• Calls for shift to direct taxes, removal of para-tariffs

The World Bank has called on Sri Lanka to shift its tax burden from consumption to income, warning that the post-crisis revenue surge must now be made fair and sustainable.

World Bank Senior Economist Jakob Engel told The Sunday Morning Business that the tax system should be “progressive and simple, and focused primarily on taxing those who can most afford to pay”.

“The key priority over time is to broaden the base and widen the tax net, while moving towards direct taxes and away from indirect taxes,” he said.

He made these statements while speaking to The Sunday Morning Business on whether the country’s heavy reliance on indirect taxes, paid by every consumer regardless of income, was dragging down the poor.

Engel defended the tax increases that followed the 2022 crisis. “In 2022, Sri Lanka was collecting very little revenue – around 7-8% of GDP – at a time when even low-income countries were moving towards 15%. Increasing revenue collection was necessary,” he said.

However, he stated that the next phase must target those outside the net. “A large number of people are currently not complying. Broadening the base, improving compliance, and strengthening administration are areas where there are significant leakages,” he said.

He noted that the Government was addressing compliance gaps in Value-Added Tax (VAT), income tax, and other areas through its new Medium-Term Revenue Strategy.

The bank also renewed its call to scrap para-tariffs. “We have been encouraging a move away from taxes that have negative growth effects, especially para-tariffs, towards taxes that are not distortionary and do not hold back private sector activity or growth,” Engel said.

He added that firms had frequently cited tax administration as a concern in the bank’s latest Enterprise Survey.

“There has been a very rapid increase in revenue. The task now is to make it sustainable,” Engel further noted.

Sri Lanka raised VAT and income taxes and stripped back exemptions under its International Monetary Fund (IMF)-backed reform programme. Indirect taxes still account for the bulk of collections.