The World Bank has criticized the steep rise in Sri Lanka VAT, warning that the tax hike has increased household costs and contributed to rising poverty amid the country’s ongoing economic crisis.
World Bank warns Sri Lanka VAT rise adds to household strain and risks worsening inequality
The World Bank’s latest report has placed Sri Lanka VAT at the center of the debate on taxation and poverty, arguing that recent hikes have intensified the financial strain on lower-income households. The findings suggest that while value added tax is a vital source of government revenue, its rapid increase has contributed to higher living costs at a time when many families are struggling with inflation and declining real incomes.
According to the report, Sri Lanka’s VAT measures may have pushed poverty up by 3.9 percent between 2022 and mid-2023. Rising utility costs, including the removal of subsidies and the shift to cost-recovery pricing, were highlighted as factors that compounded the impact. The World Bank noted that for the poorest households, disposable income fell by around five percent, while overall poverty increased by nearly two percentage points.
The criticism of Sri Lanka VAT comes against a backdrop of fiscal reforms designed to stabilize state finances after years of monetary instability, tax cuts, and excessive money printing. Analysts caution that while higher indirect taxes generate revenue, the political narrative against VAT could lead to renewed calls for tax reductions similar to those in 2019, which helped trigger a severe currency crisis and economic collapse.
Sri Lanka also faces challenges from protectionist food taxes, which have kept rice and other staples significantly more expensive than in regional markets. In addition, corporate tax rates remain high at around 30 percent, with the World Bank urging reforms toward a minimum 15 percent rate and broader reliance on more progressive income-based taxation.
Some experts, however, argue that Sri Lanka VAT remains a more efficient revenue tool than income tax. Shantayanan Devarajan, a former World Bank economist, has pointed out that VAT can be progressive or neutral when exemptions on basic goods are considered. He noted that in many Asian economies, VAT accounts for a much larger share of revenue than income taxes, helping governments fund services while maintaining economic stability.
The World Bank’s analysis highlights the balancing act Sri Lanka faces as it seeks to rebuild public finances without worsening poverty. While VAT generates reliable revenue, its burden on households must be weighed against the risks of inflation, food insecurity, and reduced consumption. Economists suggest that a mix of monetary stability, targeted subsidies, and more efficient spending is critical to ensure that fiscal reforms do not further deepen inequality.