Limiting VAT to Manufacturers, Importers and Service Providers, and SSCL to Traders

The Value Added Tax (VAT) is imposed quarterly at the rate of 18% on four principal branches of business activity: manufacture, imports, trading (buying and selling), and services. Similarly, the Social Security Contribution Levy (SSCL) is as well imposed quarterly at the rate of 2.5% on the very same branches of business.

It is difficult for any rational observer — except perhaps those in the political sphere — to comprehend the logic of maintaining such double taxation on the same business activities. The imposition of such dual taxes of similar nature on the same business turnover may serve short-term political convenience, but it does not reflect sound economic or fiscal policy wisdom.

Splitting what is essentially a single sales tax into two components, VAT and SSCL, may create the illusion of moderation, as each appears less burdensome when considered separately. However, this illusion cannot be sustained in the long run. Ultimately, the combined impact of these taxes increases the cost of doing business and triggers inflations, undermining efficiency of both tax administration and taxpayers.

Bureaucratic Overreach to Bring Traders within the VAT Net

Both the Goods and Services Tax (GST) and the Value Added Tax (VAT) were originally designed to exclude trading (buying and selling) activities from their scope. It is a matter of record that trading was later brought within the VAT net due to arbitrary bureaucratic outfox. However misguided, even that decision retained a semblance of prudence by maintaining a substantial disparity in the annual registration thresholds — Rs. 2,000 million for trading activities and Rs. 12 million for other non-trading activities.

It was during the Gotabaya administration that this distinction was removed, and a uniform threshold was introduced — Rs. 300 million for both trading and other activities. The Wickremesinghe government continued this uniformity, revising the threshold first to Rs. 80 million and later to Rs. 60 million. Regrettably, the present AKD government seems to be treading the same path, maintaining an identical threshold of Rs. 60 million, effective from 1 January 2024, for both trading and non-trading activities.

The following chronology of VAT registration thresholds illustrates this policy inconsistency and its increasing lack of prudence:

Note: The Standard Threshold refers to the minimum turnover limit that triggers the registration requirement for manufacturers, importers, and service providers.

Why Trading activity should be removed from VAT and SSCL should be confined to Trading?

It is regrettable that, too often, policymakers and legislators in Sri Lanka have not given due consideration to the original intent of a law before introducing new amendments. A more careful and objective examination of the purpose of the legislation, together with the implications of any proposed changes, could have helped avoid such unintended adverse consequences.

Prior to introduction of GST in 1998, Turnover Tax (TT) was in place at relatively lower rates and it was charged on all four main branches of a business. The TT mechanism had two primary defects in its self, namely cascading (tax on tax) effect and Administrative inefficiency.

The introduction of GST/VAT solved the first problem by implementing a credit-invoice system that eliminated cascading. It solved the second by strategically limiting the VAT liability to manufacturers, importers, and service providers thereby focusing administrative efforts on fewer, larger taxpayers.

Charging VAT on Trading Vs. MRP and Lower Margin

Subjecting traders to the same VAT burden as manufacturers and importers is inequitable and unjustified. Unlike these primary suppliers, traders operate at the end of the distribution chain with significantly lower margins. Furthermore, they are legally bound to sell goods at the Maximum Retail Price (MRP) as specified by the primary suppliers, non-compliance with which is a punishable offence.

In most cases, traders purchase their merchandise from suppliers who are not VAT-registered, which prevents them from claiming input tax credits. Even in situations where input credits are available, the payment of output VAT on trading activity becomes impractical when considered against the narrow trading margin and the statutory restriction imposed by the MRP.

Generally, traders who occupy the final stage of the distribution chain — unlike manufacturers and importers — operate with relatively low profit margins, typically within the 10% range. Consequently, net VAT revenue contributed by traders is often less than 2% of the turnover.

Imposition of Dual Taxes on the Same Business Activities

Against this backdrop, the rationale behind imposing two identical taxes — VAT and SSCL — on the same four branches of business activity (manufacture, imports, trading, and services) is difficult to comprehend. It is needless to emphasize that levying two taxes of similar nature on the same base undermines one of the four cardinal principles of taxation: efficiency — both in administrative terms for the tax authorities and in compliance costs for taxpayers.

If policymakers believe that duplicating taxes of the same character (VAT & SSCL) on these business activities will increase revenue, they are chasing an illusion. In reality, such duplication only compounds inefficiency, discourages business activity, and distorts the tax system’s integrity and simplicity.

Recommendations

It is disappointing that many professional bodies, trade chambers, and tax advisors — who are well-placed and ethically bound to speak up — have chosen to remain silent on this issue. Their voices matter, and their silence only deepens the policy vacuum. As a result imprudent and adverse tax measures continue to prevail.

I strongly believe that adopting the following recommendations will help the government meet its revenue goals, improve the efficiency of tax administration, and most importantly, rebuild the trust and confidence of taxpayers and the public in our tax system.

Keep Trading Activity Out of the VAT Net

The time has come to return to the original spirit of the GST and VAT — to tax only where value is created, not where goods simply change hands.

Trading (buying and selling) was initially kept out of the VAT system for good reason. It was a conscious, well-thought-out decision aimed at preventing inefficiencies and protecting small traders and consumers from unnecessary burdens.

Bringing traders into the VAT net later on (2013) was a mistake that distorted the system’s logic and increased costs across the board. Reversing that move is not a radical reform; it’s simply good sense — a restoration of fairness, simplicity, and economic logic.

Reduce the VAT Registration Threshold to Rs. 12 Million

Once trading activity is excluded from VAT, the annual threshold should be reduced to Rs. 12 million. This ensures that genuine value-adding suppliers — manufacturers, importers, and service providers — are covered under VAT.

A lower threshold will broaden the base sensibly, without dragging small traders into complex compliance obligations they were never meant to bear.

Remove Primary Suppliers from the SSCL

If manufacturers, importers, and service providers are already paying VAT, subjecting them to SSCL as well is both illogical and unfair. The SSCL, in practice, duplicates VAT on the same activity — a classic case of double taxation.

Primary suppliers should therefore be exempted from SSCL to eliminate overlap and confusion in the system.

Raise VAT from 18% to 20%

Once SSCL is removed from VAT-registered businesses, the small revenue gap that might arise can easily be bridged by increasing the VAT rate slightly — from 18% to 20%, as in the case of present VAT on financial services.

This minor adjustment would make the tax structure cleaner and more coherent, without adding any real burden on businesses or consumers.

Limit SSCL only to Traders and Non-VAT-Registered Persons

The SSCL, at 2%, should be limited only to non-VAT-registered persons — mainly traders who buy and sell, and small-scale primary suppliers whose turnover is below the VAT threshold.

This targeted approach will make the system simpler, fairer, and easier to administer, while ensuring everyone contributes their fair share.

Note: A scientific and methodological data analysis report prepared by the Secretariat Unit of the Inland Revenue Department would provide an evidence-based assessment of the feasibility of the above recommendations.

Conclusion

These proposals are not radical reforms — they are restorations of balance and common sense.

For too long, our tax system has been weighed down by duplication, inconsistency, and policy drift. By clearly separating VAT and SSCL, and by returning VAT to its original focus on value addition, Sri Lanka can create a more rational, transparent, and growth-friendly tax framework.

A fair tax system is not only about collecting revenue; it’s about building confidence — among taxpayers, investors, and the public at large. Implementing these measures will help rebuild that confidence and lay the foundation for a more stable and equitable fiscal future.

The writer is a retired Deputy Commissioner General of IRD. (Colombo/Oct25/2026)

ECONOMYNEXT – Sri Lanka’s award-winning female vocal ensemble, Soul Sounds, will perform at ‘O Come Let Us Adore Him’, a Christmas charity concert and bazaar presented by the Rays of Hope Foundation.

The concert takes place on Saturday, November 21 at 7 pm at the Bishop’s College Auditorium, Colombo.

This year the Soul Sounds ensemble will be joined by the Soul Sounds Community Choir, Anjanee Fernando and KingdomCity for an evening of carols, classics and Christmas music.

Ticket sales will help children facing critical illness, children of incarcerated parents and rural communities:

– Suwa Arana of the Indira Cancer Trust. Through its Make A Wish initiative, Suwa Arana brings moments of joy to children facing critical illness. The Trust also helps cancer patients and their families with educational support, nutritional assistance and practical aid during treatment.

– Lanka Prison Fellowship’s Angel Tree project. The project reaches children of incarcerated parents at Christmas, reminding them that they are remembered and valued, and helps strengthen family bonds.

– Live, Love and Give in Padaviya. Through Project Lift and related programmes, this community-led initiative strengthens education, provides English-language training, supports women entrepreneurs and helps build sustainable livelihoods.

“Christmas is a time for hope, compassion and coming together for something greater than ourselves,” said Chamindri Wijemanne, Founder of the Rays of Hope Foundation Sri Lanka.

“Through O Come Let Us Adore Him, we hope to bring people together through the power of music while extending meaningful support to causes that make a difference in the lives of others.”

Before and around the concert, a Christmas bazaar will give guests the chance to do some festive shopping, and that will support the same charitable causes.

Tickets are priced from 1,000 rupees (balcony seating) to 5,000 rupees and can be bought at Thai Boulevard, 33 Queens Road, Colombo 3, from 9 am to 7 pm. (Colombo/Oct24/2026)

ECONOMYNEXT – Sri Lanka signed a Memorandum of Understanding (MoU) with Yunnan Province of China on Friday (23) to boost the trade and increase goods entering China, the island nation’s government said.

The MoU signed under the trade framework of “Three Free and Three Facilitations,” provides Sri Lankan entrepreneurs with a package that includes free warehousing facilities, free permanent exhibition booths, online market access, as well as customs clearance and transport facilities to enter the Chinese market, Sri Lankan government said in a statement.

“This will provide an opportunity for Sri Lankan companies to significantly reduce export-related costs,” the government said in a statement after signing the deal.

The deal was signed at ‘Sri Lanka and Yunnan Province Special Products Promotion Summit and Business Matchmaking Event,’ jointly organized by the Department of Commerce of Sri Lanka under the Ministry of Trade, Commerce, Food Security and Cooperative Development, and the Department of Commerce of Yunnan Province.

An official delegation led by Li Chaowei, Director General of the Department of Commerce of Yunnan Province, China, along with representatives from over 30 leading Chinese business entities arrived in Sri Lanka to participate in this event.

Addressing the summit virtually Vasantha Samarasinghe, Minister of Trade, Commerce, Food Security and Cooperative Development, emphasized the importance of bilateral cooperation between the two countries and highlighted the need to expand the export capacity of Sri Lankan products within the Chinese market.

Sri Lanka also signed a Letter of Intent (LOI), confirming the participation of Sri Lankan companies in the 11th China-South Asia Expo scheduled to be held in 2027.

This will pave the way for major promotion within the Chinese market for Sri Lanka’s leading export sectors, including Ceylon tea, food and beverages, spices, coconut products, seafood, gems and jewelry, and handicrafts, the government said in the statement. (Colombo/October 23/2026)

ECONOMYNEXT – Revenue collected by Sri Lanka Customs in the first 21 days of October accounted for over 79 percent of the month’s target, official data showed, as the island nation has already outperformed the annual target.

The revenue collecting body has also surpassed monthly targets for nine straight months through September.

Customs’ October revenue target has been set at 193.3 billion rupees. But the revenue collecting body has already collected 152.8 billion rupees in the first 21 days of this month, official data showed.

It has already achieved 103.6 percent of this year’s target through October 21, official data showed.

Customs has been accelerating container clearance using digital scanning to reduce corruption and fast-track the clearance process.

Last year, Customs collected a record 2,551 billion rupees in revenues, higher than a revised target of 2,241 billion rupees for the year, achieving 64.2 percent higher revenue than the previous year’s revenue of 1,553 million rupees.

Customs has set a revenue target of 2,207 billion rupees for this year, 13.5 percent less than last year as it expects a significant decline in car imports. However, it has already achieved 2,286.1 billion rupees through October 21.

Sri Lanka Customs’ revenue jump is largely due to stronger enforcement, improved valuation practices, and a rebound in import volumes after years of contraction.

Following the economic crisis of 2022, imports fell sharply as the country imposed restrictions to conserve foreign exchange.

However, with the stabilization of reserves, the relaxation of certain import controls, and a steady recovery in consumer demand, customs collections from import duties, excise, and other levies have risen.

Officials note that tighter monitoring of under-invoicing and misdeclaration of goods has also contributed to boosting state revenue.

The combined effect of increased import activity, currency movements, and stricter enforcement has positioned Customs as one of the top revenue sources for the Treasury in 2025, providing a vital cushion as the state works to meet fiscal targets under the IMF-supported program. (Colombo/October 23/2026)

ECONOMYNEXT – Sri Lanka’s rupee closed at 332.10/20 to the US dollar in the spot market on Friday, stronger from 332.20/35 the previous day, while bond yields closed lower, dealers said.

A bond maturing on 15.09.2029 closed at 11.05/10 percent, down from 11.05/15 percent.

A bond maturing on 01.08.2030 closed at 11.45/55 percent, down from 11.55/60 percent.

A bond maturing on 01.02.2031 closed at 11.70/75 percent, down from 11.73/78 percent.

A bond maturing on 01.12.2031 closed at 11.80/90 percent, down from 11.90/12.00 percent.

A bond maturing on 15.01.2033 closed at 11.90/12.05 percent, down from 12.20/25 percent.

A bond maturing on 15.10.2034 closed at 12.35/45 percent, down from 12.40/50 percent. (Colombo/Oct23/2026)

ECONOMYNEXT – Central banks must adopt artificial intelligence with strict governance and human oversight to prevent emerging technologies from eroding public trust in financial systems, International Monetary Fund (IMF) Chief Information Officer Shirin Hamid said.

Delivering the 76th Anniversary Oration of the Central Bank of Sri Lanka (CBSL) in Colombo on Friday, Hamid warned that rapid AI adoption brings serious vulnerabilities, including voice cloning, deepfake fraud, and autonomous machine-speed cyberattacks.

“The intelligent central bank is not the bank with the most AI, It is the bank whose AI can be trusted, and can ensure that any AI that touches the financial system is explainable, governed, secure, ethical, and human-supervised,” Hamid said.

Hamid highlighted three major AI threats confronting financial institutions worldwide: impersonated humans using cloned audio and video, autonomous AI swarms executing attacks at machine speed, and indirect breaches that manipulate internal AI assistants already inside bank firewalls.

She noted that as little as three seconds of recorded voice is now enough for AI to produce an indistinguishable clone.

She also warned of data risks, revealing that when the IMF tested commercial generative AI on economic figures, tools like ChatGPT returned inaccurate GDP figures up to two-thirds of the time.

Because plausibly wrong numbers threaten institutional credibility, the IMF developed its own system, StatGPT, to run queries directly against verified data rather than letting models guess.

Hamid urged monetary authorities to ground their technological transitions in four pillars: dependable data, trustworthy systems, operational resilience, and adaptive governance.

Hamid emphasized that institutions must never treat AI simply as an IT department project, pointing out that human judgment remains the scarcest and most vital resource.

“For every AI-influenced decision, we need a named human who is answerable,” Hamid said. “We should aim to augment judgment first, and grant autonomy only where it has been earned,” Hamid said.

Hamid concluded that while financial tools will continue to evolve, the primary mission of an intelligent central bank remains unchanged: safeguarding public confidence from the vault to the algorithm. (Colombo/Oct23/2026)