By: Staff Writer
December 08, Colombo (LNW): Sri Lanka’s move to slash the VAT and Social Security Contribution Levy (SSCL) registration threshold from Rs. 60 million to Rs. 36 million marks one of the most sweeping tax adjustments since the country’s fiscal breakdown in 2022.
Announced in the 2026 Budget, the change aims to widen the tax net, curb avoidance practices, and rebuild state revenue that eroded under earlier tax cuts. But the reform has triggered unease among the small-business community, which remains weakened by years of economic distress.
The government argues the rationale is straightforward. When the VAT threshold was dramatically raised in 2019 from Rs. 12 million to Rs. 300 million the number of VAT-registered taxpayers plunged by 71 percent, dropping from 29,151 to just 8,391. Tax authorities say the new reduction is necessary to reverse this collapse and re-formalise businesses that exited the tax system.
But for many small and medium enterprises, VAT registration represents far more than administrative paperwork. Small traders, shopkeepers, and service providers warn that registering for VAT brings additional compliance costs, accounting expenses, and working-capital strain.
Many fear they will be forced to pass on the full 18 percent VAT and additional SSCL charges directly to customers raising retail prices across essential items. A senior tax official admitted that although the law does not require businesses to pass VAT to consumers, “it is inevitable” that many will do so.
This puts small retailers in a difficult position. In sectors such as groceries, household essentials, and low-margin services where competition is intense businesses must choose between absorbing the tax burden and risking losses, or raising prices and risking customer attrition. Given the dominance of small retailers in Sri Lanka’s supply chain, even minor price increases could push up the overall cost of basic goods.
Some economists warn the reform could create broad-based, short-term price pressures. Because SMEs supply a significant share of daily consumer goods and services, widespread VAT pass-through could temporarily lift the cost of living.
However, others argue fears may be overstated. Previous reductions of the VAT threshold from Rs. 300 million to Rs. 80 million, and later to Rs. 60 million did not trigger a jump in inflation, as reflected in national indices. Analysts note that other cost factors such as declining electricity and fuel tariffs helped offset price pressures.
A key reason behind the reform is to curb tax avoidance. Over recent years, many businesses legally split operations into multiple entities to remain below the threshold. Lowering it to Rs. 36 million is designed to shut this avenue and ensure a more equitable tax system.
The Treasury expects a sizeable increase in tax revenue, particularly from retail trade, food and beverages, distribution networks, and professional services.
A business earning roughly Rs. 100,000 a day will now fall into the VAT net, expanding the taxpayer base significantly. Although the Budget offered no precise estimate, Treasury numbers later showed a Rs. 60 billion upward revision—signalling strong expectations for revenue gains.
Government officials also point to international evidence. IMF studies covering 35 countries show that in nearly two-thirds of cases, VAT changes had little lasting impact on inflation suggesting that while prices may adjust initially, sustained inflationary pressure is unlikely.
