• Exemptions, allowances, and reliefs aimed at social and economic objectives
• Custom import duties and VAT account for the largest tax expenditures

Sri Lanka has foregone Rs. 965.6 billion in taxes in the last 21-month period due to exemptions, allowances and tax rate reliefs provided to achieve government social and economic objectives, the Finance Ministry said.

The Tax Expenditure Statement (TES) showed that Sri Lanka has foregone Rs. 965.6 billion in tax revenue in the 21 months between March 2023 and December 2024.

The report which is released as per the direction of the International Monetary Fund (IMF), estimates the revenue forgone from tax expenditures which establishes transparent reporting and offers a platform to understand the impact of government policies on society including individuals, households and businesses.

The highest taxes foregone in the form of custom import duties, where Rs. 375.1 billion were foregone in 2024, and custom import duties exemptions granted for Board of Investment (BOI) undertakings stood at Rs. 92.7 billion.

Next, the highest taxes were forgone in the form of value added tax (VAT), where Rs. 333.1 billion was foregone in 2024, whereas VAT foregone for BOI companies amounted to Rs. 32.5 billion.

VAT expenditures are higher for the non-BOI sector compared to the BOI sector. Out of the BOI companies, the manufacturing sector and services and utility sector have mostly benefited from VAT incentives.

Banks and the financial sector are not considered due to their liability for VAT on financial services.

The Corporate income tax (CIT) foregone for the 2023/24 financial year ended in March 2024 stood at Rs. 243.2 billion.

However, the Finance Ministry said that with the recent tax policy reforms including the removal of a vast majority of VAT exemptions from 1 January 2024, the tax expenditure estimated for the year 2023/24 and onwards is expected to be significantly lowered.