By The Pulseline News Desk
Thousands of small and medium-sized businesses across the country have been given a reprieve after the government announced it will abandon plans to lower the Value Added Tax (VAT) and Social Security Contribution Levy (SSCL) registration threshold, a move that would have brought many additional enterprises into the tax net from next month.
The decision, announced in Parliament by Deputy Minister of Economic Development Nishantha Jayaweera, marks a significant policy reversal on one of the more closely watched tax measures contained in the government’s fiscal reform agenda.
Under the original proposal, the annual turnover threshold for VAT and SSCL registration was to be reduced from Rs. 60 million to Rs. 36 million with effect from July 1, requiring thousands of additional businesses to register for taxation and comply with related reporting requirements.
However, following consultations within the government and recommendations from parliamentary oversight bodies, the proposal has now been withdrawn.
According to Jayaweera, the decision was taken after obtaining clearance from the Cabinet of Ministers, the Attorney General and the relevant Parliamentary Consultative Committee.
The move is likely to be welcomed by many small and medium-sized enterprises (SMEs), which had expressed concern about the additional compliance burden and costs associated with entering the VAT system.
Balancing revenue and growth
The reversal highlights the delicate challenge facing policymakers as they attempt to increase government revenue while supporting economic recovery and private sector growth.
Successive governments have sought to expand the country’s tax base as part of broader fiscal consolidation efforts aimed at strengthening public finances. However, business groups have frequently argued that extending tax obligations to smaller enterprises can impose significant administrative and financial costs.
These concerns came into sharp focus during deliberations of the parliamentary Committee on Public Finance (COPF), which reviewed the proposed amendments to the VAT Act.
Officials have informed lawmakers that lowering the quarterly VAT registration threshold from Rs. 15 million to Rs. 9 million could potentially bring around 10,000 additional businesses into the tax system.
For many SMEs, however, registration involves more than simply paying taxes.
Lawmakers have highlighted concerns about compliance expenses, including the estimated cost of acquiring Point of Sale (POS) systems, which could amount to around Rs. 200,000 for some businesses. In addition, questions were raised regarding penalties for non-compliance, which can reach as high as Rs. 1 million.
The discussion has underscored a broader policy dilemma: how to improve tax collection without discouraging entrepreneurship or placing excessive pressure on smaller businesses.
Focus on digital economy
While the threshold reduction proposal has been dropped, the government is continuing with efforts to modernise the country’s VAT framework, particularly in relation to the rapidly expanding digital economy.
During a three-hour review session, COPF members have extensively examined provisions concerning digital services supplied by non-resident providers.
The discussions have reflected growing international efforts to ensure that multinational digital platforms contribute tax revenue in the countries where they generate economic activity.
Committee members have compared the tax treatment of foreign digital service providers and locally registered companies, expressing concern that pricing disparities could continue even after the proposed amendments take effect.
There were also questions about the potential impact on Sri Lankan digital entrepreneurs attempting to compete in international markets.
Finance Ministry officials have responded by noting that the country’s approach is broadly consistent with taxation systems already adopted in countries such as India and the Philippines.
Stronger Parliamentary Oversight
COPF, chaired by MP Harsha de Silva, ultimately approved the VAT Amendment Bill subject to a key condition requiring executive regulations under the Act to be submitted to the committee before publication in the Gazette.
The requirement reflects Parliament’s growing emphasis on oversight of tax regulations and implementation procedures.
The review process brought together lawmakers from both government and opposition parties, including Deputy Ministers Kaushalya Ariyaratne and Nishantha Jayaweera, as well as opposition MPs Ravi Karunanayake and Harshana Rajakaruna.
A signal to business
The withdrawal of the VAT and SSCL threshold reduction is likely to be interpreted by many businesses as a sign that the government is willing to adjust policy in response to stakeholder concerns.
At the same time, the discussions in Parliament suggest that tax reform remains firmly on the national agenda. Authorities continue to seek ways to broaden compliance, strengthen revenue collection and adapt taxation systems to changing economic realities, particularly in the digital sector.
For now, however, thousands of smaller enterprises that had been preparing to enter the VAT system can continue operating under the existing threshold.
The decision offers immediate relief to many businesses, but it also highlights the continuing challenge of designing tax policies that achieve fiscal objectives while supporting economic growth, investment and entrepreneurship.
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