AKD’s Tax Drive: Cracking Down on Evaders to Rebuild a Broken Economy

As Sri Lanka struggles to recover from its worst economic crisis in decades, President Anura Kumara Dissanayake’s administration is taking bold steps to increase tax revenue and close long-standing loopholes. For the first time in years, high-income earners and corporate giants are being made to pay their dues.

The Economic Backdrop

Sri Lanka’s economic recovery remains fragile after the 2022 default on foreign debt. The country still faces a foreign reserve deficit, high inflation—currently averaging 6.8%—and significant pressure to repay restructured debt under the IMF’s Extended Fund Facility. With public sector wages, healthcare, and education underfunded, increasing domestic revenue has become critical.

According to the Ministry of Finance, tax revenue in 2024 stood at Rs. 3.1 trillion, up from Rs. 2.5 trillion in 2023 — a 24% increase. However, the tax-to-GDP ratio remains at 9.4%, well below the recommended 15% minimum for developing economies.

Bringing the Big Evaders In

The Dissanayake administration has launched a targeted enforcement campaign to go after high-net-worth individuals and corporations that have evaded taxes for years.

A senior official at the Inland Revenue Department confirmed that over 2,800 previously non-compliant entities have been identified through forensic audits and cross-checking of bank and property records. As of April 2025, Rs. 180 billion in back taxes have been recovered, with a further Rs. 290 billion under dispute or litigation.

“We are no longer turning a blind eye. Many of these individuals had declared incomes that didn’t match their lifestyles—multiple luxury vehicles, overseas properties, yet declaring under Rs. 5 million annual income. That era is ending,” the official said.

A Fairer Tax Regime

The government’s fiscal strategy involves widening the tax base while protecting low- and middle-income earners. New policy measures include:

A 15% luxury asset tax on undeclared second homes and vehicles over Rs. 25 million.

An expanded digital income audit system, targeting online business operators and gig workers.

Voluntary disclosure incentives with penalties waived for early compliance.

Meanwhile, businesses earning under Rs. 12 million annually remain exempt from VAT, preserving relief for small entrepreneurs.

Public Backing and Political Risk

Public sentiment has largely been in favour of the reforms, as surveys by the Centre for Policy Alternatives show that 71% of respondents support tougher tax enforcement against the wealthy.

However, there is political risk. Resistance is growing from powerful business lobbies, and some critics warn of "overreach" in enforcement. The Bar Association has already raised concerns about due process in certain high-profile asset freezes.

Still a Long Way to Go

Experts warn that structural reform is still needed. Dr. Nishan de Mel, economist and executive director at Verité Research, noted:

“We applaud the intent, but sustained revenue growth requires more than one-off collections. The system needs digital integration, transparency, and most importantly, consistency over political cycles.”

The IMF has also emphasised the need for sustained domestic revenue mobilisation as a condition for continued support. The next IMF review in July 2025 will assess whether Sri Lanka can meet its target of a 12.3% tax-to-GDP ratio by 2026.