The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) has submitted its comprehensive proposals for the National Budget 2027 to Secretary to the Ministry of Finance Dr. Harshana Suriyapperuma, calling for a shift towards compliance-led revenue growth, digital transformation, taxpayer fairness and a more competitive business environment.
The 16-page proposals were submitted on September 7 by CA Sri Lanka President Tishan Subasinghe, accompanied by Members of the Council, Alternate Chairman of the Faculty of Taxation Prasad Dasanayaka and Chief Executive Officer Lakmali Priyangika.
Developed through consultations with members and deliberations at the Institute’s 5th Annual Economic and Tax Symposium, the proposals present a roadmap for strengthening Sri Lanka’s fiscal position through improved tax compliance, digitalisation, formalisation and greater taxpayer confidence, while supporting investment and sustainable economic growth.
Shifting the fiscal approach
Presenting the proposals, Subasinghe said Sri Lanka’s next phase of fiscal reform should move beyond repeated increases in statutory tax rates.
“Sri Lanka has made commendable progress in restoring macroeconomic stability and rebuilding fiscal credibility, but we cannot sustain this momentum through excessive reliance on tax rate hikes alone,” he said.
“Our focus must now shift towards better capturing the economic activity already taking place across the country and bringing more of it into the formal tax system. We need to broaden and strengthen the tax base through improved compliance, better use of information and more predictable tax administration. The Institute believes that by prioritising digitalisation, formalisation and taxpayer confidence, we can mobilise revenue fairly and efficiently while fostering an environment conducive to investment and sustainable growth,” Subasinghe added.
The proposals are built around three key objectives: mobilising additional revenue without excessive reliance on higher statutory tax rates, modernising tax administration and improving voluntary compliance, and strengthening the investment, business and institutional environment required for sustainable growth.
Building a more balanced revenue structure
CA Sri Lanka has highlighted the vulnerability of Sri Lanka’s existing revenue structure, which remains heavily reliant on indirect taxation. In 2025, indirect taxes accounted for approximately 11.9 percent of GDP, compared with 3.5 percent from income taxes.
The Institute said this imbalance can place a disproportionate burden on consumers and contribute to informal economic activity. It therefore proposes a hierarchy for revenue mobilisation, with statutory tax rate increases considered only after other avenues have been exhausted.
The proposed approach prioritises improving compliance with existing taxes, identifying currently untaxed economic activity, reducing revenue leakages, broadening the tax base through digitalisation and better information, and reviewing and rationalising tax exemptions before considering broad statutory rate increases.
According to CA Sri Lanka, this approach could strengthen revenue mobilisation while reducing unnecessary pressure on compliant taxpayers and businesses.
Connecting taxpayer registration with economic activity
The proposals note that Sri Lanka’s registered taxpayer population increased from 1,239,541 in 2024 to 1,470,011 in 2025, representing an increase of approximately 18.6 percent. However, the Institute points out that registration alone does not guarantee effective compliance or revenue mobilisation.
“The next phase should focus on connecting taxpayer registration with economic activity, ownership, financial transactions and cross-agency information,” the proposals state.
CA Sri Lanka has therefore recommended developing an integrated data ecosystem through the National Taxpayer Information Network (NTIN) and Universal Business Identification Number (UBIN). This would connect information from Customs, VAT transactions, corporate ownership, financial accounts, property records and other relevant datasets.
The Institute proposes that UBIN, NTIN and electronic invoicing be developed as part of the wider World Bank-supported digital transformation agenda, with the eventual objective of creating a single digital economic identity capable of supporting both revenue administration and the delivery of government services.
Using data and AI to strengthen compliance
CA Sri Lanka has called for Sri Lanka to progressively move from volume-based enforcement towards a formal Compliance Risk Management framework, under which taxpayers would be classified according to low, medium and high risk.
As part of this transition, the Institute proposes an AI-assisted Tax Compliance Risk Engine to identify potentially high-risk cases involving shell companies, unexplained wealth, circular transactions and VAT fraud.
The proposed system would serve as a risk identification and case-selection tool rather than determine tax liability. This would allow technology to support professional assessment and due process without replacing them.
The Institute has also recommended strengthening the existing High-Wealth Individual (HWI) Compliance Programme through a formal wealth-to-income risk model.
To address gaps between reported income and actual economic capacity, CA Sri Lanka proposes enhanced monitoring of financial assets, cryptocurrencies and insurance investments through annual information returns.
It has also proposed a VAT Intelligence Programme, initially as a pilot, using indicators such as electricity consumption, bank deposits and point-of-sale data to identify potential compliance risks in high-risk and cash-intensive sectors, including gold and auto-parts businesses.
Modernising VAT and Customs administration
The Institute recommends a phased introduction of mandatory electronic invoicing, beginning with large VAT taxpayers and high-risk sectors before being expanded across the wider business community.
It also proposes automated Customs-Import Data Reconciliation, comparing Customs values and landed costs with inventory, sales, VAT and income tax returns. The system would help identify potential revenue leakages, particularly in import-dependent sectors.
CA Sri Lanka has also called for action to address unregulated economic activity in specific sectors. In broadcasting, the Institute recommends measures to address an estimated 300,000 illegal Direct-to-Home (DTH) connections, which it estimates generate approximately Rs. 3.6 billion in unregulated revenue, with potential tax recovery of around Rs. 1.5 billion.
Tax relief while protecting revenue
CA Sri Lanka has proposed increasing the Advance Personal Income Tax (APIT) threshold to Rs. 200,000 per month to provide relief to middle-income earners.
The Institute estimates that the proposal would result in an approximate revenue contraction of Rs. 26.01 billion against the 2026 baseline and Rs. 79.08 billion compared with actual revenue in 2025.
While acknowledging the fiscal impact, CA Sri Lanka said the measure could support economic activity and increase disposable income amid continuing inflationary pressures. It therefore recommends considering the fiscal cost alongside the potential economic benefits associated with higher consumption and greater formal economic activity.
Proportionate tax framework for SMEs
To encourage formalisation and sustainable business growth, CA Sri Lanka has proposed a tiered corporate income tax structure based on annual turnover.
Under the proposed framework, micro enterprises would have annual turnover of up to Rs. 20 million, small enterprises up to Rs. 350 million, medium enterprises up to Rs. 1 billion and large enterprises above Rs. 1 billion.
The framework would also apply a proportionality principle to tax compliance, recognising that smaller businesses should not face the same administrative burden as larger corporations.
The Institute proposes that micro businesses be permitted to maintain simplified records, while small and medium-sized businesses could progressively adopt standardised digital templates. The objective is to encourage businesses to formalise and grow without imposing compliance requirements that could inadvertently push smaller enterprises into informality.
CA Sri Lanka has also recommended that the Central Bank encourage financial institutions, where appropriate, to rely on audited financial statements and tax returns when assessing credit applications. This could reduce the additional costs SMEs incur to meet lending requirements.
The Institute has further called for the urgent acceleration of Development Banks’ concessionary lending facilities for SMEs, with access linked to the submission of audited accounts. According to the proposals, this could provide support to businesses facing cash-flow constraints while encouraging stronger financial reporting practices.
Capital gains and tourism taxation
The proposals also call for stronger and more transparent capital gains assessments. CA Sri Lanka recommends a framework under which valuations prepared by accredited independent professionals would be formally considered by the Inland Revenue Department.
For the tourism sector, the Institute has proposed a dedicated Digital Tourism Booking Framework to address potential tax-base erosion associated with non-resident digital platforms facilitating accommodation bookings in Sri Lanka.
The framework would seek to capture offshore deductions and related economic value, including booking commissions, franchise royalties and global marketing fees paid to non-resident platforms, ensuring that the domestic tax base reflects economic activity generated within Sri Lanka.
Strengthening taxpayer rights and predictability
CA Sri Lanka has also proposed introducing a statutory Right to Self-Correction, allowing taxpayers to correct genuine errors while distinguishing taxpayer-initiated corrections from pre-assessment correction opportunities.
The Institute recommends establishing an Independent Taxpayer Ombudsman to address complaints relating to administrative treatment, unreasonable delays, communication failures and systemic service issues.
It has also called for a Tax Administration Service Charter setting clear standards for fairness, timeliness, communication and advance notice of compliance requirements. This would help reduce situations in which taxpayers face retrospective compliance difficulties following sudden changes in requirements, such as amendments to VAT invoice procedures.
The proposals further recommend amending legislation to allow the Commissioner-General of Inland Revenue to waive or reduce disproportionate interest on just and equitable grounds where appropriate.
Another proposed holdover provision would suspend tax collection during the appeal process in qualifying cases. According to CA Sri Lanka, this could reduce undue financial pressure on taxpayers and the risk of coercive settlements while legitimate disputes are being determined.
Modernising the Inland Revenue Department
CA Sri Lanka said reform of the Inland Revenue Department (IRD) should extend beyond filling existing vacancies.
While calling for the urgent filling of 223 senior-level vacancies, the Institute has also recommended lateral recruitment for specialised technical positions, including data scientists and other digital and analytical professionals.
Continuous professional development should also form part of the transformation, including training partnerships with professional bodies such as CA Sri Lanka in specialised fields including international taxation and transfer pricing.
The proposals further recommend establishing a permanent Tax Policy and Revenue Analytics Unit within the Ministry of Finance to conduct tax-gap analysis, tax expenditure evaluations and revenue forecasting.
To strengthen transparency and accountability, CA Sri Lanka has proposed publishing information on tax expenditure, tax arrears and key compliance indicators.
International taxation and emerging revenue areas
The Institute has recommended a formal assessment of Sri Lanka’s exposure to the OECD’s 15 percent global minimum effective tax rate under Pillar Two, alongside consideration of a Qualified Domestic Minimum Top-up Tax (QDMTT) to protect the domestic tax base.
CA Sri Lanka has also proposed restoring the real tax share on cigarettes towards the World Health Organization’s benchmark of 75 percent, with estimated annual revenue recovery of Rs. 17.3 billion, subject to Treasury validation.
However, the Institute stressed the importance of evidence-based policymaking. Estimates relating to cigarette excise reforms should be assessed against potential illicit-market effects, while potential QDMTT revenue cannot be responsibly estimated without multinational enterprise-level GloBE income data.
Similarly, revenue estimates linked to NTIN, HWI compliance and Customs reconciliation should be supported by formal tax-gap studies.
A reform agenda based on evidence and trust
CA Sri Lanka has called for all major tax and revenue proposals to undergo a formal Revenue Impact Assessment before being considered for inclusion in the National Budget.
The Institute has urged the Government to prioritise integrated tax data, HWI compliance, Customs-IRD reconciliation and Pillar Two implementation, while progressively developing the digital and institutional infrastructure required for modern revenue administration.
“Fiscal consolidation cannot be sustained through repeated increases in statutory tax rates alone,” Subasinghe emphasised. “Our proposals offer a balanced approach that strengthens compliance, leverages digitalisation, protects taxpayer rights and creates a more predictable and fair tax environment that can support sustainable economic growth and improved public confidence.”
“As the national body of accountants, we stand ready to work with the Government in implementing these reforms and contributing to Sri Lanka’s journey from resilience to revival,” Subasinghe added.
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