Notwithstanding a global economic down turn, Sri Lanka managed to keep its growth rates at 6.2 per cent, on average, and bring down poverty levels. Despite this, the country is faced with many development challenges. With declining revenue and increasing demands for public expenditure, the fiscal space available for the government has been limited and improving the efficiency of government expenditure has become critical. In this regard, a better understanding on the distribution and progressiveness of taxes and public expenditure is useful. The IPS collaborated with the World Bank to review public finances in Sri Lanka and assess the distributional impacts and equity issues of fiscal policy of Sri Lanka. The analysis finds that largely direct taxes and social spending in Sri Lanka is progressive. But, as revenue collection from direct taxes is very small the positive impacts are limited. Revenue mobilization through extending value added taxes, however, are regressive negatively affects poverty.