New VAT and SSCL threshold sparks unease among SMEs and consumers
Sri Lanka’s decision to reduce the VAT and Social Security Contribution Levy (SSCL) threshold to Rs. 36 million from Rs. 60 million marks one of the most far-reaching tax policy shifts since the country’s fiscal collapse in 2022.
In the 2026 Budget, the reform aims to broaden the tax base, curb loopholes, and restore revenue lost in successive tax cuts. But behind the government’s optimism lie deep concerns among small traders, micro-business owners, and consumers groups already squeezed by years of economic strain.
For policymakers, the rationale is clear. The elevated VAT threshold introduced in 2019 raised from Rs. 12 million to Rs. 300 million led to a 71 per cent collapse in VAT-registered taxpayers, falling from 29,151 to just 8,391.
For many small enterprises, the switch to VAT registration isn’t just paperwork, it’s a major cost and operational burden. Traders and small retailers have already warned that they may pass on the 18 per cent VAT (plus SSCL) to end-consumers, raising retail prices.
One senior tax official reportedly said that while the law doesn’t force the consumer to bear VAT, “it is inevitable” that many businesses will pass on the cost.
In sectors like groceries, daily consumables, and small-scale services where competition is fierce and margins thin firms now face a difficult choice: absorb VAT costs and risk losses, or increase prices and risk losing customers.
Given the scale of small retailers in Sri Lanka, even a small price hike at many shops can meaningfully increase the overall price level of everyday goods.
Several economic analysts argue the reform will lead to broad consumer price inflation. Given that SMEs supply a large portion of everyday goods and services, a country-wide pass-through of VAT could instantaneously push up the cost of living.
However, past experience offers a counterpoint: similar threshold cuts in late 2022 and early 2024 from Rs. 300 million to Rs. 80 million to Rs. 60 million did not trigger an inflation surge, as tracked by national price indices.
Many businesses legally avoided VAT by splitting operations into multiple entities, each kept just below the threshold. Lowering the bar to Rs. 36 million is intended to shut this door and re-formalise a sector long accustomed to loopholes.
The Treasury expects higher tax collections, particularly in retail, food and beverage, distribution, and professional services. A business earning just Rs. 100,000 a day will now be VAT-liable, pulling thousands of medium-sized enterprises into the tax net.
However, the Budget speech stopped short of providing revenue estimates, though Treasury projections rose by Rs. 60 billion between October and the final publication suggesting expectations of substantial gains.
Recent CCPI (cost of living) and NCPI trends show stable or declining inflation, partially due to reductions in fuel and electricity tariffs, he added.
International Monetary Fund research covering 35 countries also reports that in 63 per cent of cases, VAT changes had little or no effect on inflation. This suggests that while price levels may adjust, fears of sustained inflation are likely overstated.
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