Revenue Mobilization is Fundamental for Sri Lanka to Get on a Sustainable Fiscal Path
COLOMBO —Sri Lanka’s economy is expected to grow by 1.7% in 2024 after contracting by 3.8% in 2023, says the World Bank in its twice-a-year update, while signaling that the outlook is clouded with uncertainty and that growth prospects depend on progress with debt restructuring and the implementation of critical structural reforms.
Released today, the Sri Lanka Development Update, Mobilizing Tax Revenue for a Better Future, says that improved revenue mobilization is critical to Sri Lanka’s return to macroeconomic stability. The country has one of the lowest tax-to-GDP ratios in the world. By 2022, the tax system was characterized by low, multiple, and frequently changing rates, a narrow and shrinking base, a high tax burden on labor rather than capital incomes, an over-reliance on indirect taxes, and a weak administration with poor compliance outcomes. These features have made the system complex, inefficient and inequitable.
A government-led tax reform package has been under implementation since May 2022. This includes the introduction of new taxes, a wide range of adjustments to the tax rates and bases, and an intention to improve the efficiency of tax collection and increase compliance. The latest Sri Lanka Development Update focuses on the progress of reforms underway, gaps, recommendations and future prospects.
“Sri Lanka has carried out critical reforms since the start of the economic crisis. Staying the course on reforms while managing fiscal risks is crucial to restore a sustainable growth path,” said Faris H. Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka. “Current efforts to mobilize tax revenue should be coupled with continued reforms towards transparency of expenditures to build public confidence and to deliver better public services.”
The effective implementation of a Tax Administration Modernization Strategy will be essential to ensure that tax policy reforms translate into a sustained increase in revenue collection. Core priorities should include the promotion of e-filing, the utilization of third-party information to strengthen compliance risk management, streamlining dispute resolution, and the recovery of taxes in default. Furthermore, better taxpayer segmentation is crucial for improved targeting of large and high-net-worth individuals and to bolster the administration’s capacity to deal with the complexity of these cases. Investments are required to strengthen the information technology (IT) infrastructure which will serve as foundation to each of these interventions.
The Sri Lanka Development Update is a companion piece to the South Asia Development Update, a twice-a-year World Bank report that examines economic developments and prospects in the South Asia region and analyzes policy challenges faced by countries. The October 2023 edition titled Toward Faster, Cleaner Growth shows growth in South Asia is higher than any other developing country region in the world, but slower than its pre-pandemic pace and not fast enough to meet its development goals. The report also includes short and long-term policy recommendations for countries in the region to manage fiscal risks and accelerate growth, including by boosting private sector investment and seizing opportunities created by the global energy transition.