While the Government presents Sri Lanka’s proposed VAT reforms as a necessary step toward fiscal sustainability, many lawmakers and business operators fear the changes could impose significant compliance costs on smaller enterprises already navigating a difficult economic environment.
The proposed reduction of the VAT registration threshold from Rs. 60 million to Rs. 36 million annually is expected to capture thousands of businesses previously outside the tax net. Retail stores, salons, laundries, and other medium-sized enterprises are among those likely to be affected.
During deliberations before the Committee on Public Finance (CoPF), concerns centred not on taxation alone but on the practical demands of compliance. Under the proposed framework, newly registered VAT entities would be required to implement approved record-keeping systems, including Point of Sale (POS) terminals, within three months of the legislation taking effect.
Committee Chair Dr. Harsha de Silva questioned whether such a timeline was realistic. Legislators highlighted that POS systems can cost around Rs. 200,000, excluding additional expenses related to accounting services, software maintenance, staff training, and administrative reporting. For businesses operating on narrow profit margins, these costs could represent a substantial burden.
Some committee members argued that an extended transition period of up to 18 months may be necessary to avoid placing undue strain on enterprises adjusting to the new regulatory environment. Treasury and IRD officials, however, maintained that businesses would have multiple compliance options. Apart from POS systems, firms could use Enterprise Resource Planning (ERP) platforms or manual record-keeping methods integrated through the Revenue Administration Management Information System (RAMIS).
Officials further noted that businesses with similar turnover levels had successfully complied with VAT obligations in previous years when registration thresholds were considerably lower. This, they argued, demonstrates that compliance is achievable with proper preparation and support.
Beyond implementation costs, lawmakers also raised concerns about fairness within the tax system. Questions emerged regarding mixed businesses that sell both VAT-liable and exempt goods, as well as products subject to price controls. Authorities responded that eligible businesses would be able to claim input tax credits, including deemed credits on existing inventory through self-assessment mechanisms.
Another contentious issue involved perceived gaps in tax enforcement. Several MPs questioned why sectors such as online gambling and betting appeared to operate with less scrutiny while traditional businesses faced expanding compliance requirements. Treasury officials countered that broader reforms are underway, including new provisions targeting overseas digital service providers and online marketplaces whose services are consumed in Sri Lanka.
The debate highlights a central challenge facing policymakers. While few dispute the need for stronger revenue collection, concerns persist over whether implementation mechanisms are adequately designed to protect smaller businesses from excessive costs. The success of the VAT overhaul may ultimately depend not on the policy itself, but on how effectively authorities manage its transition and enforcement across a diverse and evolving economy.