Investment threshold cut to unlock SME capital allowances

By Shannine Daniel
The small and medium-sized enterprises (SMEs) would qualify for full capital allowances under a proposal to cut the investment threshold to US $ 250,000, from US $ 3 million, an Inland Revenue Department (IRD) official said.
At a KPMG Sri Lanka forum on Budget 2026, IRD Senior Commissioner A.M. Nafeel said the change aims to spur investment by smaller firms. He added that the government remains confident of meeting its 2026 tax target, driven largely by the Value Added Tax (VAT) and Social Security Contribution Levy (SSCL).
“Certain suppliers, who are supplying goods without a VAT invoice, will be compelled to issue a VAT invoice because the small-scale suppliers will also be liable to pay the VAT and SSCL,” he said.
The budget proposes to lower the annual turnover threshold for the mandatory VAT and SSCL registration to Rs.36 million, from Rs.60 million from April 2026. Nafeel said the plan to levy the SSCL at the point of import or manufacture and sale of vehicles would benefit the importers and vendors.
He noted, “This measure will make it easier for the vehicle importers and vendors to calculate their costs before they make any sales.” 
The tax will not apply in the after-sales stages and will take effect in April 2026.
The government also plans to remove the Special Commodity Levy (SCL) on the imported coconut and palm oil and apply the general tax structure, including the VAT, to bring the imports in line with the domestic products. The imported coconut and palm oils are currently subject to an SCL of Rs.150 and Rs.275 per kilogramme, respectively.
Nafeel said the shift would create “a level playing field for the domestic manufacturers”.
The budget further proposes removing the cess on the imported fabric and applying the VAT at the import and supply points. The locally produced fabric is already subject to the VAT, while the imported fabric is VAT-exempt and carries a cess of Rs.100 per kilogramme.
Sri Lanka also plans to realign the customs import duty bands from zero percent, 15 percent and 20 percent to zero percent, 10 percent, 20 percent and 30 percent in April 2026, in line with the National Tariff Policy. The government said the revisions support the efforts to phase out the para-tariffs with minimal impact on revenue.