📈 Indirect Tax Reform: The Hidden Costs of Sri Lanka’s New SSCL vs VAT Thresholds

Sri Lanka's recently enacted Value Added Tax (Amendment) Act No. 14 of 2026 and Social Security Contribution Levy (Amendment) Act No. 10 of 2026 reveal a structural contradiction in the government's strategy to protect consumers from price increases while expanding revenue. • The Policy Divergence The government retained the VAT registration threshold at LKR 60 Mn per annum (withdrawing a proposal to lower it to LKR 36 Mn) specifically to avoid direct 18% price pressures on consumers. Conversely, the government lowered the SSCL threshold from LKR 60 Mn to LKR 36 Mn per annum, drawing a significantly larger cohort of businesses into the tax net. • Structural Differences & SME Impact VAT acts strictly as a tax on value addition, allowing registered businesses to claim input tax credits, ensuring the tax does not compound across the supply chain. SSCL operates as a tax on gross turnover with no input credit mechanism. Lowering the threshold directly increases the compliance burden on SMEs operating on thin margins, forcing them to pay tax on total turnover rather than value added. • The Cascading Reality Because SSCL lacks an offset mechanism, it compounds at every stage of the supply chain (from manufacturer to retailer). Bringing more businesses into the SSCL net amplifies this cascading effect, embedding opaque, cumulative tax layers into final goods. Ironically, this instrument is structurally more likely to drive up consumer prices than the VAT expansion the government actively avoided.