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Sri Lanka’s Tax Conundrum – 2025

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The eagerly awaited Performance Report of the Inland Revenue Department (IRD) for 2024 has recently been published. It offers some context regarding the IRD’s tax collections. There is room for wider disclosure that would improve transparency. The timeliness of the report’s release could also be considerably enhanced. After all, most large corporations listed on the Colombo Stock Exchange publish their Annual Reports within two months of the financial year’s end.

Sri Lanka’s fiscal challenges remain pressing, despite the strong headline growth in Inland Revenue Department (IRD) collections for 2024. The performance report shows an impressive 44% increase in collections, reaching Rs. 2.6 trillion compared to Rs. 1.8 trillion in 2023.

However, this growth has been heavily skewed towards indirect taxes, particularly Value Added Tax (VAT), whose collections increased by nearly 89%. The structural imbalance between direct and indirect taxes has widened once again, with the ratio shifting from 50:50 in 2023 to 40:60 in 2024.

While VAT reforms, including higher rates and lower registration thresholds, have expanded collections, income tax performance remains weak. The Rs. 1 trillion collected from income taxes conceals significant inequities: fewer than 1 million individuals out of a workforce of over 8 million are within the tax net, and a very small segment of high-income earners shoulder a disproportionate share of the personal income tax burden. This situation is both socially and economically unsustainable.

Recent reports, including the World Bank’s Public Finance Review and commentary from international experts such as Professor Mick Moore, highlight systemic weaknesses in Sri Lanka’s tax administration. Outdated methods, inadequate human resource planning, and governance failures at the IRD undermine enforcement and modernization. Structural reforms, particularly digitization, improved compliance enforcement, and the recruitment of skilled professionals, are essential to move away from reliance on regressive indirect taxation.

Revenue Performance: Headline Gains but Fragile Foundations

The IRD’s collection of Rs. 2.6 trillion in 2024 is unprecedented in nominal terms. VAT alone contributed an additional Rs. 615 billion, nearly doubling year-on-year. This sharp increase is attributable to two main factors: the rate hike, which saw VAT increase to 18% from 15%. – Wider base: The registration threshold was reduced from Rs. 80 million to Rs. 60 million annually, pushing the number of VAT-registered establishments to 21,227—a 53% increase.

However, reliance on VAT has shifted the tax mix towards indirect taxes. The direct-to-indirect ratio dropped back to 40:60, weakening equity. Indirect taxes, by their nature, impact lower-income households more heavily, increasing inequality.

In contrast, income tax collections reached Rs. 1 trillion in 2024—a modest 13% increase from the previous year. Given the urgent need to expand the tax base, this figure highlights the limited success of enforcement and compliance efforts.

Who Pays Income Tax?

Income tax collections reveal the narrowness and inequities of Sri Lanka’s direct tax base:

Corporate income tax, Rs. 582 billion, from 100,049 companies. The collection represents an increase of 5% over 2023.

Personal and partnership income tax: Rs. 442 billion from 976,498 individuals and 16,227 partnerships. The collection represents an increase of 26% over 2023.

In the year 456,035 new taxpayers were added to the tax base (mostly individuals). However, the report fails to disclose how much additional revenue these new taxpayers contributed. Such disclosure would improve transparency and might also help dispel the feeling that the IRD is squeezing the same lemon!

Similarly, revealing how many of the registered companies actually pay income tax would promote greater transparency.

The Rs. 442 billion collected as personal income tax has been broken down as follows:

Advance Personal Income Tax (APIT) – private sector employees: Rs. 198 billion.

Advance Income Tax on bank interest payments: Rs. 66 billion.

Advance Income Tax from specified fees and others: Rs. 98 billion.

The APIT collection from private sector employees increased by Rs. 53 billion in 2023, representing a 36% rise. There is a shortfall of Rs. 81 billion in Non-Corporate Income Tax that I could not find in the report.

Private Sector Advance Personal Income Tax Data

A new table in the performance report sheds light on who pays income tax through Advance Personal Income Tax (APIT):

This table highlights three key issues: – Even in the formal private sector, 77% of employees pay no income tax as their earnings fall below the income tax-free threshold. – A very small group (61,293 individuals) accounts for over three-quarters of APIT paid.

With the 2025 increase in the tax-free threshold to Rs. 1.8 million, around 275,000 employees will exit the tax net, further narrowing the base.

Tax Return Compliance

It is compulsory for those liable to income tax to submit a tax return by 30th November following the end of the tax year, detailing their income for the year, as well as assets owned, and liabilities owed. According to the IRD, very few companies and individuals submit their returns on time.

Only the large Corporate Taxpayers, numbering 621, achieved a 93% compliance rate. Of the remaining 91,183 companies, only 26,241 submitted their returns on time, which corresponds to a compliance rate of 29%.

The compliance rate among individual taxpayers is also very poor, with only 110,240 out of 792,530 submitting their returns on time, resulting in a compliance rate of just 24%.

Failing to submit tax returns on time does not necessarily mean taxpayers are evading taxes, but assuming so is reasonable.

World Bank’s Public Finance Review 2025

The World Bank’s Report Towards a Balanced Fiscal Adjustment highlights the fragility of Sri Lanka’s revenue model: – 75% of revenue gains since 2022 came from indirect taxes (VAT, SSCL, excise duties). – Regressive impact: VAT consumes 5.3% of pre-fiscal income for the poorest decile, compared to 3.3% for the richest. – Poverty impact: The 2024 VAT hike alone increased poverty by 2.2 percentage points. – Sustainability concerns: Reliance on indirect taxation is not only socially unjust but also economically unsustainable.

The report calls for digitization and comprehensive reform of the IRD, emphasizing the need for better sequencing, resourcing, and HR capability development. It also warns against the “easy option” of squeezing a narrow taxpayer base, urging policymakers to prioritize compliance enforcement and structural reforms.

Professor Moore’s Perspective: 20 Years Behind many African Countries

Professor Mick Moore, a leading political economist on taxation, argues that Sri Lanka’s IRD is as outdated as its Customs Department—lagging 20 years behind even many African peers. He highlights systemic failures: – Low compliance: e.g., only 20,000 of 110,000 businesses in Colombo pay local property tax. – Outdated practices: reliance on manual processes and weak data integration. – Poor HR systems: lack of skilled recruits, minimal training, and outdated promotion practices.

Moore stresses that enforcement should target large businesses and high-value taxpayers, rather than informal operators. He says that without skilled staff, modern audits, and investment in IT/data analytics, Sri Lanka cannot close its revenue gap.

Human Resource and Institutional Challenges

The IRD’s own performance report presents a grim view of institutional capacity: – Approved cadre: 1,639 officers. – Vacancies: 227 (14%). – Ageing workforce: 33% of staff are aged 51–60, with most serving over 15 years. – Promotion bottlenecks: Dozens of senior positions remain in “acting” status due to Public Service Commission delays, causing staff dissatisfaction and demotivation.

Compounding the problem, earlier officer-level recruitment was halted by trade union pressure, resulting in the discontinuation of the Tax Officer and Assessor posts. New recruits are now directly appointed as Assistant or Deputy Commissioners, roles that were previously reserved for experienced officers. This undermines institutional knowledge and succession planning. I understand that between 2007 and 2017, there was no recruitment to the officer cadre.

The lack of skilled professionals in IT, data science, and financial analysis has left the IRD unprepared for digitisation and modern enforcement.

Policy Implications and Reform Agenda

Sri Lanka cannot rely solely on rate hikes and regressive indirect taxes to fund its budget. The IRD’s weaknesses demand urgent reform. Some of the key initiatives identified by agencies and experts include:

· Digitisation and Data Integration

· Build a modern, unified tax administration platform integrating VAT, income, excise, and customs data.

· Use third-party data (banks, utilities, property registries, travel agents) to cross-check declarations and expand the net.

· Broadening the Tax Base

· Enforce compliance among high-income professionals and self-employed groups who are currently under-reporting.

· Strengthen property taxation, aligning municipal and IRD databases.

· Human Resource Overhaul

· Recruit IT specialists, data analysts, and forensic accountants.

· Reform promotions to be performance-based rather than seniority-based.

· Resolve acting appointments to restore morale and accountability.

· Targeted Enforcement

· Prioritize audits on large businesses, high-net-worth individuals, and multinational corporations.

· Avoid excessive focus on small informal operators, who contribute little revenue but face disproportionate harassment.

· Institutional Independence and Governance

· Strengthen the autonomy of the IRD to shield it from political interference.

· Ensure stable leadership and merit-based recruitment.

Conclusion

The 2024 IRD performance report highlights both achievements and vulnerabilities. The revenue increase of Rs. 800 billion over 2023 is genuine but relies heavily on regressive VAT hikes, rather than on structural reforms or a broader tax base. Income tax remains underdeveloped, with fewer than 12% of the workforce contributing directly. The result is a narrow and inequitable system that discourages compliance, undermines social fairness, and hampers long-term growth.

The World Bank and experts like Professor Moore deliver a clear warning: Sri Lanka’s tax administration is outdated, under-skilled, and politically ignored. Without urgent reforms—such as digitization, enforcement of compliance, HR renewal, and governance restructuring—the state will keep squeezing a small pool of taxpayers while leaving most outside the net.

Previous governments’ failure to strengthen the IRD has cost the country dearly in lost revenue and fiscal instability. The task now is to develop and implement reforms that are both technically sound and politically viable. A better tax system is crucial for building public trust, reducing inequality, and boosting Sri Lanka’s economy.

By Sanjeewa Jayaweera ✍️


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Relief without recovery

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A US airstrike on an Iranian oil storage facility

The escalating conflict in the Middle East is of such magnitude, with loss of life, destruction of cities, and global energy shortages, that it is diverting attention worldwide and in Sri Lanka, from other serious problems. Barely four months ago Sri Lanka experienced a cyclone of epic proportions that caused torrential rains, accompanied by floods and landslides. The immediate displacement exceeded one million people, though the number of deaths was about 640, with around 200 others reported missing. The visual images of entire towns and villages being inundated, with some swept away by floodwaters, evoked an overwhelming humanitarian response from the general population.

When the crisis of displacement was at its height there was a concerted public response. People set up emergency kitchens and volunteer clean up teams fanned out to make flooded homes inhabitable again. Religious institutions, civil society organisations and local communities worked together to assist the displaced. For a brief period the country witnessed a powerful demonstration of social solidarity. The scale of the devastation prompted the government to offer generous aid packages. These included assistance for the rebuilding of damaged houses, support for building new houses, grants for clean up operations and rent payments to displaced families. Welfare centres were also set up for those unable to find temporary housing.

The government also appointed a Presidential Task Force to lead post-cyclone rebuilding efforts. The mandate of the Task Force is to coordinate post-disaster response mechanisms, streamline institutional efforts and ensure the effective implementation of rebuilding programmes in the aftermath of the cyclone. The body comprises a high-level team, led by the Prime Minister, and including cabinet ministers, deputy ministers, provincial-level officials, senior public servants, representing key state institutions, and civil society representatives. It was envisaged that the Task Force would function as the central coordinating authority, working with government agencies and other stakeholders to accelerate recovery initiatives and restore essential services in affected regions.

Demotivated Service

However, four months later a visit to one of the worst of the cyclone affected areas to meet with affected families from five villages revealed that they remained stranded and in a state of limbo. Most of these people had suffered terribly from the cyclone. Some had lost their homes. A few had lost family members. Many had been informed that the land on which they lived had become unsafe and that they would need to relocate. Most of them had received the promised money for clean up and some had received rent payments for two months. However, little had happened beyond this. The longer term process of rebuilding houses, securing land and restoring livelihoods has barely begun. As a result, families who had already endured the trauma of disaster, now face prolonged uncertainty about their future. It seems that once again the promises made by the political leadership has not reached the ground.

A government officer explained that the public service was highly demotivated. According to him, many officials felt that they had too much work piled upon them with too little resources to do much about it. They also believed that they were underpaid for the work they were expected to carry out. In fact, there had even been a call by public officials specially assigned to cyclone relief work to go on strike due to complaints about their conditions of work. This government official appreciated the government leadership’s commitment to non corruption. But he noted the irony that this had also contributed to a demotivation of the public service. This was on the unjustifiable basis that approving and implementing projects more quickly requires an incentive system.

Whether or not this explanation fully captures the situation, it points to an issue that the government needs to address. Disaster recovery requires a proactive public administration. Officials need to reach out to affected communities, provide clear information and help them navigate the complex procedures required to access assistance. At the consultation with cyclone victims this was precisely the concern that people raised. They said that government officers were not proactive in reaching out to them. Many felt they had little engagement with the state and that the government officers did not come to them. This suggests that the government system at the community level could be supported by non-governmental organisations that have the capacity and experience of working with communities at the grassroots.

In situations such as this the government needs to think about ways of motivating public officials to do more rather than less. It needs to identify legitimate incentives that reward initiative and performance. These could include special allowances for those working in disaster affected areas, recognition and promotion for officers who successfully complete relief and reconstruction work, and the provision of additional staff and logistical support so that the workload is manageable. Clear targets and deadlines, with support from the non-governmental sector, can also encourage officials to act more proactively. When government officers feel supported and recognised for the extra effort required, they are more likely to engage actively with affected communities and ensure that assistance reaches those who need it most.

Political Solutions

Under the prevailing circumstances, however, the cyclone victims do not know what to do. The government needs to act on this without further delay. Government policy states that families can receive financial assistance of up to Rs 5 million to build new houses if they have identified the land on which they wish to build. But there is little freehold land available in many of the affected areas. As a result, people cannot show government officials the land they plan to buy and, therefore, cannot access the government’s promised funds. The government needs to address this issue by providing a list of available places for resettlement, both within and outside the area they live in. However, another finding at the meeting was that many cyclone victims whose lands have been declared unsafe do not wish to leave them. Even those who have been told that their land is unstable feel more comfortable remaining where they have lived for many years. Relocating to an unfamiliar area is not an easy decision.

Another problem the victims face is the difficulty of obtaining the documents necessary to receive compensation. Families with missing members cannot prove that their loved ones are no longer alive. Without official confirmation they cannot access property rights or benefits that would normally pass to surviving family members. These are problems that Sri Lanka has faced before in the context of the three decade long internal war. It has set up new legal mechanisms such as the provision of certificates of absence validated by the Office on Missing Persons (OMP) in place of death certificates when individuals remain missing for long periods. The government also needs to be sensitive to the fact that people who are farmers cannot be settled anywhere. Farming is not possible in every location. Access to suitable land and water is essential if farmers are to rebuild their livelihoods. Relocation programmes that fail to take these realities into account risk creating new psychological and economic hardships.

The message from the consultation with cyclone victims is that the government needs to talk more and engage more directly with affected communities. At the same time the political leadership at the highest levels need to resolve the problems that government officers on the ground cannot solve. Issues relating to land availability, legal documentation and livelihood restoration require policy decisions at higher levels. The challenge to the government to address these issues in the context of the Iran war and possible global catastrophe will require a special commitment. Demonstrating that Sri Lanka is a society that considers the wellbeing of all its citizens to be a priority will require not only financial assistance but also a motivated public service and proactive political leadership that reaches out to those still waiting to rebuild their lives.

 

by Jehan Perera

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Supporting Victims: The missing link in combating ragging

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A recent panel discussion at the University of Peradeniya examined the implications of the Supreme Court’s judgement on ragging, in which the Court recognised that preventing ragging requires not only criminal penalties imposed after an incident occurs but also systems and processes within universities that enable victims to speak up and receive support. Bringing together perspectives from law, university administration, psychology and students, the discussion sought to understand why ragging continues to persist in Sri Lankan universities despite the existence of legal prohibitions. While the discussion covered legal and institutional dimensions, one theme emerged clearly: addressing ragging requires more than laws and disciplinary rules. It requires institutions that are capable of supporting victims.

Sri Lanka enacted the Prohibition of Ragging and Other Forms of Violence in Educational Institutions Act No. 20 of 1998 following several tragic incidents in universities, during the 1990s. Among the most widely remembered is the death of engineering student S. Varapragash at the University of Peradeniya in 1997. Incidents such as this shocked the country and revealed the consequences of allowing violent forms of student hierarchy to persist. The 1998 Act marked an important legal intervention by recognising ragging as a criminal offence. The law introduced severe penalties for individuals found guilty of engaging in ragging or other forms of violence in educational institutions, including fines and imprisonment.

Despite the existence of this law for nearly three decades, prosecutions under the Act have been extremely rare. Incidents continue to surface across universities although most are not reported. The incidents that do reach university administrations are dealt with internally through disciplinary procedures rather than through the criminal justice system. This suggests that the problem does not lie solely in the absence of legal provisions but also in the ability of victims to come forward and pursue complaints.

The tragic reminders; the cases of Varapragash and Pasindu Hirushan

Varapragash, a first-year engineering student at the University of Peradeniya, was forced by senior students to perform extreme physical exercises as part of ragging, resulting in severe internal injuries and acute renal failure that ultimately led to his death. In 2022, the courts upheld the conviction of one of the perpetrators for abduction and murder. The case illustrates not only the brutality of ragging but also how long and difficult the path to justice can be for victims and their families. Even when victims speak about their experiences, they may not always disclose the full extent of what they have endured. In the case of Varapragash, the judgement records that the victim told his father that he was asked to do dips and sit-ups. Varapragash’s father had testified that it appeared his son was not revealing the exact details of what he had to endure due to shame.

More than two decades after the death of Varapragash, the tragedy of ragging continues. The 2025 Supreme Court judgement arose from the case of Pasindu Hirushan, a 21-year-old student of the University of Sri Jayewardenepura, who sustained devastating head injuries at a fresher’s party, in March 2020, after a tyre sent down the stairs by senior students struck him. He became immobile, was placed on life support, and returned home only months later. If the Varapragash case exposed the deadly consequences of ragging in the 1990s, the Pasindu Hirushan case demonstrates that universities are still failing to prevent serious violence, decades after the enactment of the 1998 Act. It was against this background of continuing institutional failure that the Supreme Court issued its Orders of Court in 2025. Among the key mechanisms emphasised by the judgement is the establishment of Victim Support Committees within universities.

Why do victims need support?

Ragging in universities can take many forms, including verbal humiliation, physical abuse, emotional intimidation and, in some instances, sexual harassment. While all forms of ragging can have serious consequences, incidents involving sexual harassment often present additional barriers for victims who wish to come forward. Victims may hesitate to complain due to weak institutional mechanisms, fear of retaliation, or uncertainty about whether their experiences will be taken seriously. In many cases, those who speak out are confronted with questions that shift attention away from the alleged misconduct and onto their own behaviour: why did s/he continue the conversation?; why did s/he not simply disengage, if the harassment occurred as claimed?; why did s/he remain in the environment?; or did his/her actions somehow encourage the accused’s behaviour? Such responses illustrate how easily victims can be subjected to a second layer of scrutiny when they attempt to report incidents. When individuals anticipate disbelief, minimisation or blame, silence may appear safer than disclosure. In such circumstances, the presence of a trusted institutional body, capable of providing guidance, protection and support, become critically important, highlighting the need for effective Victim Support Committees within universities.

What Victim Support Committees must do

As expected by the Supreme Court, an effective Victim Support Committee should function as a trusted institutional mechanism that places the safety and dignity of victims at the centre of its work. The committee must provide a safe and confidential point of contact through which victims can report incidents of ragging without fear of intimidation or retaliation. It should assist victims in understanding and pursuing available complaint procedures, while also ensuring their immediate protection where there is a risk of continued harassment. Recognising the psychological harm ragging may cause, the committee should facilitate access to counselling and emotional support services. At a practical level, it should also help victims document incidents, record statements, and preserve evidence that may be necessary for disciplinary or legal proceedings. The committee must coordinate with university authorities to ensure that complaints are addressed promptly and responsibly, while maintaining strict confidentiality to protect the identity and well-being of those who come forward. Beyond responding to individual cases, Victim Support Committees should also contribute to broader awareness and prevention efforts, within universities, helping to create an environment where ragging is actively discouraged and students feel safe to report incidents. Without such support, the process of pursuing justice can become overwhelming for individuals who are already dealing with the emotional impact of abuse.

Making Victim Support Committees work

According to the Orders of Court, these committees should include representatives from the academic and non-academic staff, a qualified counsellor and/or clinical psychologist, an independent person, from outside the institution, with experience in law enforcement, health, or social services, and not more than three final-year students, with unblemished academic and disciplinary records, appointed for fixed terms. Further, universities must ensure that committees consist of individuals who possess both expertise and genuine commitment in areas such as student welfare, psychology, gender studies, human rights and law enforcement, in line with the spirit of the Supreme Court’s directions, rather than consisting largely of ex officio positions. If treated as routine administrative positions, rather than responsibilities requiring specialised knowledge, sensitivity and empathy, these committees risk becoming symbolic rather than functional.

Greater transparency in the appointment process could strengthen the credibility of these committees. Universities could invite expressions of interest from individuals with relevant expertise and demonstrated commitment to supporting victims. Such an approach would help ensure that the committees benefit from the knowledge and dedication of those best equipped to fulfil this role.

The Supreme Court judgement also introduces an important safeguard by giving the University Grants Commission (UGC) the authority to appoint members to university-level Victim Support Committees. If exercised with integrity, this provision could help ensure that these committees operate with greater independence. It may also help address a challenge that sometimes arises within institutions, where individuals, with relevant expertise, or strong commitment to addressing issues, such as violence, harassment or student welfare, may not always be included in institutional mechanisms due to internal administrative preferences. External oversight by the UGC could, therefore, create opportunities for such individuals to contribute meaningfully to Victim Support Committees and strengthen their effectiveness.

Ultimately, the success of the recent judgement will depend not only on the directives it issued, the number of committees universities establish, or the number of meetings they convene, or other box-checking exercises, but on how sincerely those directives are implemented and the trust these committees inspire among students and staff. Laws can prohibit ragging, but they cannot by themselves create environments in which victims feel safe to speak. That responsibility lies with institutions. When universities create systems that listen to victims, support them and treat their experiences with seriousness, universities will become places where dignity and learning can coexist.

(Udari Abeyasinghe is attached to the Department of Oral Pathology at the University of Peradeniya)

Kuppi is a politics and pedagogy happening on the margins of the lecture hall that parodies, subverts, and simultaneously reaffirms social hierarchies.

by Udari Abeyasinghe

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Big scene … in the Seychelles

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Mirage: Off to the Seychelles for fifth time

Several of our artistes do venture out on foreign assignments but, I’m told, most of their performances are mainly for the Sri Lankans based abroad.

However, the group Mirage is doing it differently and they are now in great demand in the Seychelles.

Guests patronising the Lo Brizan pub/restaurant, Niva Labriz Resort, in the Seychelles, is made up of a wide variety of nationalities, including Russians, Chinese, French and Germans, and they all enjoy the music dished out by Mirage, and that is precisely why they are off to the Seychelles … for the fifth time!

The band is scheduled to leave this month and will be back after three weeks, but their journey to the Seychelles will continue, with two more assignments lined up for 2026.

In August it’s a four-week contract, and in December another four-week contract that will take in the festive celebrations … Christmas and the New Year.

Donald’s birthday
celebrations

According to reports coming my way, it is a happening scene at the Lo Brizan pub/restaurant, Niva Labriz Resort, whenever Mirage is featured, and the band has even adjusted its repertoire to include local and African songs.

They work three hours per day and six days per week at the Lo Brizan pub/restaurant.

Donald Pieries:
Leader, vocalist,
drummer

Led by vocalist and drummer Donald Pieries, many say it is his

musical talents and leadership that have contributed to the band’s success.

Donald, who celebrated his birthday on 07 March, at the Irish Pub, has been with the group through various lineup changes and is known for his strong vocals.

He leads a very talented and versatile line up, with Sudham (bass/vocals), Gayan (lead guitar/vocals), Danu (female vocalist) and Toosha (keyboards/vocals).

Mirage performs regularly at venues like the Irish Pub in Colombo and also at Food Harbour, Port City.

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