Sri Lanka plans to revise its tax structure from April 2026 by imposing VAT and social security levies on imported coconut oil, palm oil, fabric, and vehicles, reducing the VAT registration threshold, and aligning Customs duties with the National Tariff Policy.
Sri Lanka’s Minister of Finance, Planning, and Economic Development presented the Budget Speech for 2026 on 7 November 2025, outlining significant tax policy changes—including the alignment of VAT and social security contribution levies across imported and locally produced goods, a reduced VAT registration threshold to bring more small businesses into the tax net, and the abolition of the Simplified VAT System (SVAT). It also emphasises economic modernisation through digital governance initiatives and proposes legal reforms to enhance the attractiveness of the Colombo Port City for foreign investors.
The main tax measures are as follows:
Imposition of VAT and social security contribution levy on imported coconut oil and palm oil
Locally produced coconut oil and palm oil are subject to Value Added Tax and Social Security Contribution Levy. In contrast, imported coconut oil and palm oil are subject to a Special Commodity Levy of LKR 150 per kilogram and LKR 275 per kilogram, respectively. To ensure a level playing field, it is proposed to remove the Special Commodity Levy on imported coconut oil and palm oil and instead implement the general tax structure, including Value Added Tax. It is also proposed to implement this proposal from April 2026.
Reduction of the registration threshold of VAT and social security contribution levy
To broaden the tax base, the government has proposed to reduce the annual turnover threshold for registration from LKR 60 million to LKR 36 million for Value Added Tax and Social Security Contribution Levy, effective 1 April 2026.
To assist smaller enterprises, the capital allowance incentive threshold will be reduced from USD 3 million to USD 250,000, allowing SMEs to benefit from investment-related tax breaks that were previously available only to larger firms.
Removal of CESS and imposition of VAT on imported fabric
Locally manufactured fabric is subjected to VAT, and the imported fabric, although exempt from VAT, is subjected to CESS of LKR 100 per kilogram. To ensure a level playing field, it is proposed to remove CESS and impose VAT on the imported fabric. This will take effect from 1 April 2026.
Imposition of social security contribution levy on vehicles
The social security contribution levy on vehicle sales will be collected at the point of import, manufacture, or initial sale, rather than at the point of purchase, effective April 2026.
Implementation of the National Tariff Policy
The government proposes revising Customs Import Duty rates to 0%, 10%, 20%, and 30% from April 2026, aligning with the National Tariff Policy and gradually phasing out para-tariffs with minimal revenue impact. These measures aim to simplify the tax system and increase predictability, they will also bring more SMEs into the formal tax net.
Abolishment of the Simplified VAT System (SVAT)
The Simplified VAT System (SVAT) has been abolished, effective 1 October 2025, and has been replaced with an approved refund process to enhance tax compliance and reduce misuse.
Strengthening digital governance and public administration
The 2026 budget emphasises modernising Sri Lanka’s public administration through digitalisation. About USD 98 million has been allocated to initiatives such as the Sri Lanka Unique Digital Identity project, the e-Grama Niladhari platform, and the Digital Economy Advancement Programme. These projects aim to establish a secure, centralised digital framework that enhances communication and service coordination across government agencies.
Plans also include expanding electronic procurement and payment systems, as well as upgrading the Revenue Administration Management Information System (RAMIS) to enhance fiscal management and tax revenue collection. By streamlining operations, increasing transparency, and improving service accessibility, digitalisation is expected to reduce costs, boost efficiency, and create new economic opportunities—particularly for small and medium enterprises (SMEs).
Colombo Port City reforms to attract investment
The budget proposes amendments to the laws overseeing the 269-hectare Colombo Port City, initially funded with USD 1.4 billion in Chinese investment, to boost foreign direct investment (FDI). By updating the Strategic Development Projects Act and the Colombo Port City Economic Commission Act, the government aims to reduce regulatory uncertainty and fragmented authority, making the city more attractive to investors.
