Sri Lanka’s tax system is layered with bureaucracy, involving three separate Government Departments. Each follows its own rules and decision-making process, yet all work towards the common objective of generating state revenue.
Sri Lanka’s tax system is divided among three key agencies. The Sri Lanka Customs, which levies import duties; the Excise Department, responsible for taxing alcohol, tobacco and select goods; and the Inland Revenue Department, which manages corporate and personal income taxes. While their collective goal is to generate Government revenue, these institutions function in isolation, creating inefficiencies, gaps in enforcement, and opportunities for tax evasion.
Boosting State revenue
However, with boosting State revenue as a key priority, the Government has recently implemented various reforms. In fact the National People’s Power (NPP) policy manifesto recognises that weak tax administration, inefficiency, corruption, granting tax benefits to cronies, tax avoidance, and tax evasion have led to a significant decline in Government tax revenue as a percentage of the Gross Domestic Product (GDP). As a result, revenue growth has been largely driven by a significant increase in tax collection.
For years, experts have advocated for Sri Lanka to consolidate these Departments into a single, streamlined tax authority, similar to the United Kingdom’s HM Revenue and Customs (HMRC). They argue that this reform could boost tax revenue collection by at least 65 percent.
According to experts, the current lack of coordination among these Departments creates opportunity for manipulation. Importers understate shipments for Customs, while the corresponding revenue remains unrecorded by Inland Revenue; smugglers evade excise duties altogether and even alcohol distributors who pay excise taxes might underreport profits to dodge corporate taxes.
Combining all tax functions into a single Department would establish one unified set of records and a central source of truth. A digital, centralised system would enable seamless tracking of every transaction, significantly reducing the potential for exploitation. In fact, in its policy brief, the NPP Government has outlined plans to integrate the operations of the Excise Department, Sri Lanka Customs, the Department of Motor Traffic, and the Land Registry Office with the Inland Revenue Department, aiming to improve tax efficiency and ensure greater fairness.
Equitable tax collection system
Perhaps signalling a move in this direction, President Anura Kumara Dissanayake met Excise Department officials on March 11. According to the President’s Media Division, discussions centred on integrating the Excise Department’s operations with the Inland Revenue Department to enhance efficiency and create a more equitable tax collection system.
This could be taken as a signal of a major shift in the country’s approach to taxation and financial governance. The meeting focused on addressing the pressing challenges faced by the Excise Department while also reviewing this year’s pricing structure.
A key aspect of the discussion was the regulation of the liquor and tobacco industries to ensure a sustainable and legally compliant revenue generation model. By implementing better regulatory frameworks, the Government aims to enhance State earnings while also curbing illegal activities within these industries.
Excise Officer Kapila Wijesinghe emphasized the importance of this integration. “Many individuals who pay excise duties often evade other tax obligations. The new system will ensure that the income and profits of taxable individuals are accurately tracked, guaranteeing that the correct amount of tax is collected from them” he said.
According to Deputy Commissioner General Tax Policy, International Affairs and Legal B.K.S. Shantha, he elaborated on the issue, pointing out that a significant number of those who pay excise duty do not fully disclose their income.
“Many businesses that make substantial profits contribute only a minimal amount to the Inland Revenue Department or, in some cases, pay no tax at all. The integrated system will eliminate such discrepancies by providing a more transparent and efficient tax collection mechanism,” he said.
Bringing back the focus to the issues within the Department of Excise, the meeting highlighted the importance of efficiently regulating alcohol and other approved intoxicants as a key driver of economic growth. This includes not only increasing State revenue through proper regulation of the alcohol and tobacco industries but also ensuring the legal generation of revenue, enforcing strict compliance with relevant laws and regulations, and implementing robust awareness programs to combat the illegal production and distribution of alcohol, hazardous drugs, and psychoactive substances. Moreover, the regulation aims to mitigate the health risks associated with unregulated alcohol consumption and enhance public safety.
Discussions also focused on strengthening revenue collection and protection by setting up a more effective decision-making and management framework for both strategic and operational activities.
The need for a comprehensive human resource and technological development plan to improve the efficiency of the Excise Department was also a key point of discussion. This plan would ensure that the department can adapt to evolving challenges and enhance its ability to enforce regulations effectively.
The meeting was attended by key figures, including Secretary to the President Dr. Nandika Sanath Kumanayake, Secretary to the Ministry of Finance Mahinda Siriwardana, Commissioner General of Excise Udaya Kumara Perera, along with a group of senior officials from the Excise Department.
