VAT increase offset by SSCL removal; no impact on financial sector profits

Tuesday, 5 May 2026 00:26 - - {{hitsCtrl.values.hits}}

First Capital Research says 20.5% VAT replaces 18% VAT and 2.5% SSCL
Effective tax burden on value addition unchanged
No material impact on sector profitability
Bill to take effect from 1 July subject to approval

The proposed increase in Value Added Tax (VAT) on financial services to 20.5% will have no material impact on sector profitability as it is offset by the removal of the 2.5% Social Security Contribution Levy (SSCL), First Capital Research said.

In a flash note on the Value Added Tax (Amendment) Bill issued on 29 April 2026, First Capital Research said the shift effectively replaces the existing dual levy structure of 18% VAT and 2.5% SSCL with a single VAT applied on value addition.

“The increase in VAT is offset by the removal of the SSCL, leaving the effective tax incidence broadly unchanged,” the report said.

The revision is expected to take effect from 1 July 2026 following Parliamentary approval.

The research house said the change is structural rather than expansionary, with no meaningful increase in the overall tax burden on financial institutions.

The Bill also introduces technical refinements to the VAT base. The definition of ‘emoluments’ is aligned with the Inland Revenue Act, No. 24 of 2017 to standardise the treatment of employee remuneration, while dividend income earned by entities outside specified financial institutions is excluded from business profits for VAT purposes, limiting exposure on non-core income.

First Capital Research said these adjustments clarify the tax framework without materially altering liability, reinforcing its view that the impact on sector earnings remains neutral.

The broader amendments include a reduction in the VAT registration threshold to Rs. 36 million annually, the introduction of VAT on non-resident digital services consumed in Sri Lanka, and stricter compliance measures including higher penalties and enhanced disclosure requirements.

First Capital Research said the VAT revision, taken in isolation, is unlikely to affect the profitability outlook of listed financial institutions.