Latest official data indicates that Sri Lanka's economy grew by 4.7 percent in the first half of 2026. While many analysts have lauded this as a sign of stable economic recovery, a recent survey reveals that only 25 percent of households in the country earn enough income to cover their living expenses.
A major reason for this situation is Sri Lanka's massive indirect tax policy. As pointed out by Indika Hettiarachchi, an investment, strategy, and policy consulting professional, Sri Lanka's indirect taxes have surpassed all other countries in the region, and are even higher than the average for countries belonging to the Organisation for Economic Co-operation and Development (OECD).
According to data from the first half of 2026, Sri Lanka's consumption taxes account for approximately 12.1 percent of its Gross Domestic Product (GDP). This means that for every 100 rupees in the production of economic goods and services, the government typically collects a 12-rupee tax. This levy is in addition to the direct income taxes paid by individuals and businesses. In regional countries, this figure is 5.6 percent in India, 6.7 percent in Vietnam, 4.7 percent in Bangladesh, 3.2 percent in Malaysia, and 3.1 percent in Singapore. Even in the United Kingdom and Australia, it is 10.5 percent and 7.3 percent respectively, while the average for OECD countries is 10.8 percent.
In the first half of 2026, nominal Gross Domestic Product expanded by 11.2 percent. However, the growth in real economic activity, or 'Gross Value Added' (GVA), remained at a lower figure of 8.6 percent. The gap between these two growth figures was created by an enormous 34.6 percent increase in net consumption taxes (taxes less subsidies). This tax amount, which was 1,567,894 million rupees in the first half of 2025, rose to 2,110,281 million rupees by the first half of 2026.
Due to these contractionary fiscal policies of the government, consumer demand has slowed down and prices have increased. The imposition of consumption taxes, amounting to approximately 12 percent of GDP amidst a slow expansion of GVA, indicates that this is not an 'economic transformation' but a significant 'economic shock'. Data confirms that the gap between GDP growth and GVA growth has sharply widened since 2023.
In the short to medium term, the result of this high indirect tax policy will be an increase in goods prices and a decrease in demand for economic activities. The long-term persistence of such a high indirect tax regime could lead the economy into a state of stagflation and erode export competitiveness. Signs of high inflation, coupled with an expected slowdown in overall GDP growth over the next two years, are already evident in Sri Lanka. However, the most severe impact will be the gradual shrinking of the country's middle class and a further increase in poverty.
Loading comments…