Sri Lanka: Ruinous tax policies stoke inequality

Sri Lanka’s tax policies played a driving role in the country’s devastating 2022 economic crisis and have contributed to the chronic underfunding of education and other public services, Human Rights Watch has said in a report released on Oct. 15. The government of President Anura Kumara Dissanayake should urgently adopt measures to uphold its human rights obligations and enact reforms to a system that presently favors companies and wealthy people while failing to deliver adequate revenues.

The 101-page report, “Tax Giveaways, Struggling Schools: How Low Taxes Drove Sri Lanka’s Economic Crisis and Squandered its Education Lead,” describes how Sri Lanka’s successive governments have adopted policies that resulted in inadequate revenues, contributing not only to Sri Lanka defaulting on its debt but also to a decades-long decline in public education spending as a share of Gross Domestic Product (GDP) to among the lowest in the world. It also documents the impacts of inadequate funding on children’s right to education. Moreover, low corporate and personal tax revenues have led to an average of 80 percent of taxes coming from goods and services, which generally are regressive because they claim a higher share of poorer people’s income.

“For decades, Sri Lanka has been hostage to economic policies that starve its government of revenue and reflect a myopic focus on GDP growth,” said Sarah Saadoun, senior economic justice researcher at Human Rights Watch. “In practice, that means education spending has fallen well behind the pace of growth, turning the country from a global leader in public education to a laggard.”

Human Rights Watch interviewed over 70 people, including those affected by the economic situation and familiar with the public education system, as well as a wide spectrum of prominent Sri Lankan economic experts. Human Rights Watch also conducted a comprehensive analysis of relevant data and research relevant to Sri Lanka’s tax policies and education spending.

These policy failures have infringed upon children’s right to education, Human Rights Watch found. Sri Lanka’s education spending dropped from between 3 to 5 percent of GDP in the two decades following independence, a time when the country was an education champion among postcolonial countries, to 1.5 percent of GDP in 2022, among the lowest in the world.

Low tax revenues also contributed to Sri Lanka defaulting on its debt in April 2022, which precipitated an economic crisis including widespread job and income loss alongside a sharp rise in the cost of living that remains devastating for human rights.

While former President Gotabaya Rajapaksa introduced sweeping tax cuts in 2019 that dealt a devastating blow to revenues, Human Rights Watch found that the problem began in the late 1970s, when Sri Lanka began an economic shift common at that time that deprioritized social spending and liberalised trade. The resulting sharp decline in tax revenue from trade and other sources was not replaced by a progressive tax system that appropriately benefited from the ensuing growth.

In particular, the government began regularly granting companies broad tax exemptions through an opaque body highly vulnerable to abuse. In 2022, the cost of tax exemptions reached a staggering amount equivalent to 56 percent of revenues, or nearly three times the education budget. The government also collects only a small amount of taxes from personal income and assets and has not ensured that tax agencies have the capacity and accountability needed for tax enforcement.

The report’s focus on education illustrates a broader deprioritization of social spending, but the squandered potential is particularly salient in education, an area in which Sri Lanka was once widely regarded as a global leader. Sri Lanka was among the first countries to establish free primary and secondary education for most people.

Human Rights Watch found that low spending has led to schools charging fees to cover the cost of basic resources, posing significant hardship to many families. Inadequate public funds have also led to a vast disparity in resources based on students’ socioeconomic status. Low corporate and personal income tax revenues have led the government to heavily rely on taxes and goods and services—called “indirect taxes”—such as value-added tax (VAT) that weigh more heavily on poorer people.

In March 2023, the International Monetary Fund (IMF) approved a $3 billion bailout to Sri Lanka and creditors restructured the country’s debt, although its debt servicing obligations remain very high. In 2024, the government paid 57 percent of its revenue to creditors. In January 2025, President Dissanayake’s National People’s Power (NPP) party took office following a campaign that promised sweeping economic reforms, including reducing regressive taxes and improving education.

The government should consider eliminating corporate tax exemptions given their high cost, questionable effectiveness, and vulnerability to abuse, Human Rights Watch said. The government should also adopt other progressive tax measures, such as a wealth tax.

The case of Sri Lanka reflects the challenges many governments face under the current international tax system. For example, tax competition pressures governments into offering tax incentives that fuel a race to the bottom, depriving many governments of the necessary revenue to fulfill human rights. These challenges highlight the importance of ongoing negotiations for a United Nations tax treaty to build international rules informed by human rights imperatives and increased cooperation that would enable governments to end this negative spiral.

Under international human rights law, states are obligated to take steps to the “maximum of their available resources” to progressively realize the rights to health, education, social security, and an adequate standard of living, among other economic, social, and cultural rights. States are obliged not only to act individually, but also through international assistance and cooperation. This necessarily implicates states’ fiscal practices and tax policies domestically and in international fora.

Sri Lanka’s new government has taken some positive steps, such as providing an LKR 6,000 (about $20) bursary to some families to help with education-related costs, but it has only marginally raised the education budget. It should continue to increase the education budget, with a goal of reaching the internationally agreed benchmark of 4 to 6 percent of GDP allocated to education, Human Rights Watch said. The government of President Dissanayake should also urgently adopt measures to uphold its human rights obligations and enact reforms to a system that currently favors companies and wealthy people while failing to deliver adequate revenues.

“Sri Lanka’s economic quagmire makes clear that growth alone is not enough to fulfill human rights,” Saadoun said. “The government should finally establish a progressive tax system and use its income so that it adequately funds education and other public services that benefit all Sri Lankans.”