Sri Lanka Banks Association presses for tax reset

• Stresses a fairer regime would allow banks to direct resources towards lending for critical infrastructure and priority sectors
• Urges accelerated tax deductibility for impairment provisions to encourage restructuring of distressed loans, and targeted credit guarantee schemes to help revive struggling enterprises

Sri Lanka’s banking sector has pressed the government for sweeping reforms to the country’s tax regime, warning that the current system is choking competitiveness, deterring investment, and curbing the financial system’s ability to drive recovery.  

In a comprehensive submission to the Finance Ministry ahead of the 2026 National Budget, the Sri Lanka Banks’ Association (SLBA), representing all licensed commercial banks, called for a fairer tax structure that would align with regional benchmarks. 

At present, domestic banks are taxed at 53 percent and foreign banks at 65 percent, levels the Association described as unsustainable for capital formation and growth. 

“Excessive taxation is a barrier to competitiveness and capital formation. A fairer regime would allow banks to direct resources towards lending for critical infrastructure and priority sectors,” the SLBA said.

The Association also urged accelerated tax deductibility for impairment provisions to encourage restructuring of distressed loans, and targeted credit guarantee schemes to help revive struggling enterprises. These moves, it argued, would stabilise the financial system while enabling fresh lending to support economic activity.

Alongside easing the tax burden on the formal sector, the SLBA stressed the need to widen the tax net. 

Proposals include compulsory VAT registration for SMEs at concessional rates, linking all new bank accounts to Taxpayer Identification Numbers, and incentivising digitised transactions. Such measures, it noted, would formalise more of the economy while generating sustainable revenue flows. 

To stimulate demand, the sector recommended rationalising indirect taxes to improve disposable incomes and investor appetite, and simplifying compliance by treating withholding tax as a final tax, even at higher rates, to improve liquidity and strengthen collections.

Complementary proposals focused on the digital economy, with calls for VAT on global digital services such as Google, Meta and PayPal, tax incentives for fintech startups and local payment gateways, and mandatory electronic payments for suppliers, taxes and utilities. 

The SLBA also proposed a national cloud framework to serve both public and private stakeholders and urged a public–private partnership on cybersecurity to lower compliance costs and safeguard systemic resilience.

On the investment front, banks pressed for expedited restructuring of SriLankan Airlines to improve the sovereign rating, citing it as a major barrier to foreign direct investment. 

Other proposals included one-stop shops for regulatory approvals, reforms to facilitate Port City investments, and tax incentives for corporate bond issuances. The sector also asserted the need to mobilise capital for sustainable growth through tax-free green bonds and public–private partnership bonds aimed at financing infrastructure and long-term development needs.

Underscoring the breadth of its proposals, the SLBA said the financial services industry is prepared to be a partner in reshaping Sri Lanka’s economic future. 

“These proposals are designed to address immediate fiscal challenges while laying the foundation for sustainable growth. We believe this budget can be a turning point for the country, and the banking sector stands committed to play its part,” it noted.