Willing to pay, unable to afford: Rethinking fair taxation in Sri Lanka’s 2026 Budget

Affordability of taxes is economic. It depends on whether people and businesses can meet their tax obligations without undermining their basic livelihoods

 For years, the Inland Revenue Department (IRD) has focused mainly on improving willingness to comply through awareness campaigns, digital filing, and enforcement drives. These are important, but they address only half the problem. The other half of affordability remains largely ignored. Even the best systems cannot collect what people simply cannot afford to pay

• Many Sri Lankans are willing taxpayers but when tax burdens rise beyond what people can realistically bear, even integrity comes at a cost. The 2026 Budget must restore that balance

Every society depends on two invisible forces: people’s willingness to follow the law and their ability to do so. Taxation sits precisely where these forces meet. Willingness is moral, it comes from a sense of duty, fairness, and trust that paying taxes is part of being a good citizen. Affordability, however, is economic, it depends on whether people and businesses can meet their tax obligations without undermining their basic livelihoods.

In a healthy economy, these two forces reinforce each other. Citizens pay willingly, and governments spend transparently, ensuring a virtuous cycle of trust and responsibility. But in Sri Lanka today, that balance is breaking down. Many citizens, especially youth, freelancers, and small business owners want to comply, but find it increasingly difficult to afford compliance as living costs surge and multiple taxes pile up.

The struggle of the honest taxpayer

Across the country, quiet frustration is growing. Small entrepreneurs, self-employed professionals, and salaried workers register with the Inland Revenue Department, file returns, and pay dues only to find that compliance is eating into their survival. The combined weight of income tax, Value Added Tax, Social Security Contribution Levy (SSCL), Stamp Duty (SD) and other charges leave little room for savings or reinvestment.

A young entrepreneur earning Rs. 300,000 a month, for instance, may end up contributing 35–40% of income through direct and indirect taxes. What remains barely covers rent, utilities, and daily needs. Faced with such pressure, even honest taxpayers begin to ask: “If paying taxes means I can’t survive, what’s the point of staying compliant?”

Fairness is the foundation of compliance

This is not about morality; it’s about limits. Behavioral economics shows that when people perceive unfairness or excessive loss, they withdraw delaying payments, underreporting income, or shifting to the informal sector. The real challenge is not chasing evaders but protecting those who still want to comply.

Tax morale, the inner motivation to do the right thing, depends on fairness. People judge a tax system not only by how much they pay, but by whether it feels reasonable, reciprocal, and transparent. When taxes seem arbitrary or excessive, trust collapses. Compliance then becomes reluctant, driven by fear rather than civic duty.

For years, the Inland Revenue Department (IRD) has focused mainly on improving willingness to comply through awareness campaigns, digital filing, and enforcement drives. These are important, but they address only half the problem. The other half of affordability remains largely ignored. Even the best systems cannot collect what people simply cannot afford to pay.

True tax reform isn’t just about better laws or tighter enforcement, it’s about balance. When fairness fuels willingness and opportunity supports ability, compliance stops being a struggle and becomes second nature. That’s when taxation turns from obligation to collaboration and a nation begins to rise together

Restoring fiscal fairness in Budget 2026

The upcoming 2026 Budget is an opportunity to rebuild this trust. Fiscal policy must now move beyond collection targets and become a tool for economic balance and citizen confidence. A fair tax system should empower people to live, work, and invest, not exhaust them in the process.

The IRD can play a leading role by evolving from a collector to a guardian of fiscal fairness, through the following reforms:

1. Affordability Index: Introduce a dynamic index that regularly reviews how tax policies affect different income groups, adjusting rates and thresholds to keep taxes bearable amid inflation and cost-of-living changes.

2. Real-Time Tax Tracker: Monitor how inflation, wages, and spending patterns influence the effective tax burden. Use this data to guide mid-year policy adjustments that maintain fairness without compromising revenue.

3. Simplified Rules for Small Businesses: Streamline filing systems and introduce a low-compliance-cost regime for freelancers, SMEs, and informal workers using digital pre-filled forms and automatic calculations.

4. Smart Support Systems: Link IRD data with social welfare and business development programs to ensure that tax credits, relief, and exemptions reach those who genuinely need support.

5. Citizen Feedback Channels: Launch structured digital platforms for taxpayers to report issues, suggest reforms, and receive transparent updates on how tax funds are used.

When fairness becomes visible, compliance becomes voluntary. At its heart, Sri Lanka’s tax story is not about defiance, it’s about endurance. Most taxpayers are not unwilling; they are overburdened. The real problem is not attitude, but affordability. With rising living costs, families are struggling to meet their daily needs while still trying to do their civic duty. When policies ignore this reality, compliance becomes a struggle, not a choice. A lasting tax system must do more than enforce rules. It should understand people’s everyday challenges and make paying taxes realistic and affordable. When citizens see that taxes are fair, manageable, and used wisely, their willingness naturally grows.

If the 2026 Budget can ease the pressure on households by keeping tax rates and thresholds unchanged while introducing smarter, data-driven ways to raise revenue, it can rebuild trust without adding new burdens. By using advanced data analytical tools, revenue analysis models, and proven international practices, Sri Lanka can strengthen monitoring, identify leakages, and make better use of the information already available. When people see that the system relies on intelligence rather than intensity and that the government is improving efficiency before increasing taxes, compliance will follow naturally.

If the 2026 Budget can ease the pressure on households by keeping tax rates and thresholds unchanged while introducing smarter, data-driven ways to raise revenue, it can rebuild trust without adding new burdens

In the end, true tax reform isn’t just about better laws or tighter enforcement, it’s about balance. When fairness fuels willingness and opportunity supports ability, compliance stops being a struggle and becomes second nature. That’s when taxation turns from obligation to collaboration and a nation begins to rise together.