government for delivering fuel supply throughout the country in an efficient way. That was indeed successful and many people have been benefited. If so, why cannot the government introduce the same mechanism to the country’s tax system?

During the economic recession if a vehicle was given a QR code then why cannot a person be given a QR code? Just think about it. Through a QR code, the IRD is able to check the tax history of the taxpayers, their assets or liability base, other income sources, tax payment patterns and default amounts, etc. This paves the way for curtailing the cost of printing the returns of income, tax payment slips and other corresponding letters by saving millions of rupees. That’s the next level where the government is supposed to extend its strategies to widen the government income through income tax.

Moreover, in July 2014, to revolutionize the tax culture in Sri Lanka, the Inland Revenue Department introduced a system called ‘RAMIS’ (Revenue Administration Management Information System) as their one-stop tax management platform by addressing the aforementioned facts up to a certain extent. But simultaneously IRD has been sending the printed returns of income and the printed payment slips to the taxpayers via post even though this system provides the same features to do so via online. That’s indeed a waste of government money.

At the inception a proper marketing strategy should have been launched for promoting the newly introduced system among the general public as to how they should get the maximum benefits when they make the tax payments or submit the return of income through this system. Unfortunately, it has been eight years since the induction of RAMIS but there are many people who still don’t know how to get access or operate this system.

Therefore, IRD should introduce continuous awareness programs/training to the general public as to how this system works and the benefits of using it. In fact, what’s the meaning of having a system which was supposed to be utilized by a large section of the people but is actually being utilized by a small number of persons? These problems should be immediately addressed by IRD to increase the tax revenue whilst letting the taxpayers avoid a maze of taxes, forms and filing requirements. A simple and transparent tax system helps taxpayers better understand the system and reduces the costs of compliance while letting them know who is being taxed, how much they are paying, what is being done with the money and who benefits from tax exemptions, deductions, and tax credits, etc.

Motivating taxpayers

The government should introduce strategies, schemes or motivational campaigns and certain monetary and non-monetary encouragements to the taxpayers. It’s obvious that people are making rational decisions when spending their own money such as doing a cost-benefit analysis. So that a person who is liable to pay tax may be thinking of the benefits that are being received in lieu of the tax payment. That’s obvious. The question is; has the government properly introduced such a mechanism or a system for it?

In April 2016, IRD introduced some annual privilege cards for the taxpayers based on the income tax paid in the immediately preceding year of assessment. As per the official website of IRD, ‘the individuals who paid income tax more than Rs. 500,000 and submitted the return on or before the due date are eligible for this scheme’. And it has mentioned certain benefits for having these privilege cards. But the problem here is; this section has not been updated for six years. It was last updated in 2016.

Another thing is; these mentioned benefits are mainly given through the banks. That’s not sufficient at all. The IRD should introduce more benefits for the taxpayers by expanding its relationships with other stakeholders such as food city chains, hospitals, educational institutions, etc. With these comprehensive strategies, IRD can attract more non-tax payers to the tax system and increase the tax base of the country.

Moreover, migration and brain drain are severe issues to any country. At the moment Sri Lanka has come to the top of this issue. Lots of professionals, academics and young generation are leaving Sri Lanka for their future betterment. The core reason behind their decision is this unbearable tax system. In Sri Lanka, most of the salaries are not on par with industry norms compared to the international level. Even from lowest salaries government takes proportionally a huge part. Then the purchasing power will drastically deteriorate. Will that motivate the tax payers?

Due to the recent WHT scandal lots of senior citizens have faced a huge inconvenience. Many of them are waiting in the queues expecting their turn to go in to the bank. Some of them do not have any literacy to fill the required forms and any awareness about these new regulations. Some people are not in a position to travel due to sickness and some are living in areas where banks are located far from the residence. As tax practitioners we have been experiencing these challenges faced by the innocent general public.

Has the Inland Revenue Department demonstrated any comprehensive video or conducted any awareness campaigns or official dialogues for educating people on these new regulations? At least any fruitful conversation on these tax matters in the television media? Is this how they motivate the tax payers? These burning issues must be addressed soon. If not, the repercussions will be unmeasurable.

By Indrajith Karunarathna ✍️

MBA (Sri J’), BSc. Business Administration (Special) Hons,
FCA, FCMA, FMAAT, FIPA (Australia), FFA (UK), ACCA (UK),
ACIM (UK), MCPM, ADCN

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Business

Unit Trust industry remains stable in February

Published

12 hours ago

2026/03/28

Thilina Walpola

The unit trust industry of Sri Lanka reported assets under management (AUM) of Rs. 609 Bn, up 4.0% year-over-year and largely unchanged compared to the previous month. These assets are currently managed across 85 funds by 16 management companies.

AUM was supported by flows to equity-related funds, which doubled year-over-year to Rs. 68 Bn. Fixed income funds, on the other hand, declined by 4.4% year-over-year. In addition, since 2025, there has been a gradual shift from shorter-term instruments towards more medium to longer-term investment options, with inflows into open-ended income funds, open-ended equity index/sector funds, and open-ended growth funds (equity), alongside a decline in flows to money market funds.

During the month, the industry added 2,623 new unit holders, up 69.8% year-over-year, bringing the total number of unit trust investors to 149,573, which represents a 26.4% increase year-over-year.

Commenting on the February industry results, newly elected President of the Unit Trust Association of Sri Lanka (UTASL) and Director/CEO of Senfin Asset Management, Jeevan Sukumaran, stated: “The industry’s performance as at end-February 2026 reflects a degree of consistency, with continued activity in equity-related funds. We are also observing a gradual shift towards more balanced investment allocations across fund categories.”

He further noted: “As we move forward, our priority will be to build on this momentum by enhancing investor awareness, broadening access to unit trust products, and working closely with regulators and market participants to strengthen further the industry’s depth, resilience and long-term relevance within Sri Lanka’s financial landscape. In a dynamic market environment, maintaining a disciplined, long-term approach whilst reinforcing the resilience of the unit trust structure, with its focus on diversification and professional fund management, will remain key priorities for the industry.”

Business

Import price shocks of the Hormuz Crisis 2026: How will this affect Sri Lanka?

Published

13 hours ago

2026/03/28

Thilina Walpola

Dr Asanka Wijesinghe

The supply shock in the commodity market directly affects 39.3% of imports of Sri Lanka, or USD 8.3 Bn, across 951 products.

The price shock extends beyond petroleum and petrochemicals to nitrogenous fertiliser, biodiesel alternatives like palm oil, and food, exerting pressure on food prices.

Currently, price pass-through and demand management are the best options, while easing regulatory barriers, such as licensing schemes, are necessary to ensure food security.

The closure of the Strait of Hormuz has unsettled global energy markets. According to the International Energy Agency (IEA), 20 Mn barrels of crude oil products were transported through the Strait in 2025, which accounted for a quarter of the world’s daily energy needs. The closure has driven fuel futures higher, with the Brent futures reaching USD 112 per barrel on 19 March 2026 . A phenomenon called “backwardation” is clearly visible in the fuel market, implying that spot market prices for “physical” fuel are significantly higher than futures prices for “paper” fuel.

The economic impact of the energy price shock can impact Sri Lanka through various channels, and if hostilities in oil-producing regions continue, the effects will intensify over time. The immediate impact stems from rising commodity markets, including not only fuel but also biodiesel feedstocks such as soybean, canola, and palm oil; petrochemicals; fertilisers that use liquefied natural gas (LNG) as a feedstock; and aluminium and base metals, which demand significant energy for smelting.

Against this background, this article examines the future prevalence of high fuel prices, Sri Lanka’s vulnerability, the impacts on foreign exchange outflows, and the necessary policy measures to mitigate the adverse effects.

High Fuel Prices and the Effects on Sri Lanka’s Import Basket

Given that a quarter of the global energy supply is disrupted, the current energy shock is unprecedented. After the Russian invasion of Ukraine, fuel prices rose above USD 100 per barrel in 2022, and they remained there for roughly 90 days. The high energy cost resulted in a high inflation episode in 2022-2023. As shown in Figure 2, by the end of 2023, energy prices had returned to and stabilised around the pre-invasion level. Notably, Russia’s share of the global energy market was about 11%, while the Hormuz crisis accounts directly for around a quarter of the global energy supply. The energy infrastructure damage so far has also been significant. Thus, high fuel prices may prevail if there is no swift resolution to the crisis. Sri Lanka should consider such a possibility.

Based on 2025 import data, 39.3% of Sri Lanka’s imports, or USD 8.3 Bn, are directly exposed to rising commodity prices. Of this, USD 3.7 Bn are petroleum products, including crude oil, liquid petroleum gas (LPG) and refined fuel. Currently, the fuel price shock is 38.9% when forward-curve movements in Brent futures are factored in. Additionally, energy-intensive base metals and crude oil-based products like plastics and synthetic fibres will be expensive in the world market. These are important intermediate imports for Sri Lanka’s manufacturing sector.

Since natural gas is a key raw material for urea, increasing urea prices, in turn, raises the costs of related agricultural commodities like wheat. As shown in Figure 3, Sri Lanka spent USD 310.1 Mn on fertiliser in 2025, while the import bill for wheat and maize was USD 384.1 Mn. The global increase in fuel prices has boosted demand for biodiesel feedstocks, putting pressure on oil and fat prices, including palm oil used for cooking. Soybean meal and maize are used in poultry feed, so price hikes will have direct nutritional effects on households, mainly through reduced protein intake.

If high prices persist, Sri Lanka’s import bill is likely to increase, as the price response can be inelastic in the short run, which is common for essential commodities with few substitutes. Using 2025 monthly import values and assuming a future fuel price shock equal to the futures market-reflected percentage increase, it is estimated that Sri Lanka’s import bill could rise by USD 1.9 Bn. This means Sri Lanka will incur a 23% increase in imports over the baseline of USD 8.3 Bn. However, the estimated value is at the upper-bound as it is assumed that Sri Lanka would consume the same quantity as in 2025. If high prices persist, adjustments across the entire economy will inevitably necessitate changes in quantity. Demand will contract when a high import price is passed on to consumers. Such a response can be quantified using product-level import demand elasticities. If higher prices lead to reduced demand, Sri Lanka’s import bill could fall by about USD 608 Mn relative to the baseline. However, such a reduction would mainly occur if energy use adjusts in line with longterm demand patterns. This estimate also does not account for wider, economywide adjustments to higher import prices. Under a full demandadjustment scenario, the overall effect would therefore be a net reduction of USD 608 Mn.

Policy Options for Sri Lanka

Although inflationary pressures remain a serious concern for Sri Lanka in the post-Hormuz crisis period, a transparent pass-through of the supply shock to price levels is a suitable policy. While memories of recent high-inflation episodes are still vivid, the Hormuz crisis and the 2022-2024 sovereign debt crises are fundamentally different events. The elevated inflation during 2022-2024 was driven by structural changes in fiscal and monetary policy. Policy implementations such as cost-reflective utility pricing, energy price pass-through, and a floating exchange rate were introduced sequentially, leading to higher inflation. The economy was moving toward reforms to address multiple distortions introduced by a low interest rate and a controlled exchange rate regime.

In the current crisis, significant price shocks from corrective policies are not anticipated. Instead, inflationary pressure resulting from the Hormuz disruption is an external, supply-side shock primarily transmitted through the prices of imported fuel, rather than via domestic policy reversals. Since high airfares and rising shipping fuel costs may impact foreign exchange inflows, managing the reserve position becomes crucial. In this context, restricting fuel consumption is essential while ensuring available fuel is allocated primarily for industrial use.

A fiscal response that suppresses the price signal, such as reducing taxes on certain imported goods, might not be suitable at the moment, as it could boost demand for very costly imported products like fuel. The analysis shows that the import bill can rise substantially if a high price prevails without a quantity adjustment. Notably, under the current framework, such import demands are transmitted to the exchange rate, which can further increase inflationary pressures. However, Sri Lanka should consider easing import licensing schemes for animal and poultry raw materials as global market prices rise, to facilitate imports and secure food supply. Temporarily removing the existing Special Commodity Levy (SCL) on corn imports should also be considered. These products incur small reserve outflows but play a larger role in the country’s protein nutrition.

By Dr Asanka Wijesinghe, Research

Fellow, Institute of Policy Studies of Sri Lanka

Business

Australia hosts ‘Thought Leadership Session’ on disaster recovery

Published

13 hours ago

2026/03/28

Thilina Walpola

The Australian High Commissioner, Matthew Duckworth, hosted a pivotal ‘Thought Leadership’ educational session titled ‘ConnectEd” at his residence in Colombo recently, focusing on disaster recovery efforts following Cyclone Ditwah. This event was part of a series organized by the Australian Trade, Investment & Education division, aimed at fostering discussion on pressing issues in Sri Lanka.

The discussion aimed to reflect this ambition, inviting participants to share their insights and engage with expert speakers. Attendees were encouraged to voice their questions and contribute their perspectives, fostering a collaborative environment for learning and growth.

“As we approach 80 years of bilateral relations between Australia and Sri Lanka, this exchange highlights the enduring value of our partnership built on dialogue and trust. Today, we focus on recovery and rebuilding in the aftermath of Cyclone Ditwah. Effective recovery requires collaboration across various sectors to ensure that we not only address immediate needs but also build resilience over time. I encourage everyone here to actively engage in our discussions, as your expertise is invaluable to shaping a stronger future together, the Australian High Commissioner said in his opening remarks at the event.

He further noted that “this session is being held under Chatham House Rules, which I hope fosters a frank, open, and constructive exchange. A vital aspect here is uniting Australian and Sri Lankan thought leaders, reflecting our longstanding partnership and aligning discussions with Sri Lanka’s broader priorities and ambitions”.

‘ConnectEd’ event was coordinated by Ms. Sandy Seneviratne, Director of Education for the Australian Government based in Colombo. The session brought together key stakeholders to address the challenges and strategies involved in recovering from natural disasters. The dialogue was enriched by insights from notable panelists, Prof. (Ms.) Udayangani Kulatunga, Department of Building Economics at the University of Moratuwa, Sri Lanka, specializing in disaster risk reduction, construction management, and performance measurement and Professor Pat Rajeev, Chair, Department of Civil and Construction Engineering from Swinburne University of Technology in Australia. Lauren Nicholson, Second Secretary for Development at the Australian High Commission moderated the session.

By Claude Gunasekera