Tax collections rose to the equivalent of 15.4% of GDP in 2025, the highest level since 1997 and up from 12.3% a year earlier, the Ministry of Finance said in its 2025 annual report. The biggest gains came from VAT, up 33%, income tax, up 11%, and excise on imported vehicles, up 706%.
The government collected Rs5.05 trillion in tax in 2025, 36% more than the year before. Value Added Tax, or VAT, accounted for 35% of the Rs5.05 trillion, the single largest source.
trillion, the single largest source. The report shows VAT collections rose 33% from 2024 to Rs1.75 trillion. The number of registered VAT payers in 2025 was 33,187, compared with 21,227 from the previous year. By the end of February 2026, the number of VAT payers had risen again, to 34,769. The IMF reported just 8,152 in 2020, less than a quarter of where it stands today.
Income tax came second, accounting for 22% of the total, and rose 11% to Rs1.14 trillion. The Finance Ministry attributes the rise to higher wages and “the upward revision of corporate income tax rates on selected industries.” The government raised the tax on profits at liquor, tobacco, and gambling companies from 40% to 45%.
“The Biggest Gains Came From VAT, Up 33%, Income Tax, Up 11%, And Excise On Imported Vehicles, Up 706%.”
The government also introduced a new 15% tax on money earned from selling services abroad, targeting the growing number of locals working online for foreign clients, and doubled the withholding tax on savings interest to 10% from 5%. Withholding tax is money the bank deducts from a saver’s interest and sends straight to the government. It counts towards the income tax they owe for the year, so they are not taxed twice, and they can claim it back if they end up paying too much.
The number of people and firms registered to pay income tax rose 19% to about 1.3 million. Excise duty came third, a charge on goods such as cars, alcohol, and fuel, and made up 21% of revenue. The report says this “growth was largely driven by higher collections from motor vehicles, petroleum products, and liquor,” with vehicles being the largest contributor.
The government had banned car imports in 2020 to save scarce foreign currency, as the economy slid towards a crisis that by 2022 had sent the rupee crashing from about 200 to 360 against the US dollar.
When it lifted the ban on February 1, 2025, buyers rushed back to the market, and the excise duty on imported vehicles rose to Rs471.8 billion from just Rs58.6 billion the year before, roughly eight times as much.
Liquor contributed Rs231.5 billion in 2025, up 8.5% from 2024, as the government increased excise rates by 5.9% in line with inflation.
Fuel contributed Rs240.6 billion in 2025, 20.2% more than in 2024, attributed to higher import volumes, according to the Ministry.
“The Larger And More Lasting The Surplus, The Faster Sri Lanka Can Pay Down Its Debt.”
Cigarettes went the other way, the only major excise category to fall. Excise collected on tobacco dropped 13.2% in 2025 to Rs102.7 billion, from Rs118.3 billion the year before. So far, 2026 is following the same trajectory. In the first four months of 2026, the government collected Rs1,776.9 billion in tax, the report says. That is 31.7% more than it collected in the first four months of 2025.
Holding on to the rise is the hard part. Tax is the government’s biggest source of income, and solid tax revenue is the main reason the budget can run a primary surplus, the point at which the state earns more than it spends on running the country, before counting the interest it owes on its debt. The larger and more lasting the surplus, the faster Sri Lanka can pay down its debt.
The report stresses that the country needs “sustained primary surpluses over the medium term” to do that, not a single strong year, and flags global trade tensions as a risk to that path.