• Improved revenue from other sources to offset loss

No revenue shortfall is expected from the reversal of the earlier decision to reduce the mandatory Value-Added Tax (VAT) registration threshold from Rs. 60 million to Rs. 36 million, according to the Government. 

Speaking to The Sunday Morning Business, Deputy Minister of Trade, Commerce, and Food Security R.M. Jayawardana said that the original decision to propose the reduction of the mandatory VAT threshold to Rs. 36 million from Rs. 60 million had been intended to increase the VAT base. 

He added that contrary to criticism, the decision would not have impacted the income of businesses as significantly as claimed. 

However, responding to queries as to how the Government expected to offset the loss of revenue from the reversal of the decision, he said improved revenue generation from other sources was expected to compensate for the shortfall. 

“As far as I know, this decision was made following discussions on the expectation that the revenue collected from other sources would improve to cover this resulting shortfall,” he said. 

The Deputy Minister further stated that the Government had decided not to reduce the mandatory VAT registration threshold at this stage, leaving the door open to implement the measure at a future date. 

Similar sentiments were expressed to The Sunday Morning Business by Ministry of Trade, Commerce, Food Security, and Co-operative Development Secretary K.A. Vimalenthirarajah. 

“There is no shortfall [in Government revenue from the decision]. This decision was taken after considering that fact,” he stated. 

Accordingly, he stated that the Government was of the view that improved revenue generation from other sources would offset the loss of the anticipated revenue. 

The VAT (Amendment) Bill of 2026 had originally proposed reducing the annual turnover threshold for mandatory VAT registration from Rs. 60 million to Rs. 36 million. 

However, in the face of opposition from political parties and civil society, the VAT (Amendment) Act certified by the Speaker of Parliament on 30 June retained the VAT registration threshold at the previous level of Rs. 60 million per annum, forgoing the bill’s proposal. 

The proposed reduction had been part of the Government’s broader effort to recover revenue losses following the sweeping tax cuts introduced in 2020, with further threshold reductions having been expected in the future, according to tax experts.

Speaking to The Sunday Morning Business in May, tax expert and KPMG Sri Lanka Principal – Head of Tax and Regulatory Suresh Perera explained that prior to the tax policy changes introduced by the previous administration in 2020, the VAT threshold had 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 – 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, and the Government had since been reducing the threshold in stages – from Rs. 300 million to Rs. 80 million, and then to Rs. 60 million – as part of a phased approach to reverse the earlier policy shift. 

In 2019, the 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.