Monday Jun 22, 2026
Monday Jun 22, 2026
Monday, 22 June 2026 00:32 - - {{hitsCtrl.values.hits}}
Treasury and Inland Revenue Department (IRD) officials have defended the Government’s proposal to lower the Value Added Tax (VAT) registration threshold, arguing that Sri Lanka’s longstanding failure to broaden the tax base has contributed to fiscal imbalances and entrenched economic distortions.
Appearing before the Committee on Public Finance (CoPF) chaired by MP Dr. Harsha de Silva last week, officials said the proposed reduction of the annual VAT registration threshold from Rs. 60 million to Rs. 36 million is expected to bring around 10,000 additional businesses into the tax net.
Officials noted that the current VAT base comprises approximately 35,000 registered entities and that the amendment is expected to increase that figure to around 45,000.
Defending the move, Treasury officials pointed to previous policy decisions that sharply increased VAT thresholds and reduced the number of registered taxpayers.
According to data presented at the Committee, there were 28,914 VAT files at the end of 2018 when the registration threshold stood at Rs. 12 million annually.
Officials argued that the subsequent increase in thresholds, which eventually reached Rs. 300 million following tax concessions introduced in late 2019, significantly narrowed the tax base and created distortions within the economy.
“The problem today is the inconsistency of tax policy over many years,” officials told the Committee, arguing that repeated changes to tax structures have complicated efforts to restore fiscal sustainability.
The discussion took place against the backdrop of improving Government finances, with Committee members noting that Sri Lanka’s primary surplus had increased from the International Monetary Fund (IMF) program target of around 2.3% of GDP to above 5% in 2025.
However, Treasury officials maintained that stronger revenue collection remained essential to reducing reliance on a small group of taxpayers and creating space for future tax reductions.
Officials argued that a broader tax base would ultimately allow Sri Lanka to move towards lower tax rates while maintaining revenue performance, a position echoed by the Government’s broader tax reform agenda.
Several Committee members, however, questioned whether businesses would be able to comply with the new requirements within the proposed timeframe.
Dr. de Silva raised concerns over the cost of compliance, particularly for smaller businesses such as retail outlets, salons, and laundries that would be brought into the VAT net.
Under the proposed framework, newly registered VAT entities will be required to install Point of Sale (POS) systems within three months of the legislation taking effect. Non-compliance could result in penalties.
Committee members noted that POS terminals can cost around Rs. 200,000, while businesses may also face additional accounting and administrative expenses associated with VAT reporting.
Dr. de Silva argued that affected businesses may require a longer transition period, suggesting that 18 months may be necessary to prepare adequately for the new requirements.
Treasury and IRD officials responded that businesses would continue to have multiple options for maintaining records, including POS systems, Enterprise Resource Planning (ERP) systems, and manual record-keeping mechanisms supported through the Revenue Administration Management Information System (RAMIS).
Officials also pointed out that businesses operating at similar turnover levels had previously complied with VAT registration requirements when thresholds were significantly lower.
The Committee also examined concerns regarding the treatment of mixed businesses selling both VAT-liable and exempt goods, as well as the impact of VAT on price-controlled and price-marked products.
Officials explained that businesses would be entitled to claim input tax credits, including one-time deemed input tax credits on existing inventories based on self-assessment declarations.
During the discussion, members repeatedly highlighted the need to address tax loopholes and unequal treatment across sectors.
Several MPs questioned why segments such as online gambling and betting platforms were perceived to remain outside the effective tax net while compliance requirements were being expanded for traditional businesses.
Officials responded that broader reforms were underway, including provisions covering non-resident digital service providers and online marketplaces. Under the proposed digital VAT framework, overseas service providers whose services are consumed in Sri Lanka would be required to register, file returns electronically, and account for VAT liabilities locally.
The Committee also reviewed provisions relating to VAT on financial services, the abolition of the Simplified VAT (SVAT) scheme, penalties for non-compliance, and measures aimed at curbing tax avoidance.
While concerns were raised regarding implementation challenges and compliance costs, Treasury and IRD officials maintained that broadening the tax base remains essential to reducing distortions, improving equity within the tax system, and strengthening long-term fiscal sustainability.
The VAT Amendment Bill was eventually allowed to proceed following extensive deliberations, although some members requested further clarification on several provisions and implementation mechanisms.
