• Threshold to be reduced to Rs. 36 m from Rs. 60 m
• Still trails pre-2020 VAT threshold of Rs. 12 m
• Move aims to reverse impact of 2020 tax cuts: Experts 

The proposed reduction of the Value-Added Tax (VAT) registration threshold to Rs. 36 million per annum is part of the Government’s broader effort to recover revenue losses following the sweeping tax cuts introduced in 2020, with further threshold reductions expected in the future, according to tax experts.

Speaking to The Sunday Morning Business, tax expert and KPMG Sri Lanka Principal – Head of Tax and Regulatory Suresh Perera explained that the proposed amendments to the VAT Act would reduce the current threshold from Rs. 60 million to Rs. 36 million per annum, effective from 1 July.

“From 1 July, the threshold will come down to Rs. 36 million, which translates to Rs. 9 million per quarter and Rs. 3 million per month,” he stated.

Perera noted that the expansion of the VAT base resulting from this reduction was unlikely to create administrative challenges, pointing out that prior to 2020, the VAT threshold had been maintained at significantly lower levels.

He elaborated that prior to the tax policy changes introduced by the previous administration in 2020, the VAT threshold stood at Rs. 12 million per annum. 

However, it was subsequently increased to Rs. 300 million, leading to a sharp contraction of the VAT base in Sri Lanka – an outcome widely identified by economists as a key contributor to the country’s economic crisis.

According to Perera, this drastic increase effectively eroded a substantial portion of the VAT base, resulting in an estimated loss of around Rs. 5 billion in tax revenue.

He explained that the current reduction was part of a phased approach by the Government to reverse the earlier policy shift. “It has brought down the VAT threshold in stages – from Rs. 300 million to Rs. 80 million, then to Rs. 60 million, and now to Rs. 36 million,” he said.

“The erosion caused by the sudden increase from Rs. 12 million to Rs. 300 million is now being gradually rectified,” he observed.

Moreover, he revealed that he expected the Government to further reduce the VAT threshold in the future.

Perera also highlighted that, in principle, for the VAT to function effectively as a tax on value addition, a broad base of businesses must be brought within the VAT net, which further justified the policy of the Government.

In 2019, the previous administration reduced the VAT rate from 15% to 8% across most sectors, excluding financial services, with effect from 1 December 2019. This was followed by a substantial increase in the VAT registration threshold from Rs. 12 million to Rs. 300 million per annum from 1 January 2020, significantly narrowing the country’s tax base.