evidence: Sri Lanka has substantial scope to mobilize revenue by strengthening income taxes and VAT. Currently, Sri Lanka’s tax-to-GDP ratio is among the lowest in the world, and its tax system stands out with its low rates, small base, and complexity. Aligning its PIT rate schedule with other Asian emerging market economies and removing sector-specific CIT exemptions could generate around 0.7 percent of GDP in additional revenue. Since Sri Lanka’s VAT rate is low compared to peers, there is scope to mobilize additional revenue from rate increases. However, such a reform should be accompanied by base broadening measures and enhanced revenue collection efficiency. Indirect tax reform should be comprehensive and reduce the complexity of the system, by combining the removal of VAT exemptions with a phasing-out of para-tariffs. [...] 21. The VAT registration threshold in Sri Lanka was raised significantly in 2020, putting it among the highest in the world (Figure 11). It rose from 12 million to 300 million LKR, which is much higher than in comparators. This lightened the tax compliance burden for many medium-sized firms, but also drastically reduced the number of VAT payers. Indeed, there were only 8,152 registered VAT payers at end-2020, down from 28,914 at end-2019. Given that VAT revenues are highly concentrated among the largest taxpayers, the immediate revenue impact of this measure has been less than proportional to the decrease in VAT payers. However, a smaller roster of VAT taxpayers could contribute to compliance weaknesses, as information for invoice matching is becoming more limited with fewer taxpayers.