A recent study by the Institute of Policy Studies (IPS) reveals that the Sri Lankan government lost an alarming Rs.80 billion in tax revenue in 2023, primarily due to widespread evasion of the Personal Income Tax (PIT) among eligible taxpayers.
The research assessed tax contributions across various income groups, highlighting a concerning trend that directly affects government revenue from direct tax payments. IPS Research Economist Pranayak Jayawardana noted that approximately 20% of public sector workers are subject to the Pay As You Earn (PAYE) system, while around 300,000 individuals in both the employer and self-employed sectors are liable for PIT.
Despite an estimated PIT revenue of Rs.130 billion for 2023, the actual amount collected was only about Rs.50 billion, indicating significant tax evasion. The study also pointed out that the burden of direct tax liabilities disproportionately falls on wealthier households, while lower-income groups face a heavier burden from indirect taxes, particularly the Value-Added Tax (VAT).
According to the findings, the poorest households endure a VAT burden of approximately 9% of their total income, compared to 6% for wealthier households. The recent VAT increase from 15% to 18% has further exacerbated this inequity, raising the tax burden on the bottom 40% of the population by 60%, compared to a 50% increase for wealthier groups.
The report underscores the need for urgent reforms in Sri Lanka’s tax structure to enhance administration and compliance, ensuring a fair and sustainable system for all citizens.