Sri Lanka is planning to lower both the value added tax (VAT) and social security contribution levy (SSCL) registration thresholds from LKR60m to LKR36m (US$179,000 to US$107,000), but the changes are moving on different timelines.
The VAT threshold reduction is expected to be introduced soon. The SSCL threshold reduction, however, took effect from 1 July, bringing businesses with annual turnover above LKR36m – roughly LKR9m per quarter or LKR3m per month – into mandatory registration and return filing obligations.
‘There needs to be a well-rolled-out knowledge series for SMEs to understand’
The change draws in ‘businesses with a monthly turnover of approximately LKR3m, such as mid-sized retail shops, bakeries and cafes’, according to Suresh Perera, principal and head of tax and regulatory at KPMG Sri Lanka.
Compliance learning curve
From a compliance point of view, smaller businesses might find it hard to understand how to comply as they deal with a shift towards online return filing and new invoice requirements. Sarah Afker, partner and head of tax services at BDO Partners, says that the response needs to be sector-specific, trilingual guidance delivered directly to business owners. ‘There needs to be a well-rolled-out knowledge series for them to understand,’ she says. ‘You need to go to the grassroot level and train them how to comply with the VAT law.’
The Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) notes a concern among members driven by the pace and cost of adjustment more than opposition to the policy itself. ‘A business with daily sales close to the new threshold may still operate with very thin margins, limited staff and manual records,’ says a spokesperson for FCCISL, adding that compliance costs are likely to arrive before any benefit from formalisation becomes visible.
Burden, with some upside
Perera suggests that most affected SMEs view the change as a burden, citing the cost of new invoicing software and point-of-sale hardware, and a self-imposed growth ceiling, where some owners cap turnover below the registration threshold to avoid entering the compliance net.
For SSCL entrants, the immediate upside is narrower than it will be under VAT; SSCL carries no input credit mechanism, making it a direct levy on turnover. When VAT registration eventually widens, newly registered businesses will be able to claim input tax credits on purchases, including a one-time deemed input credit on unsold stock at the time of registration.
Perera notes that the move to digital record-keeping, regardless of which obligation triggers it, reduces cash leakage and gives owners a clearer picture of profitability.
In-house or outsourced
Views differ on whether the lower threshold is pushing SMEs towards professional advisers. Afker suggests that smaller businesses generally prefer to manage compliance internally, often through their existing accountant, and tend to engage an external consultant only when they lack the resources to handle filing themselves. An immediate surge in outsourced demand, she says, is more likely among businesses freeing up time for operations than among the smallest entrants.
‘The levy is a direct cost on our turnover, so we have to plan for it as part of our pricing from the start’
FCCISL describes a parallel pattern in which better-prepared SMEs are already reviewing turnover against the threshold, separating personal and business accounts, consulting accountants and exploring basic accounting software, while smaller traders risk waiting until the last stage of the transition.
According to the owner of an SME that sells imported electronic items and is preparing to register under the revised threshold, ‘The levy is a direct cost on our turnover, so we have to plan for it as part of our pricing from the start.’ They add that decisions on whether to absorb the cost or adjust prices will need to be made carefully.
Reconciliation of invoices, bank deposits, cash collections and outstanding balances will become a weekly task, and the portion of revenue owed as SSCL will need to be ring-fenced. ‘We will set aside that portion separately, otherwise there can be pressure when the payment deadline comes,’ the owner continues.
Both Perera and FCCISL link improved bookkeeping to better access to finance. Perera notes that audited or formally maintained accounts directly affect lending decisions. ‘Bank loan officers consistently cite audited financial statements as the single most reliable indicator of an SME’s financial health,’ he says, adding that loan applications from businesses without certified management accounts are generally rejected automatically regardless of the underlying potential of the business.
Perera also points to Sri Lanka’s adoption of Simplified SLFRS for SMEs, the Central Bank of Sri Lanka’s Secured Transactions Register for asset-backed lending, along with a LKR25bn SME development fund in the 2026 Budget offering loans of up to LKR50m at 8% interest over 10 years, for which formal accounting records are a prerequisite.
FCCISL makes a similar point, noting that formal accounts allow a business to demonstrate turnover, profit, stock movement, receivables and repayment capacity, and that banks are more comfortable assessing businesses that can produce statements and tax records rather than relying on the owner’s personal reputation.
The SME owner adds that formal records would make it easier to present sales, margins and tax records to banks, and that some larger customers already prefer suppliers that issue proper invoices and maintain documentation.
Timely compliance needed
According to FCCISL, SMEs need four things: tax education in Sinhala, Tamil and English covering thresholds and filing deadlines; practical bookkeeping training; affordable digital tools for invoicing and record-keeping; and cost-effective access to accountants through clinics or shared advisory arrangements. ‘The transition should be treated as a compliance-readiness exercise, not only as a tax collection measure,’ says FCCISL.
FCCISL notes that the risk falls hardest on smaller traders who delay registration and bookkeeping decisions until close to enforcement deadlines, where weak awareness could result in penalties, incorrect filings or cashflow pressure that better-prepared businesses are already working to avoid.
