Budget 2026 and SMEs

Budget 2026 lays a foundation for SME growth, but its success will depend on implementation speed, transparency, and a shift from debt-driven support to capability-building and global integration. For SMEs, this Budget offers hope and opportunity—but turning policy into tangible outcomes requires collaborative effort between Government, financial institutions, and private sector stakeholders

 Introduction

The 2026 National Budget, presented by President Anura Kumara Dissanayake, comes at a pivotal moment for Sri Lanka’s economy. Following two years of IMF-led reforms and a steady recovery trajectory, the Government has set ambitious goals: sustained GDP growth above 7%, fiscal consolidation, and integration into global value chains. But for the backbone of the economy—Small and Medium Enterprises (SMEs)—the question remains: Has the Budget 2026 provided sufficient support to drive resilience and growth?

Why SMEs matter

SMEs contribute over 52% of Sri Lanka’s GDP and play a critical role in employment generation. Their ability to thrive determines the pace of economic recovery and inclusive growth. However, SMEs have faced severe challenges since the 2022 crisis—tight credit conditions, high inflation, and limited market access. Budget 2026 needed to address these structural issues while fostering competitiveness.

Key SME-focused measures in Budget 2026

1. Lower investment threshold for tax incentives

The qualifying investment threshold for enhanced capital allowances has been reduced from $ 3 million

to $ 250,000, making tax incentives accessible to SMEs. Enhanced capital allowances of 100% (or 200% for Northern Province) can now be claimed for investments in fixed assets, in addition to standard capital allowances under the Inland Revenue Act.

2. Concessionary loan schemes

The Government has introduced loan facilities through local banks at concessional interest rates, offering:

•  Up to Rs. 25 million for successful businesses
• Rs. 15 million for enterprises facing hardship
• Up to Rs. 50 million for others

Additional schemes target youth entrepreneurship, women-led businesses, and microfinance initiatives, signaling a strong push for inclusive SME financing.

Budget 2026 allocates:

• Rs. 7,700 million for the SME Development Loan Scheme
• Rs. 6,200 million for Agricultural Value Chain Development
• Rs. 15,000 million for the Pledge Loan Scheme for paddy mill owners
• Rs. 800 million for the Sustainable Farmers’ Loan Fund
•  Rs. 1,700 million for the New Comprehensive Rural Credit Scheme (NCRCS), offering agricultural loans up to Rs. 3 million at 5% interest

These measures aim to ease liquidity constraints and foster inclusive growth, particularly in rural and agricultural sectors.

3. Institutional reforms for SME development

Budget 2026 proposes consolidating SME support agencies—IDB, NEDA, and SMED—under the Industrial Development Board to streamline services, reduce duplication, and improve efficiency in delivering technology, market access, and advisory support.

4. Digitalisation and market access

The Government plans to establish Startup Ecosystems, IT zones, and data centers, alongside a Digital Single Window for investment approvals. Export-oriented SMEs will benefit from the National Export Development Plan (2025–2029) and the introduction of a Trade National Single Window (TNSW) to simplify export documentation and reduce administrative bottlenecks.

Budget 2026 also emphasizes developing auxiliary zones linked to existing investment zones, creating opportunities for SMEs to integrate into industrial value chains, access shared infrastructure, and reduce operational costs.

Challenges and missed opportunities

Despite positive steps, concerns remain:

nIndirect Tax Burden: Lower VAT and SSCL thresholds (Rs. 36 million) will bring more SMEs into the tax net, increasing compliance costs.

nAccess to Credit: Effective implementation and timely disbursement of loans will be critical.

nExport Competitiveness: Tariff reforms and para-tariff phase-outs lack clear timelines, creating uncertainty for SMEs engaged in trade.

Lower inflation and interest rates should ease operating costs and improve credit access. However, broadening the VAT base without reducing the VAT rate adds pressure on SMEs and consumers. Given VAT’s regressive nature, a rate reduction would have provided meaningful relief.

Budget 2026 demonstrates intent to empower SMEs through lower investment thresholds, concessional financing, institutional reforms, and digitisation initiatives. However, success hinges on swift execution, ease of access, and complementary support in skills development and infrastructure

Global best practices for SME support

While concessional loans and tax incentives are important, global best practices show that SME development requires more than financial assistance. Countries such as Singapore and South Korea have 

successfully empowered SMEs by providing:

nAccess to technical and managerial skills

nMentorship programs and international market exposure

nSupport for obtaining globally recognized certifications

In Singapore, programs like the Enterprise Development Grant (EDG) and Market Readiness Assistance (MRA) help businesses upgrade capabilities and expand internationally. SkillsFuture equips SME owners and employees with technical and business management skills, while certification support enables compliance with foreign market standards.

South Korea’s Ministry of SMEs and Startups (MSS) offers structured programs for technology development, global partnerships, and legal compliance. Initiatives such as the Global Corporate Collaboration Program and Startup Legal Support Program assist SMEs in forming international alliances and navigating regulatory requirements. These measures help SMEs build sustainable business models, enhance competitiveness, and reduce dependency on debt.

The way forward

Budget 2026 demonstrates intent to empower SMEs through lower investment thresholds, concessional financing, institutional reforms, and digitisation initiatives. However, success hinges on swift execution, ease of access, and complementary support in skills development and infrastructure.

The Government should actively facilitate:

nInternational market access: Promote Sri Lankan SMEs globally and assist with trade fair participation.

n Skill development: Offer training in technical, managerial, and digital skills.

nCertification assistance: Provide guidance and subsidies for international certifications.

nInnovation and technology adoption: Encourage digital transformation and sustainable practices.

Such measures will strengthen SMEs and position Sri Lanka as a dynamic player in the global economy.

Conclusion

Budget 2026 lays a foundation for SME growth, but its success will depend on implementation speed, transparency, and a shift from debt-driven support to capability-building and global integration. For SMEs, this Budget offers hope and opportunity—but turning policy into tangible outcomes requires collaborative effort between Government, financial institutions, and private sector stakeholders.

(The author is Principal – Tax and Regulatory at KPMG and the views and opinions expressed in this article are personal)