Reducing VAT threshold is a death blow to SL’s MSMEs
View(s):Sri Lanka’s micro and small business community has expressed concern over the recent reduction, announced in the budget, of the VAT threshold to Rs. 36 million from Rs. 60 million, effective from April 2026, saying it would adversely affect lower income groups,
“This poses an additional burden to all MSME (micro SME)’s as well as all the people in country. This move will bring a large number of small retailers into the tax net and ultimately pass the 18 per cent VAT burden onto consumers. It will also create an imbalance in the economy, as most consumers will shift their purchases toward goods and services provided by businesses that are not liable for VAT. At a time when people are already struggling with the rising cost of living, this will be yet another blow to both small enterprises and the wider population,” asserted Mahendra Perera, President of the Ceylon Federation of MSME, adding that many shops and small businesses will be trapped in this financial dilemma.
Speakers at the event: Mr. Mahendra Perera (left) and Mr. G. K. Sudath Kumar. Pic by M.A.Pushpa Kumara.
He was speaking at the Sunday Times Business Club (STBC)’s bi-monthly meeting on Tuesday which focused on the ‘collapse of small Sri Lankan businesses’ owing to the Easter Sunday attack, the COVID-19 pandemic and the resulting economic crisis. The host hotel of the meeting is Shangri-La and the sponsor of the club is NDB Bank.
He said like in many other countries, the MSME sector is the backbone of Sri Lanka’s economy. MSMEs contribute 52 per cent to the national GDP and provide employment to 4.5 million people in the workforce. 
Quoting 2022 data from the Department of Census and Statistics, he said out of 1.3 million MSMEs, 263,000 have permanently closed, 14,577 are temporarily closed, and approximately 1,050,000 remain active. This data represents the situation up to 2022; however, the major impacts of the economic crisis was felt most strongly in 2023–2024. “Therefore, we believe that an additional 100,000 or more enterprises have already been affected due to the bankruptcy declaration and the sharp rise in interest rates,” he added. 
Mr. Perera said while parate execution was temporarily suspended, the extension ended in March 2025 and now a large number of MSME assets are already in the process of being auctioned. The Parate Act, which dates back to 1990, urgently needs to be amended to reflect current economic realities.
Although the present government issued two circulars in December 2024 and January 2025, these have failed to address the core issues faced by MSMEs, pointing out that even though Rs. 50 billion was allocated for the MSME sector in the 2026 Budget, more than 60 per cent of MSMEs are listed in CRIB with Non-Performing Loan (NPL) status, making access to capital finance extremely difficult.
The second speaker at the event, liquidator expert G. K. Sudath Kumar, Partner – Nanayakkara & Company, detailed out the various options offered to bankrupt firms via the process of an administrator or, if that doesn’t work, liquidation. He said many companies are going into liquidation, and faced with the growing number of cases, one of the commercial high courts has been set aside purely for liquidation cases. 
When a company is unable to pay its debt, the directors of the company seek court permission to either wind up the company or declare bankruptcy. An administrator is then appointed, as a first step, to see whether the company can be revived after speaking to all creditors and debtors on restructuring due payments and restructuring the debt. In some cases, resuscitation succeeds, in some cases it won’t. It’s a fine balancing act by the administrator, he pointed out adding that in the Sri Lanka case, many people don’t trust an administrator and this is an issue.
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