The Best Next Step for Improving Tax Collection

Abstract

In 2021, the country’s tax revenue as a share of gross domestic product (GDP)reached its lowest level since 1959 – dropping to just 8%. Increasing tax-to-GDP ratio is one of the most important measures of Sri Lanka’s ability to achieve sustainable economic recovery, and meet its commitments on the current International Monetary Fund (IMF) programme. The Sri Lankan Government has recognized this challenge and taken several steps since 2022 to increase tax revenues, by increasing tax rates and introducing new taxes. Among others, Withholding Tax (WHT) was reinstated at a rate of 5%, Value Added Tax (VAT) was revised upwards from 8% to 15%, and both Personal Income Tax and Corporate Income Tax rates were hiked significantly. Despite this, Sri Lanka is still falling short of its budgeted revenue targets. Sri Lanka had a target to collect 2.1% of GDP in tax revenue in the first quarter of 2023. It fell short of this target by 11%. The target for June was 4.3% of GDP. The government has publicly acknowledged that the target was not achieved, though the precise shortfall has not been revealed as of yet. Given that taxes rates have seen huge upward revision, it is clear that Sri Lanka’s current problem lies not in how much people are being taxed, but in how well taxes are collected. In essence, it is a problem of tax administration/collection.