Thursday Oct 22, 2026
Thursday Oct 22, 2026
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Sri Lanka should shift part of its tax burden towards accumulated wealth and assets through targeted measures rather than a comprehensive net wealth tax, the Institute of Policy Studies (IPS) said, cautioning that VAT cuts would be premature and further rate hikes are highly unlikely.
In its flagship report, Sri Lanka State of the Economy 2026, released in early October, the think tank said revenue gains since 2022 have been driven primarily by high tax rates. Rising living costs, pressures on businesses and concerns regarding competitiveness are fuelling calls for tax relief, particularly reductions in VAT.
“Tax increases are often effective during crisis periods, but may generate diminishing economic and political returns if maintained indefinitely,” the report said.
High consumption taxes can disproportionately affect lower-income households, particularly when real wages remain under pressure. Although inflation has moderated substantially from its 2022 peak, poverty levels remain elevated and household consumption has yet to fully recover, the IPS said, concluding that further increases to statutory tax rates are highly unlikely.
Yet relief would be premature. “Reducing VAT before achieving a broader and more efficient tax system could reverse recent fiscal gains and place additional pressure on debt sustainability,” the IPS said. Tax compliance remains uneven, informality remains widespread and numerous exemptions continue to reduce potential revenue collection, it noted. Sri Lanka’s tax-to-GDP ratio, though substantially improved since 2022, remains below that of many emerging Asian economies and still falls short of the level required to sustainably finance public services, social protection and debt obligations.
The way out, the report argued, lies in broadening the tax base and improving the balance between direct and indirect taxation, with wealth at the centre. “Wealth taxation can improve social welfare by shifting part of the tax burden away from productive activities and consumption towards accumulated wealth and assets. This is one of the least distortionary forms of taxation, generating a stable source of revenue,” it said.
High-income households command a disproportionate share of national income and wealth, the IPS noted. They are also associated with more resource-intensive consumption patterns, resulting in a larger share of total emissions than the lower-income group.
However, the think tank ruled out a levy on total net assets. “Wealth taxation should not be a comprehensive net wealth tax, but rather a targeted strengthening of existing tax instruments linked to wealth and high incomes,” it said.
That would mean modernising property taxation through updated valuation, digital cadastres (computerised registers of land ownership and boundaries) and improved enforcement.
It would also mean streamlining the taxation of capital gains and rental incomes, given the significant share of wealth accumulated through asset price appreciation, particularly in land and real estate markets. Complementary taxation of luxury and high-value assets could enhance progressivity, the report said.
The IPS also singled out high-income professionals. Tax non-compliance is often concentrated in income streams outside formal withholding systems, where tax is not deducted at source, including professionals in medicine, law, consultancy, construction and private education, it said.
“Expanding electronic invoicing, strengthening taxpayer identification systems, integrating banking and tax information, and using data analytics to identify high-risk taxpayers could significantly improve compliance and broaden the tax base,” it added.
