Sri Lanka continues to face significant revenue losses due to widespread tax exemptions, raising concerns about fiscal stability and the broader economic recovery. According to the latest Tax Expenditure Statement published by the Ministry of Finance in November 2025, exemptions and concessions reached Rs. 285.7 billion in the first half of 2025 alone equivalent to 57% of the total tax expenditure recorded since April 2023.
The report highlights that total exemptions since April 2023 have soared to Rs. 787.1 billion, encompassing Corporate Income Tax, Personal Income Tax, Value Added Tax (VAT), Excise Duty, Customs Import Duty, the Social Security Contribution Levy, and the Luxury Tax on Motor Vehicles. While measures to broaden the tax base and increase revenue collection have been introduced under the economic recovery program, these large-scale concessions continue to limit their impact.
The 2023/24 financial period primarily reflects income tax exemptions: Rs. 12.2 billion in Personal Income Tax and Rs. 119.3 billion in Corporate Income Tax, totaling Rs. 131.5 billion. VAT, excise, customs, and other consumption-based exemptions are reported in 2024, totaling Rs. 369.9 billion. Notably, VAT exemptions alone amounted to Rs. 333.3 billion in 2024, with Rs. 207.4 billion recorded in the first half of 2025, primarily covering essential goods, utilities, medicines, food supply chains, and priority sectors outside the Board of Investment framework.
Other significant exemptions include Rs. 61.7 billion in the Social Security Contribution Levy, largely aimed at shielding consumers from higher prices for electricity, water, fuel, and pharmaceuticals. Customs duty and excise duty exemptions, while smaller, support agricultural inputs, construction projects, and locally assembled vehicles. Luxury motor vehicle tax reliefs granted under Gazettes in 2023–2024 added to the fiscal burden, though recovery actions are underway against non-compliant beneficiaries.
These patterns have direct implications for Sri Lanka’s commitments under the International Monetary Fund program, which relies on improved revenue collection through VAT, income taxes, and enhanced administration of the Social Security levy. Analysts warn that continued high exemption volumes reduce the effectiveness of base-broadening reforms and could constrain public spending on essential services.
The Finance Ministry acknowledges these challenges and aims to integrate tax expenditure analysis into the annual budget cycle. Future efforts will include clear benchmarks, regular evaluation of high-cost exemptions, and sector-specific assessments to align tax reliefs with fiscal consolidation goals. However, the persistence of legacy exemptions from older investment regimes and transitional projects, such as Port City developments, suggests that achieving meaningful revenue gains will require careful policy recalibration.
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