Sri Lanka has approved changes to its personal income tax (PIT) system. These changes, which take effect in April 2025, adjust income thresholds and tax brackets to account for inflation. The amendments will lower tax burdens for most individuals while reducing government revenue, noted an IMF staff report on the successful conclusion of the third review under the Extended Fund Facility in March 2025. After the review, Sri Lanka received $334 million, bringing the total disbursements under the $3 billion programme to a little over $1 billion.
The previous government introduced the existing PIT structure in January 2023. It raised tax rates, reduced the tax-free threshold, and implemented mandatory withholding tax to increase government revenue. As a result, PIT revenue rose by 0.5% of GDP in 2023 compared to the previous year. However, cumulative inflation of over 40% since the reform caused more taxpayers to move into higher tax brackets, increasing their tax liabilities even when their real incomes remained unchanged.
To address this, the incumbent government has revised the PIT structure. The tax-free income threshold will rise from Rs1.2 million to Rs1.8 million annually. The income band subject to the 6% tax rate will expand from Rs500,000 to Rs1 million, and the 12% tax rate will be removed. The highest marginal tax rate of 36% will now apply to incomes above Rs4.3 million instead of Rs3.7 million.
The amendments will reduce tax liabilities across various income levels. The largest percentage decrease in tax payments will be for individuals earning between Rs1.2 million and Rs1.8 million annually. At the same time, those earning between Rs1.8 million and Rs4 million per year will see their tax burden reduced by at least 40%. The government intends the changes to ease the financial burden on lower-income earners and skilled professionals, particularly those at risk of migrating in search of better economic opportunities.
The estimated revenue loss from these adjustments is 0.2% of GDP annually. Since the new structure takes effect in April 2025, the revenue impact for that year will be limited to three-quarters of the full-year estimate. While the amendments reduce the overall redistributive effect of the tax system, the structure remains progressive, with only the highest earners subject to PIT. Under the revised system, the IMF says approximately 17% of individuals will continue to be liable for income tax, keeping Sri Lanka’s PIT framework aligned with those of other countries in the region.
The IMF Upbeat, Concerns Remain
The IMF struck an upbeat tone after the third review. It said the reforms in Sri Lanka have contributed to an economic recovery, with inflation remaining low, revenue collection improving, and foreign reserves accumulating. Economic growth has averaged 4.3% since the third quarter of 2023, and by the end of 2024, the IMF projects real GDP to have recovered 40% of the losses incurred between 2018 and 2023. It expects the recovery to continue in 2025, though vulnerabilities remain. The reform momentum is critical to ensuring macroeconomic stability, debt sustainability, and long-term growth.
According to the IMF, Sri Lanka’s programme performance has remained strong, with all quantitative targets met except for the indicative target on social spending. Sri Lanka has achieved most of the structural benchmarks due by January 2025, but there have been some delays. Continued revenue mobilization will be necessary to restore fiscal sustainability and maintain essential government services. Strengthening tax compliance and avoiding exemptions will be key to supporting economic reforms. IMF says the government must meet social spending targets to mitigate economic hardship and ensure support reaches the most vulnerable, with a focus on well-targeted assistance within the available fiscal space.
The IMF notes progress in restoring debt sustainability, with the successful completion of the bond exchange marking a significant milestone. The timely finalization of bilateral agreements with official creditors and remaining stakeholders remains a priority. At the same time, monetary policy must focus on maintaining price stability, upholding central bank independence, and avoiding monetary financing. Exchange rate flexibility and a gradual rollback of the balance of payments measures are critical for rebuilding external buffers and supporting economic adjustment.
Addressing structural challenges will be necessary to sustain long-term economic growth. The IMF highlights the importance of resolving non-performing loans, improving oversight of state-owned banks, and strengthening insolvency frameworks as priorities for reviving credit growth. Governance reforms and broader structural adjustments will ensure Sri Lanka’s long-term economic stability.