Industry Minister and Deputy Minister for Finance and Planning Anil Jayantha Fernando has said that the government plans to reduce various taxes through the 2027 budget.
He mentioned this while commenting on the budget for 2027. In particular, the Minister said that the value added tax (VAT) and the taxes paid while working will be reduced in a phased manner. He also said that the ideas for this will be presented in the budget.
In Sri Lanka, which has faced economic crisis in the past few years, increasing tax revenue has been a key move by the government. The need to rebuild government revenue after the economic crisis led to many changes in the tax structure.
In this background, an announcement regarding reduction of taxes has been released. How much the tax cut will be, which income groups or which goods and services it will apply to will be clear from the ideas presented in the budget.
According to the minister, with the cooperation of the International Monetary Fund, the country’s economy has now been stabilized and financial discipline has been preserved. He also mentioned that the program recommendations of the International Monetary Fund have been largely implemented.
Expect changes in VAT and Income Tax
The Minister’s announcement that proposals to reduce VAT and income-related taxes in a phased manner in the 2027 budget has caught the attention of the public and the industry.
Since VAT is a tax directly related to the price of goods and services, a change in it may also affect the day-to-day expenditure of the public. A reduction in the tax rate may be expected to have a corresponding impact on the prices of certain goods and services. At the same time, it will also be important to ensure that the full benefit of the tax cut reaches consumers.
On the other hand, changes in the tax paid by labor income earners may impact the monthly income of middle and high income earners.
Changes have already been made to Sri Lanka’s personal income tax structure. Among the changes implemented from 2025, the tax-free income limit has been increased and some tax brackets have also been changed. The documents of the International Monetary Fund have also recorded these changes.
However, tax cuts can also affect government revenue. So the important questions are how to reduce taxes and how to manage government expenditure and how to generate alternative income.
The International Monetary Fund has also consistently pointed to the need to further expand Sri Lanka’s tax system and improve tax compliance. It also asserted that by broadening the tax base, over-dependence on certain taxes can be reduced.
As a result, the 2027 budget is likely to not only announce tax cuts, but also replace them with measures to protect government revenue.
Action without jeopardizing economic stability
The minister said that in the last two years, the government has not taken any decisions that could affect the economy in order to gain political popularity. He also mentioned that he is advancing the state administration while protecting the economic stability.
This concept is important. On the one hand, the government wants to reduce the tax burden on the public while recovering from the economic crisis. On the other hand, fiscal discipline also needs to be maintained so that government revenue does not decrease and fiscal deficit increases again.
The same balance is important in the current program of the International Monetary Fund. Sri Lanka has committed to the target of bringing the primary budget surplus back to 2.3 percent by 2027, the IMF said. At the same time, it has also said that improving tax collection and broadening the tax base is necessary.
Thus it is important whether the tax reduction announcement will be a complete reduction in the tax burden or a phased change in only certain taxes.
According to the IMF, government revenues have increased significantly in the past. The IMF noted that higher revenue from import taxes and duties related to vehicle imports, in particular, helped improve the government’s fiscal position. But it also emphasized creating a broad tax base rather than over-relying on a few tax sources.
Based on this, the tax cuts in the 2027 budget could represent the next phase of the economic recovery. But how the reduction is implemented will determine its true impact.
A reduction in tax burden for the public may provide some relief in managing household expenses. A reduction in tax burden on industrial companies can create a favorable environment for investment and expansion activities.
At the same time, the government has to continue to provide necessary funds to sectors such as public services, social welfare programs, health, education and infrastructure without losing revenue.
Hence, the tax reduction ideas proposed in Budget 2027 will be important for the public and the business sector. The key issue to be addressed in the next phase will be how the government creates a new tax structure to reduce taxes and preserve economic stability.
The full details of which taxes will be cut by how much will be revealed only after the budget is tabled in Parliament. Until then, the minister’s announcement is seen as a major sign of the government’s intention to gradually reduce the tax burden.