An Examination of the Resiliency of Sri Lanka's Tax System

Abstract

The government revenue–income ratio of Sri Lanka has fallen sharply over the years, especially from 1990. The trend can be observed in many revenue components too. As the declining revenue–income ratio casts serious concerns over the resiliency of the country's tax system, this article sheds light on the issue by estimating the buoyancy parameters of tax functions. Results show that the long–term responsiveness to income is absolutely low in corporate income taxes. Further, the buoyancy of general goods and service tax is biased downwards due to non–structural factors. Nonetheless, personal income, excise and import taxes grow in relation to their tax bases. The non–tax revenue component also reports an almost one–for–one relation–ship with the base variable proxy. Depending on the estimated results, we claim that the low buoyancy of corporate income tax and the susceptibility of general goods and service tax to unexpected non–structural shocks are the main causes of the declining revenue–gross domestic product (GDP) ratio.