• Nearly Rs 1.6 t is tied up in tax assessment appeals and other disputes

Sri Lanka's total tax arrears recorded by the Inland Revenue Department (IRD) had reached nearly Rs 2.1 trillion by the end of 2025, according to a new technical assistance report issued by the International Monetary Fund (IMF).

The report found that nearly Rs 1.6 trillion of the outstanding amount was tied up in appeals against tax assessments or other disputes.

Appeals have therefore emerged as the biggest obstacle to recovering outstanding taxes, the IMF said.

The report also found that total tax arrears had stood at nearly Rs 1.1 trillion in 2024, of which approximately Rs 947 billion was subject to appeals or other disputes.

Even tax arrears that are not under dispute have continued to accumulate over long periods, the report noted.

Among the factors contributing to the problem are staff shortages, inadequate prioritisation and the absence of a risk-based system to distinguish between taxes that can realistically be recovered and those for which recovery is unlikely or would be impractical relative to the administrative costs involved.

The report also pointed out that the IRD does not have the authority to write off unrecoverable tax debts directly under the Inland Revenue Act and the Value Added Tax Act. Such cases must instead be referred to the Ministry of Finance.

The IMF further observed that sufficient recovery action had not been taken in some cases involving tax arrears outstanding for more than five years, even where the amounts were not subject to appeals or other disputes.

To address these weaknesses, the report recommended introducing a risk-based tax arrears management system that classifies outstanding taxes according to how long they have remained unpaid, whether they are subject to appeals or other disputes, their recoverability and the administrative cost of collection.

Such a system would allow greater priority to be given to recoverable tax arrears while enabling the authorities to separately manage those involving low-value amounts, disputed assessments, a low likelihood of recovery or collection costs that make recovery impractical, the report said.