By: Staff Writer
October 26, Colombo (LNW): Sri Lanka’s tax system is facing renewed scrutiny over the simultaneous imposition of Value Added Tax (VAT) and the Social Security Contribution Levy (SSCL) on the same categories of business activity, with retired Deputy Commissioner General of the Inland Revenue Department N. M. M. Mifly calling for a fundamental restructuring to eliminate duplication, improve efficiency and restore taxpayer confidence.
Mifly argues that imposing two taxes of a similar nature on the same business turnover creates unnecessary complexity, increases the cost of doing business and potentially contributes to inflation. His proposals raise a broader policy question: whether Sri Lanka’s drive to strengthen government revenue is being undermined by a tax structure that places overlapping obligations on businesses across the supply chain.
VAT is currently imposed at 18% on manufacturing, imports, trading and services, while the SSCL applies to the same four categories at a rate of 2.5%, according to the document setting out Mifly’s views. He contends that separating the two levies administratively does not remove their combined economic impact.
“Splitting what is essentially a single sales tax into two components, VAT and SSCL,” he argues, can create an illusion of moderation while leaving businesses to bear the cumulative burden.
The consequences extend beyond accounting departments. Businesses facing higher tax and compliance costs may seek to recover them through prices, potentially affecting consumers already struggling with living expenses. Additional reporting, registration and payment requirements also consume resources that could otherwise support investment, employment and expansion.
However, the precise effect on prices, investment and government revenue requires empirical assessment rather than assumption. Mifly’s criticism highlights the need for the authorities to publish evidence showing how the two taxes interact across different industries and business sizes.
His concerns also focus on the historical expansion of VAT to trading activities. He maintains that the original Goods and Services Tax and subsequent VAT framework were designed to concentrate liability on manufacturers, importers and service providers, thereby limiting administrative demands on the wider trading network.
According to his account, trading was subsequently brought into the VAT system in 2013. A higher annual registration threshold of Rs. 2,000 million had initially distinguished trading from other activities, for which the threshold was Rs. 12 million. That distinction was later removed, with successive administrations adopting a common threshold that eventually fell to Rs. 60 million.
Mifly argues that maintaining the same threshold for traders and primary suppliers fails to recognise their different commercial circumstances.
The distinction matters because manufacturers and importers introduce goods into the supply chain, while traders generally purchase and resell products at narrower margins. Mifly estimates that trading margins commonly fall within the 10% range and argues that the net VAT contribution from traders can be less than 2% of turnover.
He also points to maximum retail price restrictions imposed by primary suppliers and difficulties claiming input-tax credits when goods are purchased from suppliers who are not VAT-registered.
These conditions, he says, can make the application of VAT to traders economically inequitable and administratively inefficient.
The government, meanwhile, must balance these concerns against the need to maintain revenue under fiscal consolidation commitments. Removing a tax obligation from one category of businesses could affect collections unless the reform is carefully designed and its fiscal consequences quantified.
Mifly proposes excluding trading from VAT, restoring the Rs. 12 million threshold for manufacturers, importers and service providers, and removing VAT-registered primary suppliers from SSCL.
The central issue is therefore not simply whether businesses should pay less tax. It is whether the same revenue objectives can be achieved through a more coherent system that minimises duplication, reduces compliance costs and protects the tax base.
A scientific analysis of collections, effective tax incidence and administrative expenses would help establish whether the proposed restructuring could improve both economic efficiency and revenue performance.
Without such scrutiny, the controversy over VAT and SSCL risks becoming another unresolved dispute between revenue collection priorities and the need to create a business environment capable of supporting sustainable economic recovery.
