Sri Lanka's Tax Arrears Reach Rs 2.1 Trillion as IMF Flags Gaps in Revenue Collection

A revenue rebound meets a collection crisis

Sri Lanka's Inland Revenue Department recorded about Rs 2.1 trillion in unpaid taxes by the end of 2025, including Rs 1.6 trillion tied up in appeals or other disputes, according to the International Monetary Fund's Revenue Administration Diagnostic. The arrears nearly doubled from about Rs 1.1 trillion in 2024, exposing weaknesses behind the country's recovery in tax receipts.

Tax revenue rose from 7.3% of gross domestic product in 2021 to 15.4% in 2025. GDP measures the value of goods and services produced in the economy. The increase of 8.1 percentage points means taxes grew from roughly seven rupees to more than 15 rupees for every 100 rupees of economic output.

Major changes to value added tax, or VAT, helped drive that recovery. VAT is a tax on consumption collected through businesses. The IMF diagnostic now points to a different challenge: making sure the agencies administering taxes can identify liabilities, process returns, collect payments and pursue overdue debts reliably.

The weaknesses extend across the Inland Revenue Department, Sri Lanka Customs and the Excise Department. They include low filing rates, incomplete checks on goods receiving customs concessions, staff shortages and dependence on technology contracts that expire in January 2027.

IMF staff simulations suggest stronger internal revenue operations could generate an additional 1.9 percentage points of GDP in revenue over five years. That is a potential gain from better administration, conditional on reforms being carried out.

Most unpaid taxes are caught in disputes

The Inland Revenue Department's arrears increased by roughly Rs 1 trillion between 2024 and the end of 2025, a rise of about 91%. Over the same period, the amount subject to appeals or other disputes increased from Rs 947 billion to approximately Rs 1.6 trillion.

Disputed assessments accounted for about 76% of the total arrears in 2025. An assessment is the tax authority's calculation of what a taxpayer owes. When a taxpayer challenges that calculation, the amount can remain outstanding while the disagreement is considered.

The IMF identifies appeals as the largest obstacle to collecting overdue taxes. The Rs 2.1 trillion balance therefore combines debts at different stages, including amounts being contested and amounts outside disputes. How much can ultimately be recovered remains uncertain.

Subtracting the disputed amounts leaves approximately Rs 500 billion outside disputes in 2025, compared with about Rs 153 billion in 2024. Those figures, calculated from the rounded totals, show that the problem also extends beyond the appeals process.

Some undisputed debts more than five years old had received insufficient collection attention. Staff shortages, weak prioritisation and the absence of a structured way to distinguish recoverable debts from difficult or costly cases have allowed arrears to remain on the books.

Why collecting debt requires better sorting

The IMF recommends classifying arrears by age, dispute status, likelihood of recovery and the administrative cost of collection. This would help officials decide which cases need immediate action and which require a different approach.

A recent, undisputed debt owed by an operating business presents a different collection task from a small balance owed by an entity with no recoverable assets. Treating every entry in the debt register the same way can consume staff time while more promising cases wait.

The Inland Revenue Department also faces a legal constraint. Under the Inland Revenue and VAT Acts, it cannot directly write off tax debts judged to be uncollectible. Such cases must be submitted to the Finance Ministry.

Writing off an uncollectible debt means formally removing an amount that the administration judges it cannot recover. A workable process would help officials maintain a more useful debt register while concentrating collection efforts on money that can be recovered.

Tax returns reveal a wider compliance gap

The diagnostic records on time filing rates of just 23.6% for Corporate Income Tax, 26.8% for Personal Income Tax and 15.9% for Individual Income Tax. It lists those categories separately, with corresponding nonfiling rates of 52.7%, 45.6% and 67.8%.

In practical terms, fewer than one in four corporate returns were filed on time, while more than half were not filed. In the Individual Income Tax category, roughly two in three returns were missing. Late returns account for another part of the compliance picture.

A tax return gives the authority information needed to calculate or check a liability. When returns are missing, officials have less information about income, deductions and payments. That makes it harder to identify unpaid tax promptly and to select cases for examination.

Employer withholding compliance is also weak outside the group of large taxpayers. Withholding means an employer deducts tax from a payment and passes it to the government. Weak compliance at that stage disrupts a collection method intended to bring revenue in during the year.

The proposed response combines closer monitoring of missing returns, consistent penalties and better selection of taxpayers for enforcement. The objective is to make routine compliance work more reliably while directing more intensive checks toward cases with a greater risk of unpaid tax.

Customs checks leave gaps around investment concessions

Sri Lanka Customs has introduced digital tools and reduced aggregate physical inspections to around 38%. A system that physically examines fewer consignments needs reliable information to decide which shipments merit closer attention and effective checks after goods have been released.

The IMF finds that the framework for audits after clearance remains incomplete and that customs data lack sufficient detail. An audit after clearance checks declarations and business records once goods have passed through the border, allowing officials to examine transactions beyond the initial inspection.

Control over Special Economic Zones and enterprises overseen by the Board of Investment is another concern. The BOI oversees roughly 200 enterprises inside these zones and 1,500 outside them, with incomplete customs checks across this area.

Duty exemptions allow qualifying businesses to import certain goods without paying the customs charges that would otherwise apply. The risk arises when those goods or materials enter the domestic market outside the conditions attached to the concession.

The diagnostic associates weaknesses in this area with estimated annual revenue forgone of Rs 800 billion to Rs 1 trillion. The estimate concerns revenue lost or forgone around these arrangements; collecting additional money would require officials to identify the transactions involved, apply the relevant rules and pursue liabilities.

Better information exchange between Customs and the BOI, together with stronger audits after clearance, would give officials a clearer view of where imported materials go and whether businesses meet the terms of their exemptions.

Excise faces vacancies and manual controls

The Excise Department has 509 vacancies against an approved workforce of 1,649. That leaves about 31% of authorised posts unfilled, limiting the staff available for an administration that still depends heavily on manual processes.

Resident officer controls remain central to its operations. This approach places officials at regulated premises to supervise activity, making staffing levels especially relevant. Manual records also make it harder to bring information together quickly across locations.

Enforcement of alcohol and tobacco supply chains is complicated by responsibilities spread across agencies. Effective control requires information about production, movement and sales to reach the officials responsible for checking tax obligations.

The security sticker system faces a further operational risk because its vendor contract expires in January 2027. Security stickers provide a visible control on regulated products, so arrangements for continuing the system need to be ready before the contract ends.

January 2027 brings two technology deadlines

The Inland Revenue Department faces its own contract deadline in January 2027, when the vendor agreement for RAMIS expires. The IMF identifies this as a high risk to the continuity of core tax administration.

RAMIS supports revenue administration, making continuity a practical concern for processing tax information and carrying out everyday work. The Excise Department's sticker contract expires in the same month, putting two important operational arrangements on a shared timetable.

The wider digital programme covers RAMIS, ARMS and RASED, alongside data warehouses and business intelligence tools. A data warehouse brings records together so officials can analyse them, while business intelligence tools help turn those records into usable information about compliance and collection.

Sri Lanka's main revenue milestones and approaching deadlines are:

• 2021: Tax revenue stood at 7.3% of GDP.
• 2024: Inland Revenue Department arrears reached about Rs 1.1 trillion, including Rs 947 billion in disputes.
• End of 2025: Tax revenue reached 15.4% of GDP, while department arrears rose to about Rs 2.1 trillion.
• January 2027: The RAMIS vendor contract and the Excise Department's security sticker contract expire.

Five priorities for stronger collection

The IMF's proposed Medium Term Revenue Strategy groups the response into five pillars. Together, they address the technology, working methods, legal rules and staffing needed to turn tax obligations into dependable revenue.

• Digital modernisation: Secure essential systems and build shared data and analytical capacity.
• Integrated compliance and risk management: Use evidence to guide audits, enforcement and the treatment of different taxpayer groups.
• Stronger core enforcement: Follow up missing returns, apply penalties consistently, improve debt collection and strengthen audits after customs clearance.
• Legal and policy alignment: Pursue customs amendments, formal information exchange arrangements and a possible unified tax procedures code.
• Governance and workforce planning: Clarify accountability, plan specialised staffing and improve coordination among revenue and related agencies.

A unified tax procedures code would bring administrative rules into a common framework. The proposal sits alongside more immediate tasks, such as maintaining essential systems and acting on overdue returns and recoverable debts.

The coordination agenda includes the Inland Revenue Department, Customs, Excise, the Financial Intelligence Unit and the BOI. Each holds information relevant to parts of the revenue system, but that information must be shared through clear legal and operational arrangements.

What the reforms would change in practice

The projected gain of 1.9 percentage points of GDP would equal Rs 1.90 for every Rs 100 of economic output. It is a five year simulation of what stronger operations could deliver, rather than an announced collection target already achieved.

Taxpayers would encounter an administration that follows up missing returns more consistently and distinguishes routine cases from those needing closer scrutiny. Businesses using customs concessions would face stronger checks on whether imported inputs reach their authorised destination.

Revenue officials would need clearer priorities, usable records and reliable systems. A debt register organised by recovery prospects would guide collection work; shared customs and BOI information would support checks on exemptions; better excise data would help staff monitor regulated supply chains.

Sri Lanka's recovery has already shown how much tax receipts can change when policy changes. The next stage depends on execution across several institutions: keeping systems running, resolving disputes, collecting viable debts and making compliance checks more dependable.

The January 2027 contract expiries give that work an immediate deadline. The wider reform programme will require sustained implementation and transparent rules for managing and sharing taxpayer information.

Key Points

• Inland Revenue Department arrears reached about Rs 2.1 trillion by the end of 2025, up from Rs 1.1 trillion in 2024.
• About Rs 1.6 trillion, or 76% of the 2025 total, was tied up in appeals or other disputes.
• Tax revenue rose from 7.3% of GDP in 2021 to 15.4% in 2025, but filing and collection weaknesses persist.
• Customs controls around investment concessions, excise staffing and manual processes are major areas of concern.
• The RAMIS vendor agreement and the excise security sticker contract expire in January 2027.
• IMF staff simulations suggest stronger internal revenue operations could yield another 1.9 percentage points of GDP over five years.