Sri Lanka’s Inland Revenue Department (IRD) recorded the highest tax revenue in its 93-year history by collecting Rs. 2,203 billion in 2025, marking a 15% increase compared to 2024.
With a Rs. 2,401 billion revenue target set for 2026, the IRD has introduced new efforts to ensure tax compliance and expand the tax base, including a special field observation programme centred in Colombo and its suburbs to assess business establishments.
Experts have appreciated this effort for its potential to expand the tax net, while also highlighting the broader need for revenue collection strategies, such as the proper digitisation of the tax system, in order to witness continued growth.
When questioned by The Sunday Morning Business about the project’s progress and matters related to its expected expansion, the IRD noted that the process was currently being carried out as a pilot project within several selected locations in Colombo, including Pettah, Kollupitiya, and Maradana.
Over 3,000 business establishments have been visited by the IRD so far, with the project primarily being implemented as a data collection initiative for the department’s digitisation efforts to build a digital application with essential information on businesses. This database can be used for future IRD work, including auditing and assessing information accuracy.
An IRD official, who wished to remain anonymous, noted that the pilot project was expected to form one pillar of the department’s digitisation efforts. Following its finalisation, the system is expected to be linked gradually with the IRD’s Revenue Administration Management Information System (RAMIS), depending on the project’s success. The programme also aims to help bring informal business establishments into the tax net by verifying the registration and payment status of businesses.
To address informal economy tax-related issues
Speaking to The Sunday Morning Business, tax expert and KPMG Sri Lanka Tax and Regulatory Division Principal Suresh Perera explained that the launch of this programme spoke volumes for IRD officers’ motivation to collect taxes and expand the taxpayer base.
He explained that the informal economy had long been an issue for the tax authorities and noted that this was the first effort of its kind by the IRD. Thus, he added that one must congratulate the tax authorities for this programme, irrespective of its results.
“In many countries including in the sub-Saharan region, door-to-door registration drives are a common occurrence. Sri Lanka’s new field observation programme by the IRD seems designed to directly verify business registration, check accuracy of tax files, and identify unregistered taxpayers. This approach can strengthen compliance, expand the tax base, and gradually formalise more businesses through its long-term success, which depends on complimentary reforms in digitalisation, simplification, and trust building,” he explained.
He added that direct verification took place where officers physically checked whether businesses were registered with the IRD, closing gaps where firms operated informally, including accuracy checks, providing on-site solutions, and identifying hidden taxpayers. Further, Perera believes that this programme will discourage evasion.
According to Perera, non-compliant businesses will be exposed while building deterrence and implementing immediate corrective action. However, since this methodology is resource intensive, it has limitations such as the requirement for trained officers and logistics. Since urban areas such as Keyzer Street and Liberty Plaza are being focused upon, another limitation, according to him, is the uneven enforcement of the programme.
“As per my knowledge, the campaign has been very successful so far. In practice, this is effective as an initial short-term compliance boost for expanding the tax base, but in the long run, digital tools will have to be used more extensively. My understanding is that mobile apps and QR codes are being used for gathering information at present. The collected information is then being uploaded to the IRD database in real time.”
Perera said that if this door-to-door drive were to become successful, it would address gaps in non-payment of taxes by the informal sector of the economy on a significant scale.
Visibility as a compliance booster
Meanwhile, Arutha Executive Director Yolani Fernando noted that initiatives aimed at improving tax compliance among businesses, especially commercial establishments, were logical, given long-standing concerns about the lack of a level playing field.
She explained that a key issue raised by compliant businesses was the presence of informal and semi-formal entities operating outside the tax net, despite appearing formal in nature.
Fernando stated that measures involving greater physical involvement of the IRD, including on-site checks, could help address the prevailing perception that non-compliance carried no consequences. She added that such visibility could contribute to improving overall compliance if implemented carefully.
“It’s good that it is carried out as a pilot project at present, since it allows room for adjustments based on practical challenges and outcomes. Certain earlier efforts such as mass registration for personal income tax have largely been ineffective although resource intensive, especially given the IRD’s staffing constraints. Instead, registration based on professional categories has been more targeted and effective. So the current approach could be deemed as somewhat of a continuation of it,”she said.
Commenting on the geographical focus of the initiative, Fernando said the emphasis on Colombo was practical due to the concentration of economic activity and the relatively higher availability of IRD staff in the area. She noted, however, that staffing limitations could pose challenges to the sustainability of such efforts in the long term.
Fernando added that such initiatives should not be negatively framed as efforts to hunt down non-compliant businesses. Instead, she believes that framing them as interactions to provide on-site assistance, address registration issues, and reduce administrative barriers, especially for businesses that lack access to tax consultants or professional support, is a far better outlook.
“Hence, this initiative also presents an opportunity for the IRD to improve public perception and adopt a more taxpayer-oriented approach. While enforcement is necessary, there is also a need for the IRD to demonstrate a taxpayer-oriented role, especially in facilitating compliance,” she said.
Speaking on broader revenue collection strategies, Fernando emphasised the importance of digitising the tax system, noting that the IRD had faced decades of neglect in terms of capacity and resources. She said that the extreme focus on revenue collection following the economic crisis had now created an opportunity for meaningful reforms, especially in modernising systems and processes.
Referring to recent budget proposals, Fernando noted indications that the IRD was moving away from a largely clerical, document-based approach towards a risk-based audit system. She said this shift was necessary in order to allow the department to utilise limited resources in a more effective manner, rather than expending excessive time on routine checks.
“There is also this perception that taxing the informal economy would bring in massive amounts of revenue. However, this may not always be true. It’s not just about that and there is a large amount of people outside the tax net, both Value-Added Tax (VAT) and income tax payers, who need to be brought into the system. Thus, the focus should be more about widening the tax net altogether,” she said.
Compliance from taxpayers and tax officers
Analysing the economic implications of tax compliance, University of Peradeniya (UOP) Department of Economics and Statistics Professor Ananda Jayawickreme noted that the lack of tax compliance remained one of the most serious weaknesses in Sri Lanka’s tax system, despite the availability of a large number of tax files. He noted that while many individuals and businesses were registered, actual tax payment levels remained low, even among those whose incomes exceeded the tax threshold.
He said that improving tax compliance was therefore a key need for the Government, along with a need to understand the underlying reasons for poor compliance across different sectors by implementing a proper analysis, since causes of non-compliance differed across sectors.
Prof. Jayawickreme pointed out that tax compliance should not rely solely on voluntary payment, especially where such approaches had proven ineffective. He explained that while voluntary compliance could be encouraged through awareness programmes, enforcement mechanisms were also necessary.
He added that motivating taxpayers needed transparency in revenue collection, accounting procedures, public expenditure, and clear accountability in the use of public funds, emphasising the need for proper planning to ensure accurate estimates and forecasts.
According to Prof. Jayawickreme, tax compliance depends on two key factors: compliance by taxpayers and compliance by the IRD itself.
“They must ensure that proper tax procedures and estimated taxes have been collected. In most cases, VAT, excise, and Corporate Income Tax are revenue streams that have frequently fallen short of targets, since tax compliance is not maintained,” he said.
Prof. Jayawickreme added that tax compliance efforts would be undermined if collected revenue was not correctly spent or reinvested into the economy in a timely manner.
“Simply retaining the revenue within Government coffers without properly implemented expenditure will not see a return of that revenue in economic activities and may lead to certain leakages from the economy,” he said.
Thus, according to him, strengthening tax compliance requires proper spending of revenue, re-investments, and digitisation. He highlighted that authorities needed the institutional capacity to ensure compliance where voluntary efforts failed.