The World Bank (WB) has highlighted that Sri Lanka’s corporate income tax (CIT) collection remains far below regional peers, raising concerns about the sustainability of government revenue and the country’s post-crisis fiscal recovery.
Despite increasing the statutory CIT rate to 30 percent in October 2022 and removing exemptions and concessionary rates, corporate tax collection as a share of GDP in 2023 remained at just 2 percent—compared with 3.5 percent in South Asia and 3 percent in other lower-middle-income countries.
The WB noted that low direct tax collection drives Sri Lanka’s heavy reliance on indirect taxes, such as VAT and excise duties, which now account for nearly 75 percent of total tax revenue and are expected to remain at that level through 2025. Policy choices have created opportunities for tax avoidance and expenditures that erode the tax base, the report said.
Sri Lanka’s participation in the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has yet to translate into effective compliance. Preferential regimes, including Strategic Development Projects (SDP), Board of Investment incentives, and special economic zones such as Port City Colombo, pose significant BEPS risks. The impact of multinationals shifting profits offshore to low-tax jurisdictions remains unclear.
The WB cautioned that excessive reliance on indirect taxes reduces progressivity, lowers tax morale, and limits compliance, particularly during a fragile economic recovery. While the government has committed to reducing tax expenditures and refraining from approving new projects under the SDP, structural weaknesses remain due to multiple authorizing bodies, limited cost-benefit analysis, and the lack of sunset clauses.
To strengthen corporate tax collection, the WB recommends improving the predictability of tax policies, reducing policy and administrative complexity, enhancing coordination across tax administration, engaging in clear external communications, and reporting on tangible benefits from tax revenue and government spending.
