Sri Lanka's government has proposed increasing the personal income tax-free threshold from LKR 150,000 to LKR 200,000 per month ahead of the upcoming national budget. While the move may appear to offer welcome relief to salaried workers still recovering from the country's devastating economic crisis, it raises serious and timely questions about the direction of Sri Lanka's tax policy. Is this the right move at the right time — or does it risk undermining the fragile fiscal recovery the country has worked so hard to achieve?
Understanding the Proposed Change
The proposal to raise the personal income tax-free threshold is not occurring in a vacuum. It follows a series of significant tax reforms that Sri Lanka has undertaken as part of its IMF-backed economic recovery program. The tax-free threshold was already adjusted in recent years, and another substantial increase so soon after the last revision naturally invites scrutiny. Under the new proposal, individuals earning up to LKR 200,000 per month would pay no personal income tax — a move that would effectively remove a larger portion of the workforce from the tax net entirely.
On the surface, this seems like a compassionate policy response. Sri Lankan households have endured soaring inflation, currency depreciation, and sharp increases in the cost of living. Reducing the tax burden on middle-income earners could free up disposable income and stimulate domestic consumption. However, the broader economic picture demands a more careful and nuanced evaluation.
The Fiscal Risk of Shrinking the Tax Base
One of Sri Lanka's most critical structural weaknesses — identified repeatedly by economists and institutions like the IMF — is its historically low tax-to-GDP ratio. For years, Sri Lanka collected far less in revenue than comparable economies, leaving the government chronically underfunded and dangerously reliant on borrowing. The economic crisis of 2022 was, in large part, a consequence of this fiscal imbalance.
Raising the tax-free threshold reduces the number of individuals who contribute to income tax revenue. If a significant portion of the workforce falls below the new threshold, the government collects less — at precisely the moment when stable and growing revenue is essential to debt servicing, public services, and rebuilding economic credibility with international creditors. The Advocata Institute, a leading Sri Lankan policy think tank, has raised concerns that such a move could compromise the revenue targets Sri Lanka has committed to under its IMF program, potentially jeopardizing future disbursements and investor confidence.
Who Actually Benefits?
It is also worth asking who stands to benefit most from this threshold increase. Tax-free threshold adjustments disproportionately benefit those in formal employment — salaried workers in the private and public sectors who are already part of the documented economy. The vast majority of Sri Lanka's lower-income population, including informal workers, daily wage earners, and self-employed individuals, may see little direct benefit from this change, as they often fall outside the formal income tax system altogether.
This raises an important equity question. If the government's goal is to provide relief to struggling households, are there more targeted and effective mechanisms — such as direct transfers, subsidies, or cost-of-living adjustments — that could achieve this without eroding the tax base? Policymakers must weigh the political appeal of a tax threshold increase against the practical reality of who it truly helps and at what cost to the broader public.
The Case for a Measured Approach
None of this is to say that adjusting the income tax threshold is inherently wrong. Thresholds should be periodically reviewed and updated to reflect inflation and changes in the cost of living — that is sound fiscal housekeeping. The concern, rather, is about the timing, the magnitude, and the frequency of these changes. Making another substantial upward revision so shortly after a previous adjustment sends a mixed signal about Sri Lanka's commitment to building a sustainable, broad-based revenue system.
A more measured approach might involve indexing the threshold to inflation on a predictable schedule, rather than making ad hoc increases that respond to political cycles. This would provide taxpayers with certainty while protecting revenue streams. Simultaneously, the government could invest in expanding the tax net to include more informal sector participants and high-income individuals who currently evade or avoid taxation — a far more effective long-term strategy for fiscal health.
Conclusion: Revenue Integrity Must Come First
Sri Lanka stands at a critical juncture in its economic recovery. The decisions made in the next budget will signal to the world — and to its own citizens — whether the country is serious about building a resilient and equitable fiscal foundation. Raising the income tax-free threshold may win short-term political goodwill, but it must not come at the expense of the revenue integrity that Sri Lanka's long-term stability depends upon. Thoughtful, evidence-based tax policy — not populist adjustments — is what the moment demands.