What Sri Lanka’s next tax plan must deliver
October 11 (Citizen News) - Sri Lanka has stopped the bleeding. Inflation has cooled, reserves have been rebuilt, and the government is again running primary surpluses. But the hard question now is not how we survived the crisis, but how we avoid the next one. The answer lies in a single, unglamorous document: the Medium-Term Revenue Strategy (MTRS) that must follow the IMF programme.
The IMF programme fixed the emergency. Now what?
When the economy collapsed in 2022, revenue had fallen to around 7–8% of GDP—barely enough to keep the lights on in the state. Under the IMF’s Extended Fund Facility (EFF), that number has roughly doubled to about 14–15% of GDP by 2025–26, helped by higher tax rates, tighter exemptions, and stronger collection. Primary surpluses of over 2% of GDP have been recorded, and the 2026 budget kept the fiscal path broadly on track with programme targets.
This is real progress. Yet the International Monetary Fund warns that risks remain “tilted to the downside” and that Sri Lanka’s revenue is still below what is needed for durable debt sustainability and adequate social spending. Regional peers often collect 18–20% of GDP in tax; Sri Lanka is still several points below that.
In other words, the emergency room work is done. The patient is stable. But without a serious rehabilitation plan, the same weaknesses that led to crisis can return.
The IMF has been clear about what comes next. In its latest statements, it calls for a “strong medium term revenue strategy and administration” as a key priority, alongside energy cost recovery and execution of capital investment. This is not technocratic jargon. It is the blueprint for whether Sri Lanka can move from short term stabilisation to long term sustainability.
What exactly is an MTRS?
As part of Sri Lanka’s ongoing Extended Fund Facility programme with the International Monetary Fund, the Fund has required the development of a Medium-Term Revenue Strategy (MTRS). Under the fifth and sixth programme reviews completed in May 2026, the authorities committed, with IMF technical assistance,to carry out tax diagnostics and publish clear MTRS objectives by the end of October 2026.
The strategy is intended to lock in sustainable revenue gains beyond the current programme by broadening the tax base, reducing exemptions, improving tax administration, and making the system fairer and more efficient. While the full document has not yet been released, recent IMF statements continue to highlight the MTRS as a key priority for long-term fiscal strength. From Stabilisation to Sustainability
An MTRS is not just another set of revenue targets in a budget speech. It is a multi year plan that answers four questions:
How much revenue does Sri Lanka need, and by when, to keep debt on a safe path and fund essential services?
What mix of taxes: income tax, VAT, excise, customs, property taxeswill raise that revenue fairly and without choking growth?
How will the tax administration actually collect it, through better systems, digital tools, and enforcement?
How will the government be held accountable if it drifts away from the plan?
For Sri Lanka, the MTRS must cover at least the period after the EFF ends in 2027, setting a clear path for 2028–2032. It should be public, detailed, and treated as a binding reference point for major tax decisions.
Why 15% of GDP is not enough
The jump from 7–8% to around 15% of GDP in revenue is impressive, but it is not the finish line. At current levels, the state still struggles to:
* Fund adequate health, education, and social protection without excessive borrowing.
* Invest enough in infrastructure and human capital to lift long term growth.
* Service debt comfortably while leaving room for counter cyclical spending in future shocks.
Independent analysts note that Sri Lanka’s long term growth outlook has been weakened by repeated shocks, and that a higher, more stable revenue base is essential to “defy post crisis growth trajectories”. The IMF’s own projections show a fiscal path that is “broadly unchanged” from earlier reviews, with primary surplus targets around 2.3% of GDP, but they also stress that further reforms are needed to secure sustainability.
If revenue stalls at current levels, the temptation will be to borrow more domestically, crowd out private credit, and eventually face another round of painful adjustments. The MTRS must therefore set a realistic but ambitious target: for example, moving from around 15% of GDP in 2026 to 17–18% by 2030, driven by base broadening and better administration rather than constant rate hikes.
No more shock therapy
One of the biggest mistakes Sri Lanka has made in past decades is treating tax policy as a series of emergency dials: turn up this rate, slap on that levy, cut this exemption for six months, then reverse it under pressure. This creates uncertainty, encourages avoidance, and erodes trust.
The IMF and independent commentators have emphasised that future revenue gains should come from “broadening the tax base and rationalising tax exemptions and incentives”, not from repeated headline rate increases. In practice, this means:
* Cleaning up VAT and income tax exemptions that benefit narrow sectors or well connected groups.
* Tightening thresholds so that high turnover informal and semi formal businesses contribute fairly, without crushing micro enterprises.
* Ensuring that transfer pricing rules and anti avoidance measures are aligned with international standards so that profits cannot be easily shifted out of Sri Lanka.
The message to taxpayers should be simple: rates will not keep jumping unpredictably, but loopholes will close steadily and fairly. That is the kind of environment that encourages voluntary compliance.
The hidden battle
Even the best tax laws will fail if the machinery of collection is weak. The IMF has repeatedly highlighted “strengthening revenue administration” as essential to sustain and deepen revenue gains. This is where the MTRS must get concrete.
Sri Lankans experience administration failures every day: slow VAT refunds, arbitrary audits, long queues at tax offices, and a sense that the system rewards connections rather than compliance. The MTRS should promise visible changes:
* Risk based audits and refunds, building on reforms that moved away from simplified VAT refund regimes to systems that target high risk cases.
* Digital tools: e invoicing, e filing, pre filled returns, and automatic datamatching with customs, banks, land registries, and company records.
* Strengthen the existing or new dedicated large taxpayer units, tailored compliance strategies for SMEs, and simple but enforceable regimes for smaller and informal operators.
* Clear performance metrics: how long refunds take, how many audits are completed, how much arrears are collected, and how taxpayers rate their experience.
If a business can file online, get refunds within weeks, and know why it was audited, compliance becomes less painful and more normal. That is the cultural shift the MTRS must drive.
Making the plan stick
Sri Lanka has no shortage of strategies that look excellent on paper and vanish after the next election. The MTRS must be designed to survive political cycles.This means building in governance mechanisms such as:
* An annual “Revenue Strategy Statement” to Parliament, explaining where revenue stands, why targets were missed or exceeded, and what changes are proposed.
* A requirement that major tax changes be assessed against the MTRS and debt sustainability analysis before they are introduced.
* Public reporting of tax expenditures, the revenue lost through exemptions and incentives, so that the “hidden budget” becomes visible and debatable.
These steps do more than improve technical quality. They signal to investors, rating agencies, and ordinary citizens that tax policy is not a moving target. The IMF has linked a “predictable, rules based tax ecosystem” directly to investor confidence and foreign direct investment. In a country that has lived through default, restructuring, and sharp austerity, that credibility is priceless. A credible MTRS should read like a timetable, not a wish list. A realistic path might look like this:
2026: Finalise and publish the MTRS with explicit revenue targets, base broadening measures, and an administrative reform plan. Publish more effective and detailed, annual tax expenditure statement.
2027–28: Implement priority reforms: Rationalise major exemptions, adjust thresholds, launch e invoicing pilots, and roll out risk based audits and refund systems.
2029–30: Review progress against targets, adjust the strategy in light of growth and debt dynamics, and consolidate digital and administrative reforms.
The guiding principle should be gradualism and predictability: steady, announced steps rather than sudden shocks that panic businesses and households.
The IMF programme has given Sri Lanka something it lacked for years: breathing space. Inflation is down, reserves are up, and the state is no longer lurching from one cash crisis to the next. But as the EFF winds down towards its end of 2027, the real test will be whether the country can lock in these gains through a credible MTRS.
If done well, the MTRS can be more than a technical document. It can be the anchor of a new fiscal social contract: funding schools and hospitals, keeping debt on a safe path, and restoring confidence in Sri Lanka’s economic management. If done poorly, or ignored, it will be just another report on a shelf, while the cycle of boom, bust, and bailout continues.
Sri Lanka has survived the emergency. The question now is whether it can build a tax system that makes another crisis less likely. The MTRS is where that decision will be made.
The writer is an Attorney-at-Law, LLB, FCMA(UK), CGMA, FCMA, was awarded Tax Practice Leader of the Year 2024 (ASPAC) by International Tax Review (ITR) and was a top-four finalist for Tax Litigation and Disputes Practice Leader of the Year (ASPAC). - sundayobserver
