📈 Tax Base vs. Tax Retention: Sri Lanka’s Revenue Challenge

Sri Lanka must balance tax registration with taxpayer retention to build a sustainable revenue system, as widening the tax base alone acts like a "leaky bucket." • Key Challenge: Acquiring Taxpayer Identification Numbers (TINs) does not guarantee compliance. Registered taxpayers often become inactive due to complex procedures, lack of guidance, or administrative friction. • Core Recommendations: • Onboarding: Introduce a "First 100 Days" journey with digital welcome packages, targeted reminders, and clear assistance. • Friction Reduction: Implement a Compliance Friction Index and use recurring taxpayer complaints as data to eliminate systemic obstacles. • Risk-Based Enforcement: Distinguish between unintentional mistakes (requiring education) and deliberate tax evasion (requiring enforcement). • Trust & Incentives: Implement a Taxpayer Charter and offer simpler digital compliance for consistently compliant taxpayers. • Proposed KPI: The Ministry of Finance and Inland Revenue Department should adopt a Taxpayer Retention Rate to track active compliance over 1-, 3-, and 5-year periods. • Economic Impact: Long-term revenue growth relies on two engines—registering new taxpayers and supporting retained ones—to strengthen tax morale and fiscal stability across SMEs, corporates, and individual tax bases.