Revenue surge or burden shift in Sri Lanka’s Budget 2026
Sri Lanka is preparing to unveil its 2026 Budget under the theme of “achieving a Productive Economy and fostering the engagement of everyone in economic development.”
Yet behind this aspirational message lies the reality of a tight fiscal programme, rising debt obligations, and the demands of the IMF programme, all of which point to higher taxes and the possible introduction of new levies, and a reformed capital gains tax regime.
The Appropriation Bill, approved by the Cabinet in advance this week will be gazetted shortly in September 20, with second reading and Budget Speech following early in November.
Treasury Secretary Dr. Harshana Suriyapperuma has instructed ministries and provincial councils to bring forward their estimates within a stringently contained fiscal framework, prioritising settling arrears, restarting suspended infrastructure development projects, improving public transport, and furthering digitalisation.
While these priorities suggest a development agenda, they also require an accelerating surge in government income, and that can only be brought about through more tax reform.
IMF reviews of Sri Lanka’s fiscal framework have repeatedly stressed the need to broaden the tax base, remove exemptions, and shift the system toward direct taxation.
In this context, several new measures are being prepared for 2026. Chief among them is the introduction of reformed capital gains tax regime, designed to capture contributions from high net-worth individuals and help rebalance a tax structure long skewed toward indirect levies. Proposals to tax imputed rental income on owner-occupied and vacant properties are also expected to resurface, while exemptions for some export-oriented service industries may be curtailed.
At the same time, the government is moving to expand VAT coverage, particularly on digital services provided by non-resident firms, a measure already announced for April 2026.
Sectors such as liquor, tobacco, and gaming may also face higher corporate tax rates in line with IMF guidance to increase progressive taxation.
To meet fiscal targets under the IMF programme, Sri Lanka must lift its tax to GDP ratio to 14-15 per cent by 2025-2026.
This implies a revenue requirement of between Rs. 5,500 and Rs. 6,000 billion in 2026, with total receipts, including non-tax income, projected at around Rs. 6,500 billion.
The expenditure ceiling for next year is set at Rs 4,385.4 billion, according to the Treasury provisional data and mathematical models. .
Despite the policy emphasis on improving the balance between direct and indirect taxes, the latter will still account for the lion’s share of state income.
The 2026 Budget may narrow this gap slightly through wealth and property taxes, but the system will remain dominated by indirect levies that disproportionately burden ordinary households.
The risks of taking this path are clear. Expanding indirect taxes can fuel consumer prices and stir inflationary pressures, and politically sensitive measures like a wealth tax will test the government’s ability to make it stick as well as blunt the opposition from vested groups.
Budget 2026, therefore, is shaping up to be more than a spending budget. It will be an important litmus test of Sri Lanka’s capacity to overhaul its tax structure, harmonise equity with fiscal necessity, and give the revenue base it needs to stabilise the economy.
If it succeeds, it can begin to shift the burden onto those who are best able to bear it. But if it fails, the country may be embarking on another cycle of revenue deficiencies, borrowing, and austerity.
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