By Panduka Keerthinanda, Attorney-at-Law
A powerful critique of Sri Lanka’s 18% VAT threshold exposes how a policy meant to promote equity may instead cripple small businesses, stifle innovation, and push the economy toward deeper instability.
The government’s recent budget, presented as a path to a more equitable society, has revived a familiar refrain: higher taxes on businesses. Under the new mandate, any enterprise with a monthly turnover of 3 million LKR is now subject to an 18% VAT. The intention is noble to fund social programmes and support the most vulnerable. No one disputes the moral value of lifting people out of poverty. Yet the critical question remains: at what cost does this revenue come? Rising concerns suggest that the policy may dismantle the very engine driving economic stability: Sri Lanka’s entrepreneurs and small to medium enterprises.
Labelling a business with a 3 million LKR monthly turnover as a “high-income earner” is a fundamental miscalculation. Turnover is not profit. A company earning 36 million LKR annually may face razor-thin margins after raw materials, utilities, salaries, transport, and loan repayments. Imposing an 18% VAT on total revenue, rather than profit, can quickly push a viable job-creating enterprise into financial loss. Local manufacturers and tech startups do not possess large financial reserves. They represent ambition, innovation, and growth. This VAT policy taxes not only their income but also their drive.
The chilling effect is immediate. The message becomes clear: “Grow, but not too much.” The 3 million LKR threshold discourages expansion. Business owners may deliberately suppress turnover to avoid VAT, leading to reluctance to hire employees, hesitation to invest in technology, reduced production, and rolled-back expansion plans. Instead of fostering entrepreneurship, the policy cages it during a time when economic recovery depends heavily on innovation and scalability.
The pursuit of equity may ironically generate greater inequality. When businesses struggle, their employees suffer first. Job opportunities shrink, wages stagnate, and layoffs increase. Those the government intends to help will face fewer chances for economic participation. Additionally, increased business costs will be passed on to consumers, embedding the 18% VAT into the price of goods and services. This fuels inflation and erodes purchasing power, creating a cycle where social support is needed because government policy has made living costs unaffordable.
A progressive system should tax profit, not turnover, simplify the tax regime, and invest revenue in infrastructure, education, and innovation. Entrepreneurs remain Sri Lanka’s greatest asset. Policies must nurture their success rather than hinder it. The government must reconsider its approach to ensure that the pursuit of equity does not undermine national prosperity.
Courtesy: A version of this story was inititally published in the Daily Mirror
