IRD revenue soars 42% on back of sweeping VAT reforms

However, internal cracks emerge

• Backbone of IRD’s performance was an unprecedented 88.59% explosion in VAT collections, which climbed to Rs.1,309.68bn, from Rs.694.46bn in 2023
• IRD’s collections accounted for a crucial 70.73% of government’s total tax revenue
• However, IRD is grappling with a severe staffing shortage, with a 21% vacancy rate in core Inland Revenue Service and retirement of several top officials in 2024

By Nishel Fernando
Sri Lanka’s Inland Revenue Department (IRD) hauled in a staggering Rs.2,620.07 billion in 2024, a 42.22 percent surge from the previous year, according to its recently released annual performance report. 
The notable revenue jump, a cornerstone of the government’s International Monetary Fund-backed fiscal consolidation efforts, was overwhelmingly driven by aggressive Value Added Tax (VAT) reforms and a dragnet that pulled hundreds of thousands of new taxpayers into the system.
While the headline numbers point to a successful year in bolstering the state coffers, the report also reveals significant internal challenges, including a looming staffing crisis and a heavy and growing reliance on indirect taxation that raises questions about the long-term sustainability of the current strategy.
The backbone of the IRD’s performance was an unprecedented 88.59 percent explosion in VAT collections, which climbed to Rs.1,309.68 billion, from Rs.694.46 billion in 2023. This was the direct result of the government policy that increased the standard VAT rate from 15 percent to 18 percent and significantly lowered the registration threshold to Rs.60 million per annum, pulling many smaller businesses into the tax net.
This surge meant the IRD’s collections accounted for a crucial 70.73 percent of the government’s total tax revenue for the year.
The department’s push to widen the tax base saw dramatic results. The number of individuals registered for income tax ballooned from 539,862 at end-2023 to 976,498 a year later.
Amidst this expansion, the IRD reported peak operational efficiency. The cost to collect Rs.100 in tax was just 31 cents and its productivity ratio hit 322.58, meaning it generated nearly Rs.323 million in revenue for every Rs.1 million it spent.
However, beneath the surface of record revenues, the annual report lays bare significant operational strains. The department is grappling with a severe staffing shortage, with a 21 percent vacancy rate in the core Inland Revenue Service and the retirement of several top officials in 2024, including five deputy commissioner generals. The report notes this has resulted in a “critical loss of institutional knowledge and leadership”.
Furthermore, the revenue success has skewed the nation’s tax structure further towards indirect taxes. The IRD’s direct-to-indirect tax ratio now stands at 40:60, a reversal from the previous year’s 50:50 balance. This runs counter to the stated future goal of achieving a 60:40 ratio, favouring direct taxes.