Taxation lies at the heart of a country’s fiscal health, but also directly impacts its investment attractiveness. For Sri Lanka, which faces mounting debt obligations, a need to rebuild public services, and the pressure to demonstrate fiscal credibility to global lenders, tax reform is not optional. Yet reforms that are rushed, unpredictable, or poorly structured can just as easily damage investor confidence, stall business growth, and slow recovery. The challenge is to strike a balance between restoring revenue and sustaining an environment where enterprise can thrive.
Sri Lanka’s tax system has long been marked by volatility. Successive governments have revised tax structures frequently, often reversing major policies within short timeframes. Tax holidays, exemptions, and concessions have been granted for political reasons without consistent economic logic. In contrast, tax hikes have at times been introduced abruptly to meet short-term fiscal targets. This unpredictability has made it difficult for businesses to
plan investments, especially in sectors that require long-term capital commitments.
Rebuilding the tax system must start with clarity and stability. A predictable tax code encourages compliance, simplifies administration, and builds trust. Rates must be competitive by regional standards, but more importantly, they must be credible and sustained. Temporary relief followed by sharp reversals does more harm than consistent, moderate policy. Investors are not always seeking the lowest tax rates. They are seeking certainty.
The structure of the tax base is another major concern. Sri Lanka has historically relied on indirect taxes such as VAT, customs duties, and excise levies, which disproportionately affect lower-income groups and create price distortions. Meanwhile, direct taxes on income, wealth, and corporate profits remain narrow in scope and often poorly enforced. Widening the direct tax net, reducing leakages, and targeting high-net-worth individuals and large corporations are critical steps in restoring fairness without discouraging investment.
Digitalisation of tax administration can play a transformative role. By modernising tax collection, improving real-time data access, and integrating with financial systems, the government can reduce evasion, increase efficiency, and improve taxpayer experience. This will also build investor confidence, as businesses are more likely to invest in environments where institutions function transparently and predictably.
The private sector must be brought into the conversation. Policymakers should engage chambers of commerce, industry groups, and foreign investors to ensure reforms are not developed in isolation. Businesses can offer insights on loopholes, bottlenecks, and practical implications of proposed tax measures. If reforms are seen as collaborative rather than coercive, they are more likely to succeed.
International lenders and rating agencies are watching closely. Sri Lanka’s ability to raise domestic revenue is key to unlocking future financing and regaining global credibility. But this must not come at the cost of growth.
Taxation must be part of a broader economic strategy that includes regulatoryreform, infrastructure investment, and export promotion. Getting tax reform right is not about appeasing one constituency or another. It is about aligning fiscal discipline with economic opportunity. Sri Lanka needs revenue to function, but it also needs investment to grow. These two objectives are not mutually exclusive, but they must be carefully balanced. The success of Sri Lanka’s economic recovery may depend on getting that balance right.
