Sri Lanka government rejects claims of new tax burden, explains tax changes

Sri Lanka’s government has not imposed an unnecessary additional tax burden on the public but has made the existing tax system fairer and more efficient, Deputy Minister of Finance and Planning Dr. Anil Jayantha said, rejecting misleading claims circulating on social media.

In a statement issued by the Ministry of Finance, Planning and Economic Development on November 4, 2026, Dr. Anil Jayantha, who also serves as Minister of Labour, explained that the government’s tax reforms were aimed at correcting weaknesses in the existing system rather than arbitrarily increasing taxes.

He said tax revenue was the main source of funding needed to maintain essential government services, including education, healthcare, development and infrastructure.

According to the Deputy Minister, the government has taken steps over the past two years to improve tax collection, strengthen tax administration and encourage taxpayers to meet their obligations.

These measures have expanded the tax base, allowing tax revenue collected in 2025 to exceed expectations.

Responding to claims circulating on social media, Dr. Anil Jayantha provided explanations for eight major tax changes that have attracted public criticism.

6% excise duty increase on alcohol, cigarettes and tobacco

The Deputy Minister said the 6% excise duty increase applied to selected goods in January 2025 was not a new tax but an adjustment under the existing tax indexation mechanism.

Under this system, taxes on selected goods, including alcohol, cigarettes, tobacco and electronic goods, are adjusted by adding four percentage points to the previous year’s average inflation rate.

Based on inflation in 2024, a 6% adjustment was implemented in January 2025.

He pointed out that a 14% tax increase had also been implemented under the same mechanism in 2024, during former President Ranil Wickremesinghe’s administration.

Dr. Anil Jayantha said presenting the 2025 adjustment as a new tax introduced by the current government, without considering this background, was misleading.

He further stated that the government decided not to implement an upward adjustment in 2026, using the flexibility available under the formula, considering the impact of Cyclone Ditwah and the additional economic shock.

Customs duties on electric vehicles

Addressing criticism over increased customs duties on electric vehicles, the Deputy Minister said the changes were part of reforms to the existing tax structure.

He explained that the amendments were intended to improve fairness, correct weaknesses in the tax system and minimise tax revenue losses rather than introduce an additional tax.

50% surcharge on private vehicle imports

Dr. Anil Jayantha also explained the government’s decision to impose a 50% surcharge on customs duties on private vehicle imports.

He said the conflict in the Middle East had increased pressure on Sri Lanka’s foreign exchange market and raised demand for US dollars, creating a need to control import expenditure.

Instead of restricting all imports, the government decided to introduce the 50% surcharge on private vehicle imports as a short-term measure to reduce foreign exchange outflows.

He stressed that the surcharge was not intended to increase government tax revenue but to protect foreign exchange reserves, prevent disruptions to economic activity and avoid shortages of essential goods.

Withholding tax on interest income increased from 5% to 10%

Responding to criticism over the increase in withholding tax on interest income from 5% to 10%, the Deputy Minister said the revised system provided relief to individuals who were not liable to pay income tax.

Under the previous system, a 5% withholding tax was deducted from interest income even when the recipient was not liable to pay tax.

Many people did not take steps to recover these deductions, creating an unfair situation.

He explained that, under the revised system, individuals who are not liable to pay tax can obtain an exemption by submitting the required declaration or affidavit.

For individuals who are liable to pay income tax, the 10% deducted at source can be offset against their final annual tax liability.

Therefore, he said, increasing the withholding tax rate does not automatically increase the amount of tax a person is ultimately required to pay.

Higher income tax on alcohol and tobacco companies

The Deputy Minister also addressed the increase in the income tax rate on profits earned by alcohol and tobacco companies from 40% to 45%.

He said these industries had a comparatively greater capacity to generate profits, making it reasonable for the government to collect more tax revenue from them.

He added that imposing a higher tax rate on industries internationally described as “sin industries” did not amount to placing an unnecessary tax burden on the general public.

Income tax on service exports

Explaining the decision to bring income earned from service exports into the tax system, Dr. Anil Jayantha said previous tax laws and their interpretations had allowed certain service exporters to remain exempt from income tax.

He pointed out that goods exporters and businesses providing services within Sri Lanka were required to pay taxes, while service exporters enjoyed tax concessions.

This had created an imbalance in the tax structure, which the government sought to correct.

However, instead of applying the 30% tax rate proposed by the previous government, the current government introduced a concessionary 15% tax rate for companies earning income from service exports.

For individuals, the maximum income tax rate applicable to service export income was also limited to 15%.

Without this limit, individuals could have faced tax rates of up to 36%, depending on their applicable income tax brackets.

The Deputy Minister said the changes were intended to correct an existing imbalance while providing concessionary tax rates rather than unnecessarily increasing taxes.

VAT on digital services

Addressing claims about the introduction of Value Added Tax (VAT) on digital services, the Deputy Minister said the purpose was not to impose a special tax on digital technology.

Instead, the government aimed to bring businesses providing services through digital platforms into the existing VAT system.

He cited transport and food delivery companies operating through mobile applications as examples.

According to the Deputy Minister, these businesses provide services similar to those offered by traditional service providers who are already required to pay VAT.

He said operating through a digital platform should not, by itself, allow a business to remain outside the tax system.

The amendment was therefore intended to ensure that businesses providing similar services were treated equally for tax purposes.

20.5% VAT on financial services

Dr. Anil Jayantha also clarified reports about the introduction of a 20.5% VAT rate on financial services.

He explained that financial services were previously subject to an 18% VAT charge and a separate 2.5% Social Security Contribution Levy (SSCL).

Although both taxes were calculated on the same basis, businesses were required to maintain separate records and follow different administrative procedures.

To simplify tax calculation and collection, the government arranged to combine the two charges into a single 20.5% rate.

He said the change was intended to reduce administrative complexity rather than create a new tax burden.

Government’s position on tax reforms

Concluding his statement, the Deputy Minister said the impact of a tax change should not be assessed solely by examining whether a particular tax rate had increased.

He stressed the importance of fairness in taxation, sound economic policies, the proper use of public revenue and measures to prevent waste, fraud and corruption.

Dr. Anil Jayantha also said the government’s economic management measures had helped Sri Lanka maintain uninterrupted supplies of essential goods, including fuel, fertiliser and medicines, despite the economic challenges caused by the conflict in the Middle East.

He reiterated that the government remained committed to collecting revenue through a fair and systematic tax structure and ensuring that public funds were used properly, without fraud or corruption, to maintain essential services and support development activities.