Sri Lanka is preparing to overhaul how it taxes property. Under its IMF programme, the government has pledged to introduce a new property tax by 2027. Yet property taxation already exists, and barely works. It accounts for only 0.1% of GDP, among the lowest in Asia. The problem lies in how properties are valued. Assessments are still done manually, often by local officers using personal judgement, and general revaluations can take decades. Owners benefit from outdated valuations; councils lose revenue. A new report by Verité Research proposes a fix by adopting a Points-Based Valuation (PBV) system. It uses digital mapping and data models to generate consistent, transparent property values at scale, offering a way to rebuild one of the country’s most neglected revenue systems.
The Formula That Sets Every Property Tax Bill
The existing property tax system traces its roots to a 19th-century British model. Known today as the assessment rate system, it’s been in place since municipal councils were first set up in Colombo, Galle, and Kandy during the 1860s. The system hasn’t changed much since.
Even today, the responsibility for the tax lies with local government authorities: municipal, urban, and rural councils. Each council decides how much tax a property owner pays using two inputs: an Annual Value and a Rate Percentage.
The Annual Value is an estimate of how much a property could earn in rent each year. This becomes the base. The local councils then apply a Rate Percentage to that value to calculate the annual tax bill.
But the Rate Percentage isn’t a fixed value. Each council sets its own rate, and it can differ significantly depending on the type of property. Commercial buildings are taxed more heavily than homes. For example, the Dehiwala–Mount Lavinia Municipal Council charges 6% on residential properties and up to 30% on commercial ones.
Because both the Annual Value and the Rate Percentage vary by location and council, tax outcomes can differ even for similar properties. The report gives one example: two houses, each worth Rs20 million. The first in Gampaha has an Annual Value of Rs400,000 with a 7% tax. In Minuwangoda, the Annual Value is Rs140,000 but taxed at 20%. The result? Identical tax bills of Rs28,000.
This kind of variation is by design. Local councils are expected to exercise fiscal authority. But there’s a deeper flaw. There is no formal, standardised method to calculate property values across the country. In most cases, values are set by council officers using their own judgement. There’s no rental database, formal processes, or reference models. As a result, the Annual Value assigned to each property can be arbitrary and outdated.
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How Outdated Valuations Distort Property Taxes
When a new building is constructed, the first valuation is done by local council officers. They visit the site, inspect the property, and assign an Annual Value based on what they believe it could earn in rent each year. These officers are not trained valuers, and their assessments rely heavily on personal judgement. Without a formal valuation model or reliable rental database, the process is inconsistent and often open to undervaluation; or quiet deals between officers and property owners.
Once those initial values are set, councils have little authority to revise them. The job of formally revaluing all properties in a council area falls on the Government Valuation Department. These general revaluations are supposed to happen every five years. In reality, they can take decades. The Valuation Department handles valuation work across the entire public sector, from state land and acquisitions to commercial assessments, and property tax sits low on its list of priorities. Councils depend on the department to update values, but the Valuation Department lacks both staff and funding to do so regularly.
Local councils have little incentive to raise more revenue. Most of their budgets, including staff salaries, are funded by the central government. Collecting more taxes doesn’t increase what they keep for themselves. Raising rates is also politically risky, since property owners rarely see improvements in local services. That mix of dependency and disinterest keeps the system stagnant. Councils under-collect, so they have no reason to invest in better valuation or enforcement. Property owners underpay because undervaluation benefits them. The Government Valuation Department remains underfunded and overworked, as demand for revaluation stays low. Each part of the system reinforces the weakness of the others.
In the end, everyone plays a role, but the system as a whole fails to deliver. Hence, property taxes in Sri Lanka contribute less than 0.1% of GDP, one of the lowest shares in Asia.
A Digital Fix for an Outdated Valuation System
Given these issues, the report argues that reform should focus not on creating a new tax, but on modernising how properties are valued. The proposed solution is Points-Based Valuation (PBV), a digital system that replaces manual inspections. It works through four stages:
1. Mapping and identification:
A digital map of all properties is created using aerial or satellite imagery. Each property is assigned a unique ID and its geographic coordinates recorded.
2. Field data collection:
Enumerators verify and capture external property details (number of floors, roof type, access roads, nearby infrastructure) without entering the building.
3. Model calibration:
Expert valuers review a sample of properties to test and adjust the model. The goal is to ensure that the digital formula matches real market conditions.
4. Mass valuation:
Once calibrated, the model applies these formulas across all properties in the database, producing a comprehensive, updatable register of property values.
For local councils, PBV offers a fairer and more predictable tax base. For property owners, PBV brings transparency, with values derived from measurable data rather than personal judgement. The technology exists, while institutional capacity remains the challenge. Councils face staffing and digital skills gaps. The Government Valuation Department needs clear authority and resources for large scale digital revaluations. The timing is favourable. Under the IMF programme, the government has pledged to introduce a new property tax by 2027. PBV aligns with that pledge, requiring no new laws, only a modernised approach to valuation.