By Panduka Keerthinanda, Attorney-at-Law
The government’s recent budget, with its well-intentioned promise to build a more equitable society, has brought a familiar refrain: higher taxes on businesses. The new mandate, which subjects every business with a monthly turnover of 3 million LKR to an 18% VAT, is presented as a progressive tool. The objective is noble to fund social programmes and provide a financial lifeline to our most vulnerable citizens. No one can argue with the goal of lifting people out of poverty.
However, we must pause and ask a critical question: At what cost does this revenue come? There is a growing fear that this policy, rather than building a stable and equitable society, will systematically dismantle the very engine of our economy: our high-end entrepreneurs and established small to medium enterprises (SMEs).
The unseen burden on the backbone of the economy
Labelling a business with a 3 million LKR monthly turnover as a “high-income earner” is a fundamental miscalculation. Turnover is not profit. A business generating 36 million LKR annually in revenue may have razor-thin profit margins after accounting for raw material costs, skyrocketing utility bills, employee salaries, loan repayments, and transportation. Imposing an 18% VAT on the total revenue, not profit, can easily push a viable, job-providing enterprise into the red.
Consider a local manufacturer or a tech start up. They are not the corporate giants with vast financial reserves to absorb such shocks. They are the ambitious, the innovative, and the true “antropinurs” (entrepreneurs) who have built something from nothing. This VAT policy does not just tax their income; it taxes their ambition and penalises their success.
The chilling effect on entrepreneurship
The message this policy sends is perilous: “Grow, but not too much.” The 3 million LKR threshold acts not as a gateway to contributing more to society, but as a barrier to growth. Business owners will be incentivised to artificially suppress their turnover to stay below the VAT threshold. This could mean:
Hesitating to hire new employees.
Avoiding investment in new equipment or technology.
Reducing production and scaling back expansion plans.
In essence, the policy actively discourages the growth and scalability we so desperately need to revive our economy. We are not fostering entrepreneurship; we are caging it.
The irony of “Equity”
The ultimate irony is that the quest for equity may create greater inequity. When businesses are stifled, the first to suffer are their employees. Job creation stalls, wages stagnate, and eventually, layoffs begin. The very low-income persons the government aims to support will find fewer employment opportunities. The social programmes funded by this VAT will then have to function as a permanent crutch, rather than a temporary hand-up, because the natural job-creating mechanism of the economy has been damaged.
Furthermore, the increased cost of doing business will inevitably be passed on to the consumer. The 18% VAT will be baked into the price of goods and services, fuelling inflation and eroding the purchasing power of every citizen, including the poor. This creates a vicious cycle where the government taxes to provide support, while its own policies make the cost of living more unaffordable.
We must move beyond simplistic taxation that views businesses as mere piggy banks to be broken for social spending. A truly progressive and equitable system would:
Tax Profit, Not Turnover: The core of the issue. Taxing net income is a fair measure of a company’s ability to pay.
Simplify the Tax Regime: Create a clear, predictable, and easy-to-comply system that encourages formalisation, not evasion.
Invest in the Ecosystem: Use tax revenue not just for consumption (social programmes) but for investment in infrastructure, education, and innovation grants that help businesses grow and create higher-quality jobs in the country.
The goal of a more equitable Sri Lanka is shared by all. But we cannot build a stable house by burning the foundations. Our entrepreneurs are not the enemy; they are our greatest asset. It is time for a policy that nurtures them, not one that cripples them with well-intentioned but ultimately destructive taxes.
The government need to reconsider this approach and collaborate on a framework that fosters both growth and justice, ensuring that our pursuit of equity does not come at the cost of our prosperity.
