Sri Lanka collected Rs. 5.05 trillion in tax revenue in 2025, but state financial records show that nearly 77% of that money came from indirect consumption taxes rather than direct taxes on wealth or corporate income.
Data released in the Central Bank of Sri Lanka’s latest Annual Economic Review indicates that the country’s direct-to-indirect tax ratio narrowed further to 23:77, down from 28:72 in 2024, despite government ambitions to widen the personal income tax net.
The widening disparity reflects an heavy reliance on Value Added Tax (VAT) and import levies to meet revenue targets set under Sri Lanka’s International Monetary Fund (IMF) program. While total tax collection grew by 36.3% year-on-year, the vast majority of new revenue was captured at retail registers and port customs gates.
2025 Tax Revenue Composition (Per Rs. 100 Collected)
- Value Added Tax (VAT): Rs. 34.63
- Direct Income Taxes: Rs. 22.55
- Excise Duties: Rs. 20.93
- Import Duties: Rs. 5.50
- Ports & Airports Development Levy: Rs. 3.56
- Other Levies & Charges: Rs. 12.84
VAT alone generated Rs. 1.75 trillion during the year—a 33.4% surge driven primarily by import-stage collections. Concurrently, the lifting of Sri Lanka’s long-standing vehicle import restrictions in February 2025 triggered a windfall for the Treasury, with motor vehicle excise duties surging to Rs. 471.8 billion.
“Indirect taxes are comparatively simple to collect and deliver immediate cash flow to the Treasury. However, relying on consumption levies to drive fiscal recovery means the lowest-earning households pay a disproportionately higher share of their disposable income relative to their earnings.”
World Bank microsimulation modeling supports that concern. In its Sri Lanka Public Finance Review, the bank estimated that indirect taxes absorb 9.4% of total household income for the poorest decile of the population, compared to just 5.4% for the wealthiest decile. Furthermore, World Bank researchers calculated that the 2024 VAT rate hike to 18% pushed an estimated 2.2 percentage points of the population into poverty.
On the direct tax side, collections grew by 11% to reach Rs. 1.14 trillion. World Bank estimates show that the top 10% of income earners supply roughly 77% of Pay-As-You-Earn (PAYE) collections and 66% of personal income tax revenues. The Inland Revenue Department (IRD) also recorded 100% filing compliance across its newly established High Wealth Individuals Unit.
Despite those gains, structural bottlenecks persist in corporate tax administration. Official parliamentary disclosures from the Committee on Ways and Means identified Rs. 188 billion in default taxes classified as recoverable, alongside a separate Auditor General audit recording Rs. 369 billion in uncollected or suspended VAT arrears.
With tax expenditures and corporate concessions costing an estimated 3.5% of GDP annually, economists caution that true tax equity will require the IRD to publish deeper concentration metrics showing the exact contribution of Sri Lanka’s largest corporate entities.
