Revenue Measures: 2025 Budget
Sri Lanka’s economic reform programme is based on a foundation of revenue based fiscal consolidation. This is reflective of the fact that leading up to the economic crisis, Sri Lanka had one of the worlds lowest Government tax revenue levels of 7.3 percent of GDP in 2022.
For the year 2025, the bulk of revenue gains is expected to be delivered by the liberalisation of motor vehicle imports that took place on 1st February 2025. This process is being carefully monitored to ensure that import of vehicles does not result in undue negative impacts on external sector stability. Other key revenue measures which have already been announced in Parliament previously in December 2024 include the increase of tax-free threshold for personal income tax, further adjustments to the second income tax slab, removal of VAT on fresh milk and yoghurt. The Government also decided to not pursue this year the Imputed Rental Income Tax that had been agreed by the previous administration. To compensate for any revenue losses, the Government already presented in Parliament measures including the introduction of VAT on digital services, the imposition of corporate income tax on export of services, and an increase in the corporate tax on cigarettes/liquor, and gaming.
The tax policy measures outlined here are expected to deliver the required revenue to enable Sri Lanka to meet the revenue targets of 15.1 percent of GDP in 2025. Nonetheless, in parallel, the Government is taking concerted efforts to improve tax administration and compliance. In fact, Sri Lanka’s revenue strategy for the upcoming budget aims to enhance fiscal sustainability by strengthening tax administration, improving compliance, improve institutional strength through enhanced digitalization and rigorous monitoring mechanisms; while providing relief to the most vulnerable groups of the society. Efforts will be directed toward digitalizing tax systems to reduce leakages and enhance transparency while minimizing human interactions in tax administration.
Sri Lanka is moving towards a cashless economy as a part of its broader digitalization agenda to formalize the economy and improve revenue collection. The use of Point-of-Sale (POS) machines across businesses, especially in VAT registered enterprises, will be implemented as a key initiative to facilitate digital transactions and reduce cash dependency.
A cashless economy will not only curb tax evasion and illicit financial activities but also enhance fiscal efficiency, contributing to Sri Lanka’s economic stability and growth.
Digitalisation of revenue agencies and the overall digital economy drive is expected to provide significant impetus to the revenue enhancing efforts.
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