Minister of Labour and Deputy Minister of Finance and Planning, Dr. Anil Jayantha Fernando, has stated that tax revenue is the primary source of funding required to maintain essential government services, education, healthcare, development activities and infrastructure facilities. He emphasised that the present Government has not imposed unnecessary tax burdens on the public but has instead taken steps to correct weaknesses in the existing tax structure and make it fairer and more systematic.

Over the past two years, the Government has taken measures to improve tax collection efficiency, tax administration and public compliance with tax obligations. As a result, the tax base has expanded, enabling the Government to collect more tax revenue in 2025 than originally anticipated, he said.

Responding to claims circulating on social media that the Government has arbitrarily increased various taxes, the Minister described such allegations as misleading and reiterated that, as stated by the President, the present Government has not imposed an additional tax burden on the public.

He made these remarks while providing a detailed clarification on the matter today (04).

1. Was a New 6% Tax Increase Imposed on Alcohol, Cigarettes and Tobacco Products?

The Minister explained that the 6% increase in excise duties on selected products in January 2025 was not a newly introduced tax but an adjustment made under the existing indexation mechanism, which provides for tax rates to be revised in line with inflation.

Under this mechanism, taxes on selected products, including alcohol, cigarettes, tobacco and electronic goods, are adjusted by adding an additional 4% to the average inflation rate of the preceding year.

Accordingly, based on the inflationary conditions prevailing in 2024, a 6% adjustment was made in January 2025. He also pointed out that a 14% tax increase had been implemented under the same mechanism in 2024 during the administration of Ranil Wickremesinghe.

He noted that allegations suggesting that the present Government had introduced a new tax increase, while disregarding this established mechanism, amounted to a distortion of facts.

Furthermore, taking into consideration the impact of Cyclone Ditwah in 2026 and the additional economic shock it caused, the Government decided not to implement the tax adjustment, exercising the flexibility available under the existing tax revision formula, he added.

2. Increase in Customs Duties on Electric Vehicles

Addressing allegations that customs duties on electric vehicles had been increased, the Minister stated that the changes were not the imposition of an additional tax but part of a reform of the existing tax structure.

He explained that the objective of these revisions was to ensure fairness in the application of tax principles, correct shortcomings in the existing tax structure and minimise revenue losses.

 3. Imposition of a 50% Surcharge on Private Vehicle Imports

The Minister stated that the pressure exerted on the foreign exchange market and the increased demand for US dollars, arising from the conflict in the Middle East, created a need to control import expenditure.

Under these circumstances, rather than imposing restrictions on all imports, the Government decided to impose a 50% surcharge on customs duties applicable to private vehicle imports as a short-term measure to manage foreign exchange outflows.

He emphasised that the objective of this decision was not to increase tax revenue but to safeguard the country's foreign exchange reserves while preventing disruptions to economic activities and shortages of essential goods.

4. Increase in Withholding Tax on Interest Income from 5% to 10%

Responding to criticism over the increase in withholding tax on interest income from 5% to 10%, the Minister stated that the revised arrangement had provided significant relief to individuals who are not liable to pay income tax.

Under the previous system, 5% was deducted from the interest income of individuals who were not liable to pay income tax. However, many of them did not pursue the process of claiming refunds, resulting in an unfair situation, he pointed out.

Under the new system, individuals who are not liable to pay income tax can obtain exemption from the deduction by submitting the required declaration or affidavit confirming their tax-exempt status.

He further explained that although 10% is deducted at source from individuals liable to pay income tax, this amount can be credited against their annual tax liability when their final tax assessment is calculated. Therefore, a change in the withholding tax rate does not necessarily result in an increase in the final tax burden.

5. Increase in the Tax Rate on Alcohol and Tobacco Companies from 40% to 45%

Commenting on the increase in the tax rate on profits earned by companies engaged in the alcohol and tobacco industries from 40% to 45%, the Deputy Minister stated that these industries have a relatively greater capacity to generate profits, and the Government had therefore taken steps to collect a higher level of tax revenue from these sectors.

He pointed out that imposing higher taxes on such industries, commonly referred to internationally as 'sin industries', was a means of securing a fairer contribution from these sectors without placing an unnecessary tax burden on the general public.

6. Taxation of Service Exports

Responding to criticism over the imposition of income tax on individuals and companies engaged in service exports, the Deputy Minister explained that certain parties involved in service exports had previously been exempted from taxation due to exemptions and interpretations under the former tax laws.

He noted that this had created an imbalance in the tax system, as exporters of goods and businesses providing services within the country were required to pay taxes, while those engaged in service exports enjoyed a tax concession.

To address this disparity, service exporters have also been brought within the tax framework. However, instead of the 30% tax rate proposed by the previous Government, a rate of 15% has been introduced for companies, he explained.

He further stated that, in the case of individuals, the maximum tax rate applicable to income earned from service exports has also been capped at 15%. Otherwise, depending on the applicable income tax thresholds, such income could have been subject to tax rates of up to 36%.

Accordingly, he emphasised that this measure did not constitute a tax increase but rather corrected an existing distortion while introducing a more favourable tax rate for the parties concerned.

7. VAT on Services Supplied Through Digital Platforms

Clarifying the introduction of VAT on digital services, the Deputy Minister stated that the objective was not to impose a special tax on digital technology but to bring service providers operating through digital platforms within the VAT system.

Citing companies that provide transportation and food delivery services through digital applications as examples, he explained that these companies are essentially providing transportation or food delivery services, while other businesses offering the same services through conventional methods are already subject to VAT.

He noted that service providers should not be allowed to remain outside the tax system simply because their services are delivered through digital platforms. The amendment was therefore introduced to establish an equal tax base for all service providers.

8. Consolidation of Taxes on Financial Services at a Rate of 20.5%

Addressing reports that VAT on financial services had been increased to 20.5%, the Deputy Minister stated that the measure was not intended to create an additional tax burden but to simplify the process of calculating and collecting taxes.

Previously, financial services were subject to VAT at 18% and the Social Security Contribution Levy (SSCL) at 2.5%, collected separately. Although both taxes were calculated on the same base, separate documentation and procedures had to be maintained for each tax, he explained.

To simplify this process, the combined rate of 20.5%, representing the total of the two taxes, is now collected through a single mechanism, he added.

Concluding his remarks, the Deputy Minister emphasised that changes in tax rates alone should not be used as the basis for determining whether the overall tax burden has increased. Attention must also be paid to fairness in the tax system, adherence to policy principles, the proper utilisation of tax revenue, and measures to prevent waste, fraud and corruption.

He further stated that despite the ongoing conflict in the Middle East, the country had been able to ensure an uninterrupted supply of essential commodities, including fuel, fertiliser and medicines, owing to the economic management measures implemented by the Government.

The Deputy Minister reiterated that the Government remains committed to generating revenue through a fair tax system to ensure the uninterrupted provision of essential public services and the continuation of development activities, while ensuring that public funds are utilised properly, free from fraud and corruption.No Additional Tax Burden Imposed on the Public;