Sri Lanka's non-filings of Value Added Tax (VAT) increased even as on-time filing improved in Q1 2026 - with non-large taxpayers' non-filing rising from 12.3% in 2025 to 19.1% in Q1 2026, and lagging by almost 30 percentage points in compliance compared with large taxpayers, the Sri Lanka Revenue Administration Diagnostic Technical Assistance report released by the Ministry of Finance on Friday (30) said.
Based on data in the report, non-large taxpayers' non-filings increased by 6.8 percentage points, from 2025 (12.3%) to Q1 2026 (19.1%), while large-taxpayer non-filing increased by 3.7 percentage points (from 0.3% in 2025 to 4.0% in Q1 2026).
Meanwhile, on-time filing by non-large taxpayers also increased by 10 percentage points, between 2025 (45.9%) and Q1 2026 (55.9%), and large-taxpayer on-time filings rose to 85.7% in Q1 2026 (up 5.6 percentage points from 80.1% in 2025).
Nonetheless, non-large taxpayers continued to lag behind large- taxpayers by 29.8 percentage points in on-time filings, with a 55.9% rate in Q1 2026.
"VAT filing data show a substantial compliance gap between the large and non-large taxpayers. In 2025, 80.1 percent of large taxpayers filed their VAT returns on time, compared with only 45.9 percent of non-large taxpayers... the compliance gap remained close to 30 percentage points," the report's findings said.
On the filing of annual income taxes, the report noted that in 2025, only 23.6% of Corporate Income Tax (CIT) returns, 26.8% of Personal Income Tax (PIT) returns, and 15.9% of Individual Income Tax (IIT) returns were filed on time. Meanwhile, non-filing rates reached 52.7% for CIT, 45.6% for PIT, and 67.8% for IIT.
Furthermore, the report in detailing the expectations of the Medium Term Revenue Strategy (MTRS), which includes the IMF staff’s estimate that, under the MTRS-period internal revenue reforms, the Operational Strength Index (OSI) of the Inland Revenue Department (IRD) would rise from 0.39 to 0.55. This increase in OSI is assumed to generate an additional 1.9 percentage points of GDP to Sri Lanka over five years.
The report also noted that the estimate should be taken as an indicative medium-term yield from sustained implementation rather than a mechanical forecast. It further cautioned that the 1.9 percentage point figure is not the MTRS’ objective, as the strategy does not encompass the contribution of customs, excise, or tax policy measures, and should not be interpreted as revenue additional to the baseline.
Further, the report also noted that the MTRS is not intended as a revenue-maximisation tool; the goal of the strategy is to strengthen internal administration.