Sri Lanka’s Finance Ministry has invited public proposals to raise tax revenue to 20 per cent of GDP, seeking innovative ideas from citizens and experts to strengthen fiscal stability and support long-term economic growth.

Sri Lanka’s Ministry of Finance, Planning and Economic Development has issued a call for long-term revenue-enhancing proposals, aiming to boost the country’s tax-to-GDP ratio to 20 per cent. The Revenue Management Committee (RMC) has set a deadline of June 12 for submissions from think tanks, professional bodies, academic institutions, the private sector, NGOs, and individual citizens.

This initiative marks a significant step in the island nation’s ongoing efforts to rebuild fiscal resilience following its devastating 2022 economic crisis, which saw tax revenues plummet to critically low levels.

From Crisis Lows to Gradual Recovery

Sri Lanka’s tax-to-GDP ratio has historically been among the lowest in the world, contributing directly to the debt default and subsequent IMF bailout. In 2022, it hovered around 7-8 per cent, severely limiting the government’s ability to service debt or invest in public services.

Post-crisis reforms, including tax hikes on VAT (raised to 18 per cent), removal of exemptions, and improved administration, have driven a notable recovery. The ratio climbed to 9.9 per cent in 2023 and 12.4 per cent in 2024. Government projections for 2025 point to around 14-15 per cent, with further targets of 15 per cent-plus in the medium term.

However, officials and economists argue that 20 per cent represents a more sustainable benchmark. This level would align Sri Lanka closer to regional peers in Asia and provide the fiscal space needed for infrastructure, education, health, and debt reduction without excessive borrowing.

The 2026 budget continues this trajectory, estimating tax revenue at Rs. 4,910 billion while shifting the direct-to-indirect tax ratio gradually from 25:75 toward 40:60 for greater progressivity.

IMF Program and Structural Reforms Drive Momentum

The push comes under Sri Lanka’s Extended Fund Facility (EFF) arrangement with the IMF, which has provided critical financing and a reform roadmap. Recent IMF reviews have praised the country’s performance in fiscal consolidation, debt restructuring, and revenue administration improvements, including digitalization efforts to curb corruption and leakages.

Key past measures included broadening the VAT base, adjusting personal and corporate income tax slabs, introducing taxes on digital services, and tightening exemptions. These have helped generate additional revenue equivalent to several percentage points of GDP.

Yet challenges persist. High reliance on indirect taxes burdens lower-income groups, while tax administration inefficiencies and evasion remain concerns. The government aims to enhance compliance through technology, risk-based audits, and better public financial management.

Public investment as a share of expenditure is targeted to rise, supporting growth ambitions of up to 7 per cent in the medium term. However, this requires a stronger revenue base to avoid crowding out private sector credit or reigniting inflationary pressures.

Inviting Inclusive Ideas for Sustainable Taxation

The RMC’s invitation is notably broad, encouraging analytical submissions, policy recommendations, and innovative proposals. Topics likely to feature include:

• Further base broadening and rationalization of exemptions.
• Reforms to corporate taxation to attract foreign direct investment (FDI) while minimizing profit shifting.
• Environmental taxes or green incentives aligned with climate goals.
• Digital economy taxation, including e-commerce and crypto assets.
• Improving taxpayer services and voluntary compliance.
• Balancing equity with efficiency to protect vulnerable segments.

Economists have long advocated for a medium-term revenue strategy. Past Presidential Tax Commissions highlighted weak administration as a core issue, recommending diversification away from trade taxes.

Think tanks like the Advocata Institute and international bodies such as the IMF and World Bank have emphasized the need for predictable, growth-friendly policies. IMF technical assistance has supported areas like fiscal risk management and tax policy design.

Economic Context and Potential Impacts

Sri Lanka’s economy has shown resilience, with growth around 4-5 per cent in recent periods, supported by tourism recovery, remittances, and stabilizing reserves. Inflation has moderated, and the rupee has achieved relative stability.

Raising tax revenue to 20 per cent of GDP could transform public finances. It would reduce dependence on debt (targeting continued primary surpluses), enable higher capital spending, and improve sovereign credit ratings to lower borrowing costs.

However, implementation risks remain. Overly aggressive taxation could dampen private investment and consumption in a still-fragile recovery. Experts stress the importance of simplicity, transparency, and minimizing compliance costs.

Stakeholders from the private sector may propose incentives for key industries like apparel, tourism, and IT-BPO exports. Academics could contribute data-driven models on optimal tax rates, while civil society groups might focus on progressive taxation and social safety nets.

Path Forward for Fiscal Sovereignty

This public consultation reflects a maturing approach to policymaking in Sri Lanka, moving beyond top-down decisions toward broader participation. Successful incorporation of proposals could strengthen ownership of reforms and improve outcomes.

As the June 12 deadline approaches, the ministry will likely receive a wide array of ideas. The challenge will be synthesising them into a coherent, actionable medium- to long-term strategy that delivers the 20 per cent target without compromising growth or equity.

For a country that has endured one of the worst economic crises in its history, achieving robust revenue mobilization is not just a fiscal goal – it is essential for building resilience against future shocks and realizing inclusive development aspirations.