Sri Lanka VAT Base Expands 56% in 2025, but Revenue Driver Remains Import-Heavy 📈

• Overall Figures: Net VAT revenue reached a record Rs. 1,746.9 Bn (+33.4% YoY) in 2025, becoming the single largest source of government revenue at 5.3% of GDP. Total VAT-registered entities rose 56.3% YoY to 33,187 (and reached 34,769 by Feb 2026), driven by the lowered registration threshold of Rs. 60 Mn per annum. • Yield Divergence: Average net VAT revenue per registered entity dropped from ~Rs. 61.7 Mn in 2024 to ~Rs. 52.6 Mn in 2025, showing that smaller newly added taxpayers contribute lower individual tax yields. • Sector Breakdown: • Imports: Main driver of growth, surging 49.2% YoY to Rs. 891.4 Bn (51.03% of total net VAT), largely boosted by the resumption of vehicle imports. • Financial Services: Standout performer, jumping 64.7% YoY to Rs. 198.2 Bn. • Manufacturing: Share of total VAT fell to 16.03% (from 18.24% in 2024). • Non-Manufacturing: Share dropped to 32.95% (from 36.14% in 2024). • Tax Mix & Compliance Gaps: Direct-to-indirect tax ratio further weakened from 40:60 in 2024 to 36:64 at the IRD level. Large Taxpayers achieved 92% return filing compliance within a month of due date, but non-LTO (SME) on-time filing stood at just 42% (55% within a month), highlighting persistent compliance challenges as the base expands.