Sri Lanka’s Tax Reform Landscape 2026: A Critical Assessment of the April 29 VAT Amendment Bill, VAT and SSCL Distinctions, and the Economic and Social Repercussions
By Senior Professor Prasanna Perera
Department of Economics, University of Peradeniya, Sri Lanka
Context
This article critically examines Sri Lanka’s sweeping 2026 tax reform package, focusing specifically on the Value Added Tax (VAT) Amendment Bill gazetted on 29 April 2026. It provides a rigorous theoretical analysis of the structural differences between VAT and the Social Security Contribution Levy (SSCL), analyzes the eleven proposed measures with their respective merits and demerits, and probes the economic and social consequences of the proposed 20.5% VAT rate on financial services. Using macroeconomic theory, primary legislative documents, and verified official data from the Central Bank of Sri Lanka (CBSL), the Department of Census and Statistics (DCS), the International Monetary Fund (IMF), and the World Bank, this paper argues that while many of the measures represent overdue fiscal modernization, the 20.5% VAT on financial services is economically unjustified, regressive, and structurally misrepresented as a neutral simplification. Base broadening and enforcement-led alternatives are proposed.
1. Introduction
Value Added Tax (VAT) is a consumption-based indirect tax charged at each stage of production and distribution. The consumer ultimately bears the full economic cost of the tax. The government has introduced the VAT in Sri Lanka through the Value Added Tax Act No. 14 of 2002. The VAT took effect on 1 August 2002. Through this Act, VAT replaced Goods and Services Tax (GST). The VAT rate has undergone major changes since the tax’s inception.
The legislation has been extensively amended since its inception and incorporated twenty two amendment acts up to and including the Value Added Tax (Amendment) Act No. 04 of 2025, certified on 11 April 2025. Beginning August 2002, a dual rate came into play. This involved a 10% on supplies on the reduced schedule and 20% on all other goods and services. A single rate of 15% was applied to these from January 2004. In December 2019, the rate was cut to 8, where it stayed until May 2022. Sri Lanka’s economic crisis in 2022, which caused the first sovereign debt default in the country’s history, required two emergency upward adjustments (to 12% in May 2022 and to 15% in September). From 1 January 2024, the rate was raised to 18 percent, which is its highest in more than twenty years.
The VAT (Amendment) Act No. 04 of 2025 introduced two important structural changes effective from 1 October 2025, thus (i) extending VAT at 18% on services supplied by nonresident persons using an electronic platform to persons in Sri Lanka (the digital services VAT) and (ii) abolishing the Simplified VAT (SVAT) scheme and replacing it with a risk-based refund mechanism. The April 2026 bill must be interpreted in light of these pre-existing reforms.
The gazetting of the VAT Amendment Bill on 29 April 2026 suggests eleven amendments. The most significant are (i) the reduction of the annual VAT registration threshold from the current LKR 60 million (LKR 15 million per taxable period – per Section 10(viii) of the VAT Act (Consolidated 2025)) to LKR 36 million (LKR 9 million per taxable period); (ii) digital services VAT provisions; and (iii) an increase in VAT on financial services from 18% to 20.5% from 1 July 2026. The financial services VAT rate of 18% set in January 2022 is currently set out in Chapter III A, Section 25C(g) of the VAT Act (Consolidated 2025).
2. The Structural Distinction Between VAT and SSCL: A Theoretical Analysis
Central to evaluating the government’s justification for the 20.5% rate is a rigorous understanding of the fundamental structural differences between VAT and the Social Security Contribution Levy (SSCL) Act No. 25 of 2022. The government has presented the rate increase as a simplification, removing the 2.5% SSCL and consolidating it into a combined 20.5% VAT rate. This claim requires careful scrutiny, as the two instruments are structurally distinct in design, legal basis, economic incidence, and theoretical classification.
2.1 Classical Tax Theory — Direct vs Indirect
According to the classical distinction, if the legal and economic incidence of a tax falls on the same person, then it is a direct tax. On the other hand, if the legal and economic incidence of a tax falls on different persons, then it is an indirect tax. As established by John Stuart Mill in his Principles of Political Economy (1848), a direct tax is one that is demanded from the very person whom it is intended to bear. An indirect tax is legally collected from one party but economically shifted through the pricing mechanism to a final consumer who cannot reclaim it. VAT is unambiguously an indirect tax: its input credit mechanism is designed to pass the tax burden forward through the supply chain to the final consumer.
The SSCL occupies a more ambiguous theoretical position. Levied on gross business turnover rather than on individual transactions, it carries characteristics of a direct business-level charge. However, Mill’s criterion establishes that if the economic burden of a tax is ultimately shifted to consumers through higher prices, as the SSCL is in markets with price-inelastic demand, including financial services, it fails the test of a genuine direct tax. The SSCL represents more closely a quasi direct business levy with indirect tax consequences, a hybrid instrument that cannot be clearly classified and is not easily accommodated under classical theory (Musgrave, The Theory of Public Finance, 1959, Buchanan, Public Finance in Democratic Process, 1967). The internationally recognized fiscal classification standard, the IMF Government Finance Statistics Manual (GFSM 2014), has value added taxes under category 11411, which deals with taxes on goods and services.
The IMF Government Finance Statistics Manual (GFSM 2014), the internationally recognized fiscal classification standard, places VAT under category 11411 (value added taxes) within the broader heading of taxes on goods and services. Turnover and gross receipts taxes, the category most analogous to the SSCL, are classified under category 11413 (turnover and other general taxes on goods and services). Both fall within the same macro category of taxes on goods and services, confirming that neither is a true direct tax in the classical sense. Table 1 sets out the comprehensive structural differences.
| Feature | VAT | SSCL |
| Full Name | Value Added Tax | Social Security Contribution Levy |
| Legal Basis | Value Added Tax Act No. 14 of 2002 (as amended to 2025) | Social Security Contribution Levy Act No. 25 of 2022 |
| Nature | Multi stage indirect consumption tax on value added at each supply chain stage | Gross receipts levy on total business turnover regardless of value added |
| Classification (IMF GFSM 2014) | Category 11411: Value added taxes | Category 11413: Turnover and other general taxes on goods and services |
| Rate | 18% general; 20.5% proposed for financial services from 1 July 2026 | 2.5% on liable turnover |
| Input Tax Credit | Yes: businesses reclaim VAT paid on inputs and remit only the net amount | None: the full 2.5% is an irrecoverable cost at every stage |
| Cascading Risk | None: input credits prevent tax on tax accumulation | Present: SSCL embedded at each stage produces an effective rate exceeding 2.5% |
| Invoice Disclosure | Mandatory: separately itemized on every tax invoice and visible to consumers | Not required: absorbed into prices and invisible to consumers |
| Revenue Destination | Consolidated Fund (general government revenue) | Designated social security and welfare programs |
Table 1: Structural Differences Between VAT and the Social Security Contribution Levy (SSCL)
Source: VAT Act No. 14 of 2002 (Consolidated 2025), Inland Revenue Department; SSCL Act No. 25 of 2022; IMF GFSM 2014, Chapter 5 (Categories 11411, 11413); KPMG Sri Lanka (2026)
2.2 The Critical Implication — Why the SSCL Removal Is Not a Genuine Offset
As Table 1 makes clear, VAT and the SSCL are structurally distinct instruments. The SSCL applied only to a narrow set of financial instruments, most notably letters of guarantee. The vast majority of financial transactions, including bank account operations, foreign currency exchange, payment services, leasing, and hire purchase, were never subject to the SSCL. The October 2025 amendment under the SSCL Amendment Act No. 24 of 2025 further exempted persons carrying on the business of providing financial services from SSCL with effect from 1 January 2026. Consequently, the removal of the SSCL provides no meaningful relief for the majority of financial service users.
What is presented as a revenue-neutral simplification is, in economic substance, a direct and uncompensated 2.5 percentage point VAT increase. The phenomenon is an instance of fiscal illusion, a concept originally theorized by Puviani (Teoria della illusione finanziaria, 1903) and later developed in the English language public finance literature by Buchanan (Public Finance in Democratic Process, 1967). Fiscal illusion occurs when the true cost of a fiscal measure is concealed through language that implies neutrality or relief, precisely what the framing of this proposal achieves.
3. The April 29, 2026 Gazette — Eleven Measures: Merits and Demerits
The VAT Amendment Bill, gazetted on 29 April 2026, contains eleven key proposed measures. An evaluation of each, along with its legal basis, content, merits, and economic or social demerits and risks, is provided in Table 2. In instances where a measure builds on or amends provisions that have already been enacted by the VAT Amendment Act No. 04 of 2025, this is noted.
Table 2: April 29, 2026 VAT Amendment Bill — All 11 Measures: Merits and Demerits
| No. | Measure | Legislative Basis | Merit | Demerit / Risk |
| 1 | Annual VAT registration threshold reduced from LKR 60 million to LKR 36 million (LKR 9 million per taxable period); effective 1 July 2026 | VAT Amendment Bill No. 31, April 29, 2026, Clause amending Section 10 of the VAT Act No. 14 of 2002 (Consolidated 2025) | Broadens the tax base; reduces competitive distortion between registered and unregistered businesses; improves revenue mobilisation and aligns with IMF programme commitments | Thousands of SMEs face new compliance costs including accounting, VAT returns, and invoicing systems; risk of artificial turnover splitting to remain below threshold; disproportionate burden on the smallest enterprises |
| 2 | VAT on financial services increased from 18% to 20.5%; covers bank accounts, foreign exchange, payment services, transfer of ownership, leasing, and hire purchase; effective 1 July 2026 | VAT Amendment Bill No. 31, April 29, 2026, Clause amending Chapter III A, Section 25C(g) of the VAT Act No. 14 of 2002 (Consolidated 2025) | Presented as consolidating SSCL and VAT on financial services into a single rate, reducing multi-instrument complexity | SSCL offset claim is misleading: SSCL was not broadly applied to financial services and was fully exempted from January 2026; effective net increase for the majority of users is 2.5 percentage points; regressive burden falls disproportionately on low-income users of hire purchase and leasing (Perera, 2026) |
| 3 | VAT on digital services supplied by non-resident persons through electronic platforms to recipients in Sri Lanka: effective date deferred from 1 October 2025 to 1 July 2026; new Chapter IIIC introduced governing non-resident registration, collection, and compliance obligations | VAT Amendment Bill No. 31, April 29, 2026, New Chapter IIIC; amending VAT (Amendment) Act No. 04 of 2025 (certified 11 April 2025) | Levels the competitive playing field between foreign digital platforms and local VAT-registered providers; aligns Sri Lanka with over 120 jurisdictions that tax digital services; expands the tax base without increasing domestic rates | Digital subscriptions become more expensive for consumers; cloud-reliant businesses face higher input costs; VPN circumvention risk may reduce actual revenue below projections; further deferral from October 2025 to July 2026 signals implementation challenges |
| 4 | Penalties for VAT offences strengthened: maximum fine increased to LKR 1 million and/or imprisonment of up to six months, applicable to offences committed on or after 1 October 2025 | VAT Amendment Bill No. 31, April 29, 2026, Clauses amending Chapter XII of the VAT Act No. 14 of 2002 (Consolidated 2025) | Creates a stronger deterrent against evasion, underreporting, and fraudulent refund claims; improves fiscal discipline and compliance culture | Risk of disproportionate impact on small businesses with inadvertent errors; robust legal recourse and independent appeals mechanisms are essential to prevent administrative overreach |
| 5 | Mandatory use of secured point-of-sale (POS) machines approved by the Inland Revenue Department for all VAT-registered persons, to ensure accurate real-time transaction reporting | VAT Amendment Bill No. 31, April 29, 2026; IRD Notice PN/VAT/2026-05 (May 2026) | Strengthens real-time transaction monitoring; reduces opportunities for underreporting of turnover and VAT; complements the broader national e-invoicing initiative under the National Budget 2026 | Significant upfront investment required from businesses for hardware and software; SMEs with limited technical capacity face disproportionate implementation costs; benefits fully realised only once rollout is complete |
| 6 | Input tax credit disallowed on plants, machinery, equipment, or vehicles imported on a re-export basis for approved projects, where goods are not re-exported within one month of project completion | VAT Amendment Bill No. 31, April 29, 2026, Clause amending Section 22 of the VAT Act No. 14 of 2002 (Consolidated 2025) | Prevents abuse of input credit claims on capital goods that ultimately remain in Sri Lanka; protects revenue integrity of the VAT system | May create uncertainty for legitimate project investors; the one-month re-export window may be too short for complex infrastructure or industrial projects |
| 7 | Deemed input tax credits permitted on unsold trading stock held at the date of VAT registration, provided prescribed records are maintained | VAT Amendment Bill No. 31, April 29, 2026, Clause amending Section 22 of the VAT Act No. 14 of 2002 (Consolidated 2025) | Reduces the compliance cost of entering the VAT system; prevents double taxation on stock already acquired before registration; encourages voluntary and timely registration | Record-keeping requirements may be burdensome for smaller businesses; risk of fraudulent claims if verification mechanisms are inadequate |
| 8 | Transparency measure: Commissioner-General authorised to publicly disclose names, addresses, and tax registration numbers of VAT-registered persons | VAT Amendment Bill No. 31, April 29, 2026, New clause inserted into the VAT Act No. 14 of 2002 (Consolidated 2025) | Improves taxpayer identification and accountability; enables cross-referencing across government systems; reduces duplicate registrations and strengthens audit trails | Privacy concerns for smaller businesses and sole traders; risk of commercial sensitivity if registration information is misused; clear data governance framework essential |
| 9 | Tsunami relief provision: write-off of tax in default authorised for VAT-registered persons involved in government-sanctioned Tsunami relief projects where the government undertook to pay the tax | VAT Amendment Bill No. 31, April 29, 2026, New clause inserted into the VAT Act No. 14 of 2002 (Consolidated 2025) | Resolves long-standing legacy tax obligations arising from the 2004 Tsunami relief effort; removes uncertainty for affected businesses | Narrow in scope; no material revenue or economic consequences anticipated |
| 10 | Criminal proceedings timelines codified: proceedings must commence within 12 years from the date of the offence, or within 3 years from determination of tax liability in cases involving misrepresentation | VAT Amendment Bill No. 31, April 29, 2026, Clauses amending Chapter XII of the VAT Act No. 14 of 2002 (Consolidated 2025) | Provides legal certainty for both taxpayers and the Commissioner-General; limits exposure to indefinite prosecution risk; consistent with rule of law principles | The 12-year window for general offences is lengthy and may sustain administrative uncertainty for businesses over extended periods |
| 11 | Film exhibition services: Entertainment Tax charged by local authorities may be deducted from the value of supply for VAT purposes, preventing double taxation on film exhibitors | VAT Amendment Bill No. 31, April 29, 2026, New clause inserted into the VAT Act No. 14 of 2002 (Consolidated 2025) | Eliminates double taxation on the film and entertainment sector; aligns VAT treatment with economic reality of the supply | Limited in scope; sector-specific benefit; sets a precedent for other industries subject to overlapping local authority and national taxes |
Source: VAT Amendment Bill No. 31 (April 29, 2026), Official Gazette of the Democratic Socialist Republic of Sri Lanka; VAT Act No. 14 of 2002 (Consolidated 2025), Inland Revenue Department; VAT (Amendment) Act No. 04 of 2025 (certified 11 April 2025); KPMG Sri Lanka Tax Alert (March 2024); KPMG Sri Lanka (2026); IRD Notice PN/VAT/2026-05 (May 2026); Regfollower (May 2026); Bloomberg Tax Daily Tax Report International (May 2026)
As Table 2 illustrates, the 29 April gazette is not a monolithic reform package. It contains genuine modernization measures, including the e-invoicing system, the reduction of the registration threshold, digital services VAT provisions, SET form simplification, and the transition away from SVAT already enacted in 2025, alongside more problematic proposals, most notably the 20.5% VAT on financial services. The overall assessment is that the package is structurally uneven and inequitable in its distributional consequences.
4. Sri Lanka’s VAT in Global and Regional Context
To appreciate the significance of the 20.5% rate on financial services, it is necessary to position Sri Lanka within the global VAT landscape. According to PwC Worldwide Tax Summaries (2026) and the European Commission Taxes in Europe Database (TEDB, 2026), standard VAT and GST rates across Asia range from 5% in the UAE to 18% in India. Sri Lanka’s general rate of 18% already places it at the higher end of the regional scale. Table 3 provides a verified comparative overview.
Table 3: Comparative VAT / GST Rates — Selected Countries (2026)
| Country | Standard VAT / GST Rate | Source |
| United Arab Emirates | 5% (VAT) | PwC |
| Thailand | 7% (VAT) | PwC |
| Malaysia * | 6% (Service Tax — SST) / 10% (Sales Tax — SST) | Avalara |
| Singapore | 9% (GST) | IRAS |
| Bangladesh | 15% (VAT) | NBR Bangladesh |
| India ** | 18% (GST — most broadly applicable rate) | PwC |
| Sri Lanka — general rate (current) | 18% | VAT Act (Consolidated 2025) |
| Germany | 19% (VAT) | EC TEDB |
| United Kingdom | 20% (VAT) | HMRC |
| France | 20% (VAT) | EC TEDB |
| Austria | 20% (VAT) | EC TEDB |
| Sri Lanka — financial services (proposed) | 20.5% | VAT Amendment Bill, April 2026 |
| Spain | 21% (VAT) | EC TEDB |
| Italy | 22% (VAT) | EC TEDB |
* Malaysia: Malaysia abolished its 6% GST in 2018 and replaced it with a Sales and Service Tax (SST) — a single-stage tax that is not equivalent to VAT. The sales tax on goods is 10%; the service tax is 6% on specified services. Malaysia has no VAT/GST in 2026. The SST rate listed here is the service tax component only, provided for contextual reference. Direct comparison with Sri Lanka’s comprehensive multi-stage VAT is structurally misleading.
** India: India’s GST has four standard rates (5%, 12%, 18%, 28%). The 18% rate applies to the broadest category of goods and services. India has no single unified standard rate.
The imposition of a 20.5% VAT on financial services will place Sri Lanka above the UK (20%), France (20%), and Austria (20%). These are all advanced economies, but they have much higher per capita incomes, robust welfare systems, and more developed financial markets than Sri Lanka. For a developing economy still recovering from its worst economic crisis in modern history, such a rate is structurally inappropriate and regionally uncompetitive.
5. Regressive Distributional Impact
VAT is an inherently regressive tax. Unlike progressive income taxes, VAT applies at a uniform rate regardless of income. The regressivity of VAT on financial services, however, requires precision: while higher-income households consume more complex financial services in absolute terms, lower-income households in Sri Lanka disproportionately rely on hire purchase and leasing, two instruments explicitly covered by the proposed 20.5% rate, to finance essential consumer goods and vehicles. The increased VAT on these instruments, therefore, creates a regressive impact on their distribution. They impose a bigger burden on lower-income households, which rely on them for access to basic consumption.
According to the World Bank, Sri Lanka saw a rise in poverty levels of approximately 13.1% in 2021 to 25.0% in 2022 due to falling real incomes, widespread job losses, and record inflation in 2022. The World Bank Development Update (2024) estimated that by 2023, the poverty rate had increased even further to around 25.9%. Based on the World Bank Development Update (April 2025), the figure dipped slightly to 24.5% in 2024, a level it describes as “alarmingly high”, with household incomes and welfare remaining well below pre-crisis levels. According to the World Bank Development Update (October 2025), poverty stood at approximately 22% in 2025, still nearly double the pre-crisis level of 11.3% in 2019, with the recovery described as incomplete and subject to heightened downside risks in 2026.
The economic crisis of 2022 plunged millions deeper into poverty. While purchasing power will be partially restored by 2025, the raising of VAT burden on financial services at this stage will amount to transferring welfare from the poorest section of society to the government. This is a highly inequitable outcome, which is quite contrary to the government’s own narrative of an inclusive recovery.
6. Inflationary Consequences
From a macroeconomic perspective, a VAT increase on financial services functions as a negative supply side shock, equivalent to a leftward shift of the aggregate supply curve. By raising the cost of financial transactions at every stage of production and consumption, higher VAT feeds directly into operating costs for firms and service charges for consumers, triggering cost push inflation. In a standard AD-AS framework, this results in a new short-run equilibrium characterized by a higher price level and lower real output, conditions consistent with stagflation.
This concern is particularly acute given Sri Lanka’s recent inflationary history. According to the Central Bank of Sri Lanka (CBSL) official press release of September 2022, CCPI-based year-on-year headline inflation reached 69.8% in September 2022, its highest recorded level on that measure. On the broader National Consumer Price Index (NCPI), compiled by the Department of Census and Statistics (DCS), inflation peaked at 73.7% in September 2022. These figures reflect a catastrophic inflationary shock that deeply embedded price expectations across the economy.
Per the World Bank Sri Lanka Development Update (2025), CCPI-based headline inflation eased to approximately 4% in December 2023 from the September 2022 peak. Sri Lanka subsequently entered a protracted deflationary period. The CBSL’s official press release of 31 January 2025 reported that CCPI-based headline inflation recorded a 4.0% deflation in January 2025, the fifth consecutive month of negative inflation. Per the CBSL’s central news page, Sri Lanka experienced eleven consecutive months of deflation before inflation returned to positive territory in August 2025 at 1.2%. The April 2026 VAT hike, which is expected to put upward price pressure on inflation and the simultaneous fuel price spike due to tensions in the Middle East, can reignite inflation expectations at a crucial time in Sri Lanka’s stabilisation programme. CEYPETCO data shows Petrol 92 Octane rose from approximately Rs. 294 per litre in February 2026 to Rs. 410 per litre by May 2026, an increase of approximately 39.5 per cent.
7. Demand Suppression and the Keynesian Multiplier
According to Keynesian macroeconomic theory, if disposable income declines or the cost of financial transactions rises, consumption will be suppressed. As a result, the aggregate expenditure curve shifts downwards. Via the multiplier mechanism, any initial change in spending leads to an amplified overall impact on output. Thus, even a modest tightening of financial conditions can create a much larger negative output gap.
As per CBSL, Sri Lanka’s economy has grown by 5.0% in 2024 and 2025, exhibiting a strong recovery after the GDP contraction of 7.3% in 2022 (World Bank Development Update 2024). Currently, the nascent recovery may be stalled by a VAT shock to financial services and consumer confidence. Also, as per Laffer (Wanniski, 1978, The Public Interest; Trabandt and Uhlig, 2011, Journal of Monetary Economics), tax revenue does not vary in a linear fashion with the tax rate, meaning that beyond a point, a rate increase may reduce total revenue as activity shrinks and informality expands.
8. Threat to Competitiveness and Foreign Investment
Sri Lanka competes for foreign direct investment mainly with countries in South Asia and Southeast Asia, where consumption tax regimes are important location determinants. According to Table 3, other neighbouring economies maintain significantly lower rates of 5% for UAE, 7% for Thailand and 9% for Singapore (PwC Worldwide Tax Summaries, 2026). A 20.5% VAT on financial services will make Sri Lanka one of the most taxed financial service environments in Asia and less appealing as an investment, financial services and tourism destination.
According to the IMF’s Third Review Under the Extended Fund Facility (Country Report No. 25/056, March 2025), sustained revenue mobilization must come from efforts to comply with and reform structures rather than with rising rates on already over-taxed populations. According to international investors and credit rating agencies, a 20.5% rate will be interpreted as fiscal overreach rather than disciplined, base-building consolidation. This will discourage inflows just when Sri Lanka needs both credibility and investment.
9. Tax Evasion, Informality and Compliance Risks
Often overlooked is how high VAT rates can create an incentive for evasion and the informal sector. As the tax disparity between registered and unregistered suppliers widens, consumers turn to unregistered alternatives, especially in Sri Lanka’s large informal economy. The simultaneous reduction of the registration threshold from LKR 60 million to LKR 36 million, though sound in principle, would risk accelerating this trend by creating a new class of involuntary VAT registrants ill-equipped for compliance.
The compliance rate of VAT in Sri Lanka has faced restrictions in the past due to a lack of administrative capacity and enforcement resources. E-invoicing system mentioned in the April 29 gazette is a positive structural fix but its advantages will be evident only when finally all taxpayers are brought onboard. While a 20.5% rate for financial services might be less-than-optimal, it will probably generate less revenue than expected while pushing more activity underground.
10. Alternative Fiscal Strategies
The fiscal consolidation aims of Sri Lanka can be better supported by actions that are consistent with IMF advice on sustainable revenue mobilization, rather than raising the VAT rate on financial services to 20.5%.
· Remove exemptions and bring the informal sector into the tax net to widen the VAT base so that total revenues can be expanded without raising marginal rates on compliant taxpayers.
· The national e-invoicing system and risk-based audit framework highlighted in the April 29 gazette should be enforced effectively, thereby enhancing the compliance rate of the already existing 18%.
· Starting on 1 July 2025, the government will apply a VAT on digital services (Act No. 04 of 2025) that should generate substantial new revenues from foreign digital platforms such as Netflix, Google, Spotify, Airbnb, Uber, etc. Crucially, such a VAT would not burden the local consumers of physical goods.
· Progressive direct tax reforms involve the rationalization of corporate income tax, wealth taxation, capital gains tax reforms, and raising revenue in an equitable manner without inflation.
· Ensure the SVAT to refund transition, operative since October 2025, is adequately resourced. This will enable eligible exporters to receive refunds within the 45-day statutory period, protecting their competitiveness
11. Conclusion
The April 29, 2026 VAT Amendment Bill No. 3 of Sri Lanka is a reform package with two distinct characters in uneasy coexistence. On one side sits genuine, free modernization. Provisions related to E-invoicing, VAT on digital services, the change to the SVAT, which has already been implemented in 2025, and the simplification of the SET form and the widening of the base through the reduction of thresholds. These will bring about a sustainable fiscal future. On the other side, there is 20.5% VAT on financial services. This proposal appears to be a neutral simplification. Nonetheless, its actual effect is that of a direct, uncompensated tax increase of 2.5 percentage points on the vast number of users of financial services who will never pay the SSCL that it supposedly offsets.
Using primary legislative texts, official macroeconomic data of CBSL and DCS, World Bank poverty estimates, and IMF programme guidance, the paper shows that VAT and the SSCL are structurally two different instruments with different legal bases, incidence mechanisms, and economic outcomes.
The base assumption that these two taxes are similar and the government’s claim that removing one but raising the other is revenue neutral is not theoretically correct and empirically false. The end result will lead to a 2.5 percentage points tax hike on banking accounts, forex, payment services, lease and hire purchase. The common Sri Lankans are most likely to absorb this quietly in every financial transaction and that is the impact it will have.
Sri Lanka cannot attain public finance sustainability by raising tariffs and fees in the name of simplification. Broadening the fiscal base, strengthening enforcement and transparency will be required. The citizens of Sri Lanka who have suffered difficult conditions during the year 2022, along with the long recovery phase, must be supported with a fiscal policy that is proportional, honest, and just.
Professor Prasanna Perera is a Senior Professor in Economics and the Head of the Department of Economics and Statistics, University of Peradeniya.
Factum is an Asia-Pacific-focused think tank on International Relations, Tech Cooperation, and Strategic Communications accessible via www.factum.lk.
The views expressed here are the author’s own and do not necessarily reflect the organization’s.
