High tax rate, low tax revenue: Sri Lanka’s corporate income tax (CIT) rate was among South Asia's highest but CIT revenue was among the lowest

Abstract

Sri Lanka's Corporate Income Tax (CIT) collection is notably lower than other South Asian countries, despite having a higher tax rate. In 2023, Sri Lanka’s CIT revenue was 2.0% of GDP, with a CIT rate of 30%. In contrast, Bhutan and the Maldives, with lower CIT rates of 25% and 15%, collected 3.7% and 2.7% of GDP, respectively. India, also with a 30% CIT rate, collects more revenue than Sri Lanka. Only Bangladesh collects less (1.5% of GDP in 2022), but it taxes at a lower rate of 27.5%.

Even in the past, Sri Lanka’s revenue collection has been lower despite a higher rate. Over the past decade (2013-2023), Sri Lanka's average CIT revenue was 1.5% of GDP, well below the South Asian average of 3.4%. Bhutan, for instance, consistently collected 6–7% of GDP in CIT revenue before 2021 with a 30% CIT rate (reduced to 25% after 2021). Even Bangladesh’s historical CIT collections were higher than Sri Lanka’s. Sri Lanka’s CIT rate has consistently been 28% or higher, except for 2020–2022. This rate exceeds the South Asian average of 26% for 2013–2023.

Sri Lanka's low revenue collection is due to steep concessionary tax rates in certain sectors and tax exemptions granted under various laws. Prior to October 2022, small and medium enterprises, and sectors like education and healthcare, benefitted from concessionary rates of 14%, while manufacturing had a rate of 18%. Large firms continued to receive exemptions under the BOI and SDP acts.

Inefficiencies in the tax collection system also contribute to the low revenue.