Next on IMF agenda: Fixing tax administration?

Sri Lanka's tax reform agenda has focused on laws and policy, while tax administration has received far less attention.

Over the past 18 months, the National People’s Power (NPP) Government has pushed through a succession of tax measures that have fundamentally reshaped the compliance landscape, deepening distrust and fear in the process. High time for long-overdue tax administration reforms.

Criminal sanctions have been introduced for repeated failures to obtain Taxpayer Identification Numbers (TINs), file tax returns, and comply with Inland Revenue Department (IRD) notices. Cash payments exceeding Rs. 500,000 are no longer deductible for income tax purposes, while enforcement and investigative powers have been significantly expanded. Together, these constitute some of the most far-reaching changes to Sri Lanka’s tax framework in decades.

Taxpayers, tax experts, and legal practitioners have questioned whether some of the new provisions are overly draconian and confer overreaching discretionary powers on tax administrators. The Government and tax officials say: trust us, these only apply to wilful defaulters. But the laws do not make that distinction. The results have been immediate. Revenue performance has consistently exceeded International Monetary Fund (IMF) program expectations, helping restore fiscal stability and enabling Sri Lanka to record sizeable primary surpluses. The IMF has repeatedly cited stronger revenue mobilisation as one of the program’s key achievements.

Yet stronger laws alone do not produce a modern and, importantly, a fair tax system. Whether those concerns ultimately prove justified is secondary. Those laws are now on the statute books. The legislative phase of tax reform is largely complete. The next challenge is ensuring that the institution responsible for administering them is modern, accountable, and fit for purpose.

That point has become increasingly difficult to ignore. While tax legislation has been overhauled, the administrative machinery has evolved far more slowly. Despite an investment of around Rs. 10 billion in the IRD’s Revenue Administration Management Information System (RAMIS), weaknesses remain in IT governance, risk management, data analytics, and taxpayer services. The World Bank has identified modernising tax administration as a key reform priority. Even the Government’s own reform agenda acknowledges the gap. Under the latest IMF review, the IRD is preparing a modernisation strategy centred on strengthening risk-based compliance, expanding pre-filled tax returns, improving taxpayer registration, conducting risk-based audits of high-wealth individuals, and ensuring all taxes are administered exclusively through the RAMIS. It is also developing a Medium-Term Revenue Strategy to sustain revenue gains beyond the IMF program.

An effective tax system depends as much on administration as legislation.

The shortcomings are well documented. In its 2023 Governance Diagnostic Assessment, the IMF observed that “exposure to corruption in Customs and tax administration is substantial, given the absence of effective systems for performance monitoring and detecting and sanctioning officials for improper behaviour.”

The Government and the IRD must now earn the trust they expect from taxpayers. That trust cannot be legislated. It must be built through fairness, consistency, transparency, and accountability. 

The IMF has said the last two reviews will now focus on reforms including the issues noted in the Governance Diagnostic.

That finding remains highly relevant today. Modernising tax administration is not simply about better software or giving tax officials more powers. It requires stronger governance, greater accountability, and more effective oversight of an institution entrusted with collecting the Government’s largest source of revenue. Better training, data integration, automated risk profiling, simpler filing procedures, integrated digital platforms, and consistent decision-making are ultimately more valuable than repeatedly expanding enforcement powers. Strong administration lowers compliance costs for honest taxpayers while improving the ability to identify those who deliberately evade taxes.

Sri Lanka has demonstrated that tougher tax laws can raise revenue. The more difficult task is building a tax administration capable of sustaining those gains after the IMF program ends. That means completing the long-promised modernisation of the IRD, making the RAMIS fully functional, strengthening institutional oversight, and reducing administrative discretion through technology. Only then will Sri Lanka have a tax system that is not only more effective, but also more transparent, predictable, and fair.