Between 2021 and 2024, Sri Lanka’s government revenue and grants rose from 8.3% to 13.7% of GDP— a 65% increase in just three years. This marks a significant turnaround from the historic low of 2021, when tax cuts substantially reduced the revenue base. The latest data, from the Central Bank of Sri Lanka’s Annual Economic Review 2024, show that government revenues have not only recovered but also exceeded pre-crisis levels.
The sharp rebound was driven by a series of targeted tax reforms. A breakdown of revenue sources reveals that while most major tax categories grew, Value Added Tax (VAT) alone accounted for nearly half the total increase.

The Fall: What Went Wrong in 2020/2021?

In 2021, Sri Lanka’s government revenue fell to a historic low of 8.3% of GDP—the lowest level since 1950. This collapse was triggered by a series of tax cuts introduced in early 2020, delivered without offsetting reforms or a clear fiscal strategy.
Key policy changes in 2020 included raising the personal income tax threshold from LKR 1.2 million to LKR 3 million while reducing tax rates, and cutting corporate income tax rate from 28% to 24%, with additional concessions for sectors like construction and manufacturing. The VAT rate was reduced from 15% to 8%, and the registration threshold was increased from LKR 12 million to LKR 300 million, narrowing the tax base. The mandatory income tax deduction through the PAYE system was abolished and replaced with a voluntary Advance Personal Income Tax (APIT) scheme. Several other taxes, including the Nation Building Tax (NBT), Economic Service Charge (ESC), and Withholding tax (WHT) on domestic interest, were also removed. 
These policy changes had an immediate impact: the tax base contracted significantly. According to a previous analysis by PublicFinance.lk, the number of income taxpayers fell by 82%, and the number of VAT-registered businesses dropped by 72% in 2020 compared to the previous year. Government Revenue and Grants plummeted from 11.9% of GDP in 2019 to 8.3% in 2021, widening the budget deficit and increasing debt levels – which culminated in the worst economic crisis faced by Sri Lanka. 

The Rise: What Drove the Recovery by 2024?

By 2024, Sri Lanka’s Government Revenue and Grants had climbed to 13.7% of GDP—its highest level in 15 years, though still below the pre-1996 benchmark of over 20%. This marks a significant turnaround from the 2021 low of 8.3%. In just three years, revenue rose by 1.6 times as a share of GDP and by 2.8 times in nominal terms (from LKR 1,464 billion to LKR 4,091 billion).
The primary driver of this recovery was VAT, which increased from 1.7% of GDP in 2021 to 2.6% of GDP in 2024. While VAT alone grew by 2.6% percent of GDP, all other taxes combined only increased by 2.7% of GDP. Non-corporate income taxes—mainly consisting of personal income taxes recorded the second-largest increase—rising by 0.7 percentage points of GDP. Other major taxes, such as corporate income tax, tax on interest, and excise duties contributed to modest gains, each under 0.5 percentage points. Notably, taxes on international trade—including import duties, the Port and Airport Levy (PAL), and the Special Commodity Levy (SCL) declined compared to 2021. 
The rise in revenue was driven by targeted tax reforms aimed at restoring fiscal stability. The VAT rate was increased from 8% to 18%, while the registration threshold was lowered from LKR 300 million to LKR 60 million, and a number of exemptions were removed to widen the tax base. Personal income tax was strengthened by reducing the tax-free threshold to LKR 1.2 million, compressing slabs, and raising the top rate to 36%, alongside reintroducing mandatory PAYE. The government also raised excise duties on petroleum, cigarettes, and liquor, further boosting collections. WHT was also reinstated to cover the domestic interest component. 

Sources

Central Bank of Sri Lanka Annual Economic Review 2024 at https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/annual-economic-review/annual-economic-review-2024 [last accessed 5 May 2025].

Central Bank of Sri Lanka Box 10: Major Economic Policy Measures (2020) at https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2020/en/13_Box_10.pdf [last accessed 16 May 2025]

Research By: Sadini Galhena and Anushan Kapilan

Visualisation By: Sadini Galhena and Chamelie Epa