Tax Net Expansion Stalls as Disaster Delays Inland Revenue Drive

Sri Lanka’s effort to broaden its tax base has run into fresh obstacles as Inland Revenue Department (IRD) officials attempt to meet sharply increased revenue targets amid severe disruptions from the recent cyclone and flooding. Inland Revenue Department (IRD)

A senior-level discussion chaired by Deputy Minister Nishantha Jayaweera has now accelerated pressure on the IRD to simplify taxation processes and deliver a workable plan to achieve this year’s revenue targets.

The meeting included IRD Commissioner General Rukdevi Fernando and senior Finance Ministry officials, who examined the urgency of widening the tax net in light of reduced indirect-tax inflowsparticularly the steep drop in revenue from vehicle import duties.

Vehicle imports, traditionally a cornerstone of government revenue, have declined dramatically due to tightening foreign-exchange controls and policy uncertainty, leaving a widening gap in the tax portfolio.

According to the Ministry statement, the Deputy Minister directed the IRD to minimise taxpayer inconvenience, streamline the return-filing process, and strengthen awareness campaigns. Officials also discussed increasing voluntary compliance, which remains low due to bureaucratic complexity, distrust in the system, and limited digital uptake among small businesses.

However, the external environment is working against these ambitions. Cyclone-related flooding has severely affected businesses across multiple districts, damaging tax records, disrupting supply chains, and delaying the reopening of enterprises that contribute significantly to VAT and income-tax flows. In some regions, IRD field officers have flagged that taxpayers are unable to meet filing deadlines due to destroyed equipment and damaged premises.

The government’s revised revenue target for 2025—raised from Rs. 4,590 billion to Rs. 4,725 billion was set in expectation of stronger performance in income tax and goods-and-services levies.

The upward revision includes a 3.7% increase in the income-tax target to Rs. 1,210 billion and a 6.5% increase in levies on goods and services to Rs. 2,953 billion. Yet field data suggests that disaster-affected regions may not contribute at full capacity for months.

The IRD has long struggled to expand the tax base, with fewer than 10% of the workforce paying income tax and significant under-reporting among small and medium-sized enterprises. Officials say the cyclone has further pushed informal-sector workers into financial distress, reducing the likelihood of new registrations this year.

Analysts caution that expanding the tax net during a disaster recovery phase requires careful sequencing. Heavy-handed enforcement risks driving informal businesses deeper underground. Instead, tax officers recommend phased filing, targeted incentives, and digital-onboarding support to gradually integrate new taxpayers without harming economic recovery.

Despite these challenges, the IRD is expected to present its updated revenue-mobilisation plan within weeks. But insiders warn that meeting the newly revised targets already ambitious under normal conditions will depend heavily on reinstating trade flows, particularly vehicle imports, and ensuring disaster-hit businesses return to operation swiftly.