The next rise in tax revenue should come from better compliance, not mainly higher tax rates, according to the IMF. Tax revenue has already risen sharply in recent years. It increased from 7.3% of GDP in 2021 to 15.4% in 2025.
Major VAT reforms helped drive this increase. The IMF now says the bigger task is to make these gains last. The new Revenue Administration Diagnostic sets out how the country could improve tax collection.
It calls for a wider tax base, better compliance and simpler tax services. It also calls for more non-compliant activity to enter the tax system.
More revenue may already exist within the tax system
The IMF points to a large gap in VAT collection. Its staff estimate that the VAT compliance gap was around 41% of potential VAT revenue in 2025. The report estimates that this gap was equal to about 3.6% of GDP. This does not mean that 41% of VAT owed by taxpayers went unpaid.
Instead, the figure measures the gap between the VAT the economy could generate and the VAT actually collected.
The report also finds weak filing and payment compliance among many taxpayer groups. It says tax arrears remain large and poorly prioritized. It also says risk management does not yet guide audits, enforcement, taxpayer services and arrears collection well enough.
The tax arrears problem also shows the scale of the challenge. Reported tax defaults reached about Rs. 2.1 trillion at December 31, 2025. About Rs. 1.6 trillion of that amount was in dispute.
In 2024, reported defaults stood at about Rs. 1.1 trillion. About Rs. 974 billion was in dispute.
The IMF says appeals appear to be the biggest barrier to collection.
It also points to another problem with debts that are not under dispute.
Some debts continue to grow older because of staff shortages and weak case selection. The tax department also lacks a risk-based system to decide which debts deserve collection efforts first.
Data could change how tax officers work
The IMF wants the revenue agencies to use data more effectively. The Inland Revenue Department, Customs and Excise should use risk systems to decide where staff and enforcement resources are most needed.
For the Inland Revenue Department, the report identifies problems with filing, payments, arrears and audits. It also warns that the future of the Revenue Administration Management Information System, or RAMIS, creates a near-term business risk.
Customs faces a similar challenge.
The IMF says Customs already uses risk checks in some areas. But it does not apply the approach across all key parts of its work. These include trader checks, valuation, goods classification, post-clearance audits and paperless processing.
Staff shortages also limit the work of the three main revenue agencies.
The IMF points to shortages in auditing, data analysis, compliance planning and reform management. This gives the report a wider message than the size of the tax arrears alone.
The country has already recovered much of the revenue lost during the 2022 crisis. The next challenge is to collect more of the revenue that the existing economy can generate.
That will require better taxpayer data and stronger compliance systems. It will also require faster handling of tax disputes and better audit selection. The IMF says the proposed Medium-Term Revenue Strategy should support this shift.
The strategy should build a more stable revenue system instead of relying mainly on further tax rate increases.
International Monetary Fund (IMF)
Last modified: November 1, 2026
