Tax Reforms with Revenue Replacement: Economy-wide Effects of Food Tariff Liberalisation in Sri Lanka
DOI:
https://doi.org/10.59926/jodprp.vol10/2026/5%20%20%20%20%20%20%20%20Keywords:
Trade Liberalisation, Domestic Taxation, Food Sector Welfare, GTAP ModelAbstract
Despite the well-documented consumer benefit of import liberalisation in net-importing countries, many governments hesitate to pursue deeper tariff reforms due to concerns about declining government revenue. Consequently, domestic taxation is commonly viewed as a mechanism for replacement. This study examines the economy-wide effects of reforming food import tariffs in Sri Lanka along with domestic taxes using the Global Trade Analysis Project (GTAP) model and database. Two policy scenarios are analysed: (i) a reduction in food import tariffs (IMT) and (ii) a combined reform involving tariff reduction and a compensatory domestic output tax on food products (IMT+DMT) to maintain government revenue neutrality. Domestic output taxation is selected because it provides a direct means of examining whether lost tariff revenue can be replaced through taxation of domestic food production and how this alternative affects food prices, production incentives, and economic welfare. The results indicate positive net welfare gains under both scenarios. These gains are primarily driven by allocative efficiency improvements which outweigh the adverse terms-of-trade effects and savings–investment effects. Although the combined reform generates slightly higher overall welfare gains, it also produces more negative terms-of-trade and savings-investment effects. These findings suggest that compensatory domestic output taxation can maintain revenue objectives while preserving positive aggregate welfare outcomes; however, its implications for food prices, domestic production competitiveness, and the distribution of benefits require careful consideration in trade and fiscal reforms in Sri Lanka.
JEL Classification Codes: F13, H25, Q18, C68
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Copyright (c) 2026 Udaya Namalgama, Jeevika Weerahewa, Sumali Dissanayake
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