{"id":225,"date":"2026-10-24T11:18:08","date_gmt":"2026-10-24T10:18:08","guid":{"rendered":"https:\/\/sripuwath.com\/index.php\/2026\/10\/24\/sri-lanka-urged-to-exclude-traders-from-vat-and-abolish-double-taxation\/"},"modified":"2026-10-24T11:18:08","modified_gmt":"2026-10-24T10:18:08","slug":"sri-lanka-urged-to-exclude-traders-from-vat-and-abolish-double-taxation","status":"publish","type":"post","link":"https:\/\/sripuwath.com\/index.php\/2026\/10\/24\/sri-lanka-urged-to-exclude-traders-from-vat-and-abolish-double-taxation\/","title":{"rendered":"Sri Lanka urged to exclude traders from VAT and abolish double taxation"},"content":{"rendered":"

Limiting VAT to Manufacturers, Importers and Service Providers, and SSCL to Traders<\/strong><\/p>\n

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.<\/p>\n

It is difficult for any rational observer \u2014 except perhaps those in the political sphere \u2014 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. <\/p>\n

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.<\/p>\n

Bureaucratic Overreach to Bring Traders within the VAT Net<\/strong><\/p>\n

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 \u2014 Rs. 2,000 million for trading activities and Rs. 12 million for other non-trading activities.<\/p>\n

It was during the Gotabaya administration that this distinction was removed, and a uniform threshold was introduced \u2014 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.<\/p>\n

The following chronology of VAT registration thresholds illustrates this policy inconsistency and its increasing lack of prudence:<\/p>\n\n

Note: The Standard Threshold refers to the minimum turnover limit that triggers the registration requirement for manufacturers, importers, and service providers. <\/p>\n

Why Trading activity should be removed from VAT and SSCL should be confined to Trading?<\/strong><\/p>\n

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.<\/p>\n

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. <\/p>\n

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.<\/p>\n

Charging VAT on Trading Vs. MRP and Lower Margin<\/strong><\/p>\n

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.<\/p>\n

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. <\/p>\n

Generally, traders who occupy the final stage of the distribution chain \u2014 unlike manufacturers and importers \u2014 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.<\/p>\n

Imposition of Dual Taxes on the Same Business Activities<\/strong><\/p>\n

Against this backdrop, the rationale behind imposing two identical taxes \u2014 VAT and SSCL \u2014 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 \u2014 both in administrative terms for the tax authorities and in compliance costs for taxpayers.<\/p>\n

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\u2019s integrity and simplicity.<\/p>\n

Recommendations<\/strong><\/p>\n

It is disappointing that many professional bodies, trade chambers, and tax advisors \u2014 who are well-placed and ethically bound to speak up \u2014 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.<\/p>\n

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.<\/p>\n

Keep Trading Activity Out of the VAT Net<\/strong><\/p>\n

The time has come to return to the original spirit of the GST and VAT \u2014 to tax only where value is created, not where goods simply change hands. <\/p>\n

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.<\/p>\n

Bringing traders into the VAT net later on (2013) was a mistake that distorted the system\u2019s logic and increased costs across the board. Reversing that move is not a radical reform; it\u2019s simply good sense \u2014 a restoration of fairness, simplicity, and economic logic.<\/p>\n

Reduce the VAT Registration Threshold to Rs. 12 Million<\/strong><\/p>\n

Once trading activity is excluded from VAT, the annual threshold should be reduced to Rs. 12 million. This ensures that genuine value-adding suppliers \u2014 manufacturers, importers, and service providers \u2014 are covered under VAT.<\/p>\n

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

Remove Primary Suppliers from the SSCL<\/strong><\/p>\n

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 \u2014 a classic case of double taxation.<\/p>\n

Primary suppliers should therefore be exempted from SSCL to eliminate overlap and confusion in the system.<\/p>\n

Raise VAT from 18% to 20%<\/strong><\/p>\n

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 \u2014 from 18% to 20%, as in the case of present VAT on financial services. <\/p>\n

This minor adjustment would make the tax structure cleaner and more coherent, without adding any real burden on businesses or consumers.<\/p>\n

Limit SSCL only to Traders and Non-VAT-Registered Persons<\/strong><\/p>\n

The SSCL, at 2%, should be limited only to non-VAT-registered persons \u2014 mainly traders who buy and sell, and small-scale primary suppliers whose turnover is below the VAT threshold.<\/p>\n

This targeted approach will make the system simpler, fairer, and easier to administer, while ensuring everyone contributes their fair share.<\/p>\n

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.<\/p>\n

Conclusion<\/strong><\/p>\n

These proposals are not radical reforms \u2014 they are restorations of balance and common sense.<\/p>\n

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.<\/p>\n

A fair tax system is not only about collecting revenue; it\u2019s about building confidence \u2014 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.<\/p>\n

The writer is a retired Deputy Commissioner General of IRD.<\/em> (Colombo\/Oct25\/2026)<\/p>","protected":false},"excerpt":{"rendered":"

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