In 2024, only 8.7% of Sri Lanka’s working-age population were registered as personal income taxpayers. This figure is notably low, especially when compared to the country’s South Asian peers.
With Sri Lanka aiming for tax revenues of Rs. 4,590 billion (13.9% of GDP) in 2025, up from Rs. 3,705 billion in 2024, ensuring proper tax registration is essential moving forward. Experts emphasise the need to consider further mechanisms for broadening the tax base, as Sri Lanka has exhausted the option of increasing tax rates.
According to recent findings by Verité Research, while the 8.7% registration rate in 2024 is a significant improvement from 2022, it remains lower than most other South Asian countries. As of 2024, Sri Lanka’s registration level was higher than only Bangladesh (6.3%) and Pakistan (5.7%). Meanwhile, Sri Lanka lagged behind India (12.9%), Nepal (17.3%), the Maldives (9.9%), and Bhutan (60.4%).
Speaking to The Sunday Morning Business, Verité Research Lead Economist Raj Prabu Rajakulendran noted that, as the data suggested, Sri Lanka’s tax revenue levels had returned to their pre-crisis state but still lagged behind those of its South Asian peers. Consequently, he suggested that one path for the country to take would be to aim for the average tax collection rates of its regional counterparts.
Increasing tax revenue can be achieved either by raising tax rates or by broadening the tax base. Rajakulendran added that Sri Lanka, at its current levels, had nearly exhausted most of the options for increasing revenue through rate hikes. For instance, Value-Added Tax (VAT) is at an all-time high, and Corporate Income Tax (CIT) is also very high at 30%.
Therefore, according to Rajakulendran, collecting more revenue through rate increases will be difficult and revenue administration should be given more attention. This includes ensuring that individuals who should be registered as taxpayers are, in fact, registered, which is why a better focus is needed on revenue collection.
“Our suggestion is to broaden the base, rather than improving the rates at this point. Even regional peers with a much lower GDP per capita than Sri Lanka, or essentially poorer than Sri Lanka in those terms, have a higher number of people registered as taxpayers. This is an indicator that Sri Lanka has a notably low registration of taxpayers,” he said.
Moreover, Rajakulendran noted that the approach of getting everyone over the age of 18 to register as a taxpayer had been identified as a somewhat futile approach, as it simply added to the administrative workload of the Inland Revenue Department (IRD), especially since the IRD was already resource-constrained. Additionally, not everyone over the age of 18 is a taxpayer. Thus, the effective method, according to Rajakulendran, is to increase the number of productive taxpayers – those who actually pay taxes.
“Research has been conducted to identify a more progressive and rational way to increase the number of taxpayers. One method is to check with professional registration bodies, such as chartered accountants and medical associations, to ensure their members have tax files. This is because being a member of such a body makes it highly likely that a person is liable for taxes. This approach, which requires effectively policing a few associations, is much more convenient than following up with individuals,” he noted, while highlighting that this was a strategy the country should adopt.
Regarding the Government’s approach, Rajakulendran noted that some mandatory registrations had been made by the Government, leading to an increase in registrations. This has brought Sri Lanka back to 2019 levels, but he highlighted that the country should aim to achieve rates beyond that. He added that assessing whether these levels could be surpassed would require more time.
“With the focus being on revenue administration, trying to collect more revenue should be key. It’s not simply the quantity of revenue but also about how equitable the country is at raising revenue. Hence, the way of raising revenue matters.
“Income tax collection is a very progressive way of collecting taxes. Hence, Sri Lanka should focus more on collection through such progressive means, rather than relying on VAT, which currently contributes to around 50% of the increase in revenue,” he noted.
Medium-term goal for taxpayer registration
Commenting on the figure of 8.7%, KPMG Sri Lanka Tax and Regulatory Division Principal Suresh Perera pointed out that this level was not just low by South Asian standards, but was also alarmingly low by global benchmarks for middle-income economies.
“This figure is plausible and aligns with Sri Lanka’s historically low Personal Income Tax (PIT) registration rates relative to its working-age population. Sri Lanka has faced challenges in expanding its tax base due to a large informal economy and limited taxpayer compliance, so an 8–9% registration rate is consistent with known patterns. In my view, a realistic medium-term goal would be 20–25%, with a long-term ambition of over 30%, especially if informal sector integration and digital reforms succeed,” he said.
Perera also noted that expanding PIT registration entailed several advantages for a country’s fiscal health and social equity. Accordingly, it first broadens the overall tax base, helping to reduce dependence on indirect and trade-related taxes that tend to disproportionately burden lower-income populations.
Secondly, PIT provides a more stable and predictable source of revenue compared to the volatility of trade taxes, enhancing fiscal resilience. Thirdly, it promotes fairness by ensuring that individuals with higher earnings contribute a proportionate share, thereby helping to address income inequality. Lastly, a larger pool of formally registered taxpayers improves the accuracy of revenue forecasting and strengthens compliance with international financial standards, such as those set by the International Monetary Fund (IMF).
According to Perera, continuously low levels of tax collection have serious risks to Sri Lanka’s economic stability and social development and the consequences of inaction are far-reaching, with large opportunity costs.
Further, he highlighted that continued fiscal deficits where Government spending consistently exceeded revenue would deepen the country’s debt burden, potentially leading to unsustainable public finances, as shown by Sri Lanka’s recent economic crisis.
Moreover, Perera also commented on the Government’s reliance on precarious financing methods, including excessive borrowing and monetary expansion, adding that these could trigger inflationary pressures and currency depreciation.
“An inequitable tax system further exacerbates social disparities, as the burden often falls disproportionately on lower-income groups while wealthier individuals evade their fiscal responsibilities. This dynamic forces the State to increase indirect taxes or cut back on services that primarily benefit the poor,” he added.
Perera also elaborated on the opportunity cost of a narrow tax base, highlighting the loss of potential investments in transformative public initiatives. Accordingly, revenue that could have been allocated to infrastructure development, social protection programmes, or productivity-enhancing projects is instead foregone, limiting the country’s capacity for inclusive and sustainable growth.
Addressing challenges
In addition, he highlighted several commendable steps taken by Sri Lanka to strengthen its PIT system.
“The reinstatement of mandatory Advance Personal Income Tax (APIT) deductions in 2023 marked a significant policy shift. Adjustments to the tax-free threshold from Rs. 1.2 million to Rs. 1.8 million aimed to balance revenue generation with taxpayer relief.
“The introduction of digital filing through the Revenue Administration Management Information System (RAMIS) platform has also modernised tax administration, while reforms backed by the IMF target a more ambitious tax-to-GDP ratio of 15% by 2025.”
However, Perera believes that substantial challenges remain, one being the fact that a large informal sector continues to operate largely outside the formal tax net. He also highlighted systemic inefficiencies including manual processes, corruption, and resistance to digitalisation that undermine the effectiveness of tax collection. Furthermore, he believes legal loopholes further complicate enforcement, allowing up to four appeals without tax payment, with cases often dragging on for over a decade.
According to Perera, in order to improve tax compliance and strengthen revenue collection, there is a need for a multi-pronged reform strategy. For this, he highlighted integrating digital systems as a critical first step in linking tax records with national identity cards, banking information, land registries, and vehicle ownership databases, which could create a more transparent and efficient tax ecosystem. Moreover, he also noted that advanced technologies such as Artificial Intelligence (AI) should be employed to identify high-risk profiles and streamline audit processes.
In addition, he explained that compliance could also be encouraged through incentive-based approaches, such as offering preferential access to public services or healthcare benefits for registered taxpayers.
“Public education campaigns must be launched to raise awareness and simplify tax obligations, using accessible formats like infographics and videos to engage youth and informal sector workers. Finally, expanding and modernising the RAMIS by making it mobile-friendly and integrating QR-based payment options will facilitate real-time reporting and automated reminders, ultimately improving user experience and compliance,” Perera added.
Firm action required to draw viable people into tax net
University of Peradeniya (UOP) Professor in Economics Ananda Jayawickreme also highlighted the urgent need to ensure more people were registered as income taxpayers.
In Sri Lanka, while the threshold is a monthly income of Rs. 150,000, he noted that many, even in this category, had not effectively registered.
This lack of registration was a key issue in Sri Lanka’s revenue collection, Prof. Jayawickreme noted, adding that it also contributed to the Government’s reliance on higher rates for registered taxpayers.
He noted that even if 30% of the population was near the poverty line, around 25–30% should be earning more than the given threshold per month. He therefore pointed to the need to at least double the current levels of registration, which would also allow the Government to achieve sufficient revenue, while adding that more than 50% of the national income came from about 10–20% of the population.
“The Government must take firm action to get people into the tax net. Income taxpayers who have already registered are burdened with heavy taxes, while the Government relies heavily on indirect taxes.
“A major consequence of heavy rates is that taxpayers become reluctant to pay, as they are discouraged by the high rates. As a result, formal income earners will be discouraged, their incentive to earn more will be affected, and it may even lead to them hiding income and avoiding taxes altogether,” he observed.
Furthermore, Prof. Jayawickreme noted that the consequences of having a low number of registered taxpayers also meant that it was more burdensome for the poor, as they were subjected to high indirect taxes, making the system regressive.
Notable increase in registrations for 2025
The figure of 8.7% in 2024 represents a recovery and improvement from 2022, when the corresponding figure was only 1.4%. The expansion of the taxpayer base can be deemed primarily as a result of the Government lowering the annual tax-free income threshold in January 2023 from Rs. 3 million to Rs. 1.2 million (Rs. 100,000 per month). In April this year, the Government further adjusted the tax-free income threshold, raising it to Rs. 1.8 million annually from the existing Rs. 1.2 million.
Here, the working-age population is typically defined as individuals between 15 and 64 years old. Labour force participation, the percentage of the working-age population that is employed or actively looking for work, was 46.6% in Sri Lanka in September 2024, as reported by the Department of Census and Statistics. Moreover, in the first quarter of 2024, Sri Lanka’s total number of employed persons was estimated at 7.9 million. This is significantly higher than the number of income taxpayers, indicating low tax compliance among the working population.
Speaking to The Sunday Morning Business, a spokesperson for the IRD noted that there was a notable increase in taxpayer registrations in 2025, with approximately 12,000,000 people already registered for a Taxpayer Identification Number (TIN).
In the first quarter of 2025, only 10 million TIN holders were present, leaving nearly seven million eligible adults outside the tax net. According to the IRD, this situation has since changed. Moreover, the TIN is now required for financial and legal transactions, such as opening bank accounts as well as registration of lands, vehicles, and businesses.
Sri Lanka’s tax revenue collection had surpassed Rs. 1.7 trillion by the end of May, with the IRD specifically collecting Rs. 907 billion by the end of the month. Moreover, the IRD recorded its highest-ever total tax revenue collection in 2024 – Rs. 1,958,088 million – an increase of Rs. 392,229 million compared to 2023 with a growth rate of 25.1%. This included Rs. 1,023,207 million collected as income taxes and Rs. 714,684 million as VAT.
For this year, the IRD hopes to achieve a revenue target of Rs. 2,195 billion, for which effective taxpayer inclusion is essential.
The IRD spokesperson also noted that tax revenue had increased, especially since the department had met its targets for the first six months of the year. The official further highlighted an improvement in the tax collection process, particularly compared to 2024, with more people willing to pay taxes, especially due to the reliance on systems for the process.
Thus, according to the IRD, there is improvement in the registration and collection processes, with many people lately and gradually getting on track with making their tax payments properly.
In recent attempts by the Government to streamline the tax administration process, the plans to digitalise the IRD stands as key, which is expected to contribute significantly to the country’s economic growth.
The Government recently emphasised the need to strengthen and digitalise the IRD, especially addressing the ongoing operation and local procurement process of the IRD’s existing RAMIS as well as current shortcomings within the system, while providing appropriate technological solutions.