A leading tax expert breaks down the 2026 Budget, revealing how digitalisation, VAT expansion, and new levies will quietly reshape Sri Lanka’s economy and push thousands of businesses into the tax net.
Chartered Accountant and Tax Advisor Viraj Heenegedara has provided an extensive breakdown of the tax and policy proposals in Sri Lanka’s 2026 Budget presented by President and Minister of Finance Anura Kumara Dissanayake. Speaking on the Tax Advisor YouTube channel, Heenegedara explained that this year’s budget is one of the most digitally driven financial frameworks ever presented, aiming to modernise revenue collection, overhaul tax structures, and increase compliance through system based reforms.
He recalled that the President presented Sri Lanka’s 80th Budget on 7 November 2025. Heenegedara said that once he analysed the document closely, the overwhelming emphasis on digital governance became clear. Digitalisation has been woven into every aspect of the budget, from the introduction of upgraded systems and automated processes to the expansion of digital tax tools.
He noted that the Inland Revenue Department’s RAMIS platform will be upgraded to version 3.5. The proposed nationwide POS system, which had appeared in earlier budgets, has been reintroduced with a multi phase rollout plan. He said a substantial portion of the budget revolves around strengthening digital infrastructure and modernising state institutions.
He also highlighted that the elimination of the SVAT system from 1 October remains in place. Moreover, the government plans to revise the Strategic Development Project Act and update Port City regulations to align with current needs. Heenegedara then moved through each major tax proposal while maintaining the same thematic order used in the original commentary.
New Tax Structure on Imported Cooking Oils
The first proposal focuses on applying VAT and SSCL to imported coconut oil and palm oil. Previously, these products were taxed under a Special Commodity Levy. Coconut oil carried a levy of Rs. 150 per kilogram and palm oil Rs. 275 per kilogram. The government has now decided to remove this levy and instead charge VAT at 18 percent and SSCL at 2.5 percent.
Heenegedara explained that this change aims to eliminate the separate tax mechanism applied to imported oils compared to local oils. The intention is to equalise market competition between imported and locally produced oils under a uniform tax system.
Lower VAT Threshold Will Pull Thousands Into the Tax Net
The second major reform concerns VAT and SSCL registration. The original threshold was Rs. 60 million annually, Rs. 15 million per quarter, or Rs. 5 million per month. On a daily basis this equalled Rs. 166,000 in sales. The new proposal reduces the threshold to Rs. 36 million per year, or Rs. 3 million per month. This breaks down to roughly Rs. 100,000 per day.
Heenegedara said that from 1 April 2026, any business earning above Rs. 100,000 per day must register for VAT. This means a large number of businesses will enter the VAT system for the first time.
He pointed out that small business owners may see this as an added burden. However, the government argues that a broader tax base ensures fairness, since many businesses previously stayed below the threshold to avoid VAT.
He stated that VAT, by design, falls on the consumer. Therefore, the expansion of the VAT base will inevitably increase retail prices. He also noted that the government intends to shift from a 25 to 75 direct to indirect tax ratio to a 40 to 60 split. Yet simultaneously increasing the VAT base means consumers will continue to shoulder a heavy tax load.
VAT Replaces CESS on Fabric Imports
The third proposal removes the CESS on imported textiles and replaces it with VAT. Currently, imported fabric is taxed Rs. 100 per kilogram, while locally produced fabric is not. The government intends to remove CESS and apply VAT to ensure equal treatment for both imported and domestic fabric. This change will also take effect from 1 April 2026.
Vehicle Taxation Moved to Import Stage
The next proposal deals with SSCL on vehicles. Heenegedara explained that SSCL was previously charged when a vehicle was sold locally. Because of exemptions and legal loopholes tied to wording such as import and sale, only about half the intended SSCL was recovered. Some importers even argued that SSCL did not apply to them at all.
Therefore, the government has shifted SSCL collection to the point of import or manufacturing. Heenegedara said that while the President claimed that this would not affect retail prices, the change will in reality increase vehicle costs. Importers who previously avoided paying SSCL will now be required to pay the full levy.
Previously, importing a vehicle under a letter of credit meant the importer did not pay SSCL. Under this proposal, SSCL will apply regardless of the import method. Heenegedara stressed that vehicle prices will inevitably rise.
National Tariff Policy to Simplify a Confusing System
The fifth proposal is the long awaited National Tariff Policy. Heenegedara said that Sri Lanka’s tax and tariff system is extremely complex and confusing for businesses. The new policy aims to simplify tariff structures, gradually phase out certain import duties, and update tax rates in a structured manner. He said this proposal has appeared in earlier budgets but has not yet been implemented. If done properly, it will bring much needed clarity for taxpayers.
Audit Reforms to Reduce Corruption and Increase Transparency
He identified the sixth proposal as one of the most important in the entire budget. It concerns upgrades to the tax audit process. At present, the Inland Revenue Department routinely requests multiple documents from taxpayers during audits, especially when refunds appear in RAMIS. Often a refund identified in the system ends as a tax payment after an audit review.
The new proposal aims to reduce improper interactions between taxpayers and officers by introducing risk based audit selection managed by a specialised Risk Management Unit. A review committee appointed by the Commissioner General will oversee the process. Heenegedara said this reform will reduce bribery, increase transparency, and prevent misconduct. Disciplinary guidelines have been introduced to penalise officers who engage in improper practices.
Telecommunications Tax Framework and Anti Money Laundering Integration
The next proposal updates the telecommunications levy, especially surrounding bad debt recovery. Heenegedara noted that this area has seen multiple amendments, and a full overhaul is needed.
In addition, the Anti Money Laundering Act will now allow Inland Revenue officials to share information with the Financial Intelligence Unit and other authorised bodies. Likewise, the FIU will be empowered to obtain information from the Inland Revenue Department. This integration will strengthen tax administration and widen the revenue net.
Digital Governance as the Backbone of the 2026 Budget
Heenegedara said that digitalisation is the defining theme of the 2026 Budget. With upgrades to RAMIS, expansion of POS systems, and increased reliance on automated taxation processes, the budget aims to transform the way the state collects revenue and monitors compliance. Data integration, digital filings, and strengthened enforcement mechanisms will reduce leakages and improve efficiency.
Final Assessment of the Budget
He concluded that the 2026 Budget is a direct effort to expand revenue, enhance digital governance, reform the tax system, and bring Sri Lanka in line with international compliance standards. While the proposals may increase consumer costs and burden smaller enterprises, they also aim to create fairness, discipline, and long term stability. He stated that understanding these changes is essential because they will shape the future behaviour of taxpayers and businesses.
