1. Economic Context and Fiscal Outlook
Sri Lanka’s 2026 Budget, presented by Finance Minister Anura Kumara Dissanayake, aims to strengthen macroeconomic stability while maintaining a deficit of 5.1% of GDP and targeting revenue above 15% of GDP.
Government expenditure is projected at 20.5% of GDP, with public investment rising to 4%, signaling fiscal discipline under the Public Financial Management Act No. 44 of 2024.
Key fiscal goals:
- Maintain inflation below 5%
- Reduce debt-to-GDP ratio to 87% by 2027
- Improve tax-to-GDP ratio from 14.8% in 2025 to 15.4% in 2026
2. Major Tax Reforms in 2026
a. VAT and SSCL Thresholds
From April 1, 2026, the VAT and Social Security Contribution Levy (SSCL) registration threshold will be reduced from Rs. 60 million to Rs. 36 million annual turnover.
👉 Impact: Thousands of SMEs and professionals will enter the VAT net, broadening the tax base.
b. E-Invoicing Implementation
A national API-based e-invoicing system will connect taxpayer ERP systems with RAMIS, ensuring real-time transaction recording through POS integration.
👉 This will revolutionize VAT compliance and minimize underreporting.
c. Customs and Import Tax Changes
- Customs Duty rates to be standardized at 0%, 10%, 20%, and 30% under the new National Tariff Policy (effective April 2026).
- CESS on imported fabric to be removed and VAT imposed instead, ensuring a level playing field for local manufacturers.
- Special Commodity Levy on coconut and palm oil to be replaced with VAT + SSCL.
- Social Security Levy on vehicles will be collected at the time of import/manufacture.
d. Modern Tax Audit Framework
From January 2026, a risk-based audit selection system will be introduced — reducing discretion, enhancing transparency, and combating corruption.
e. Abolition of SVAT
The SVAT system was abolished from October 2025, replaced by a refund-based mechanism.
👉 This aligns Sri Lanka with international best practices, but refund delays must be closely monitored.
f. Taxpayer Services and Institutional Modernization
- A new Inland Revenue Department HQ (Rs. 2 billion) will centralize operations and digital services.
- RAMIS 3.5 upgrade to enhance automation and analytics.
- Final Budget Position Report advanced to May 31, and Mid-Year Report to August 31, improving fiscal transparency.
3. Incentives for Investors and SMEs
a. Reduced Investment Thresholds
To attract SMEs, the minimum investment required for tax incentives is cut from USD 3 million to USD 250,000.
b. New Loan Schemes and SME Support
- Rs. 25B SME Development Programme – concessional loans up to Rs. 50 million at 8% interest, repayable over 10 years.
- Rs. 7.7B SME Sector Development – supporting women-led and export-oriented enterprises.
- National Credit Guarantee Institution established to support unsecured SME loans.
c. Startup and Innovation
- “Agni Fund” launched to boost Sri Lanka’s startup ecosystem.
- Two new IT Zones planned in Digana and Nuwara Eliya under BOI.
- AI Data Centers and Digital Towers to enjoy five-year tax exemptions.
- Rs. 35.6B allocated for digital transformation, including Digital Identity Card (March 2026) and National Single Window for trade.
4. Key Social and Welfare Measures
- Aswasuma expanded to Rs. 231 billion covering 3.1M households.
- Pensions & gratuities: Rs. 565 billion allocation.
- Estate workers’ daily wage raised to Rs. 1,550 + Rs. 200 incentive.
- Education & health investments exceed Rs. 1.3 trillion combined.
- Housing: 70,000 new homes + urban resettlement initiatives.
5. Implications for Businesses & Taxpayers
| Area | Key Change | Practical Impact |
| VAT | Threshold down to Rs. 36M | More businesses must register |
| SVAT | Abolished | Refund-based system for exporters |
| E-Invoicing | API-linked with POS | Real-time monitoring, less evasion |
| Customs | Simplified duty structure | Predictability for importers |
| Tax Audits | Risk-based framework | Reduced harassment, data-driven checks |
| SMEs | Concessionary loan schemes | Easier access to finance |
| Digitalization | RAMIS 3.5, e-payments, e-procurement | Streamlined compliance |
6. Fiscal Discipline and Transparency
Under the Public Financial Management Act (2024):
- Primary expenditure capped at 13% of GDP.
- Annual budget reserve limited to 2% of expenditure.
- Regular publication of fiscal position reports ensures transparency and accountability.
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