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Budget Commentary
The National Budget for 2026 was presented in Parliament on 7th November 2025 by Hon. Anura Kumara
Dissanayake, Minister of Finance, Planning and Economic Development.
Presented under the theme “Building a Strong Economy Together”, the Budget follows a period of relative
stability after the 2022 crisis and successive IMF reviews. With inflation easing and reserves recovering,
expectations were high for a growth-oriented fiscal plan.
Instead,the Budgetremains largely conservative, focused on revenue retention and fiscal control ratherthan
reform or private-sector relief. Tax rates remain unchanged at historically high levels, while the reliance on
indirecttaxes such as VAT and SSCL continues. The threshold reductions from Rs. 60million to Rs. 36million
will widen the tax base but increase compliance costs for smaller businesses.
The Government’s dependence on vehicle-related and import-based revenue persists despite waning
demand. Some positives include the lowering of the Enhanced Capital Allowance threshold to USD 250,000,
which extends investment relief to mid-sized enterprises, and the simplification of customs duties into four
bands, which could enhance clarity if properly implemented.
However, there are no progressive or creative measures—no private-sector incentives, no relief for
middle-income earners, and no tangible reform of an oversized public sector. Digitalisation promises remain
unfulfilled, with systems like RAMIS and e-ROC still slow and unreliable.
In essence, Budget 2026 delivers continuity, not creativity. It meets fiscaltargets but fails to inspire business
confidence or relieve the pressures on productive enterprise. The sustained reliance on indirect taxes and
weak administrative capacity remain pressing concerns.
The following pages summarise the key revenue proposals affecting businesses and individuals, together with our independent commentary.
Corporate Income Tax
- The standard rate of corporate income tax remains at 30%
- Tax on betting, gaming, liquor and tobacco will continue to remain at 40%
- Enhanced Capital Allowances - Investment threshold to qualify reduced from USD 3 Million to USD 250,000/=, with effect from 1st April 2026.
Comments
- Enhanced Capital Allowances are a special incentive that allows qualifying investments to claim an accelerated deduction on the cost of new depreciable assets, over and above the standard Capital Allowance rates.
- This is a genuinely positive move that broadens access to investment incentives for SMEs and medium-scale ventures. By lowering the threshold, more enterprises can claim enhanced allowances, which will encourage new investments, modernization, and expansion.
- The legislation is to be reviewed to understand how this may be retrospectively applied for completed projects, or projects currently in progress.
- The unchanged Corporate Income Tax rate of 30% signals policy stability but offers no support for smaller businesses. SMEs continue to be taxed at the same rate as large conglomerates.
Income Tax Rates (Individuals)
- The tax-free threshold remains at Rs 1,800,000/= per annum, for residents and Sri Lankan citizens.
- The tax slabs remain the same as follows :
| Taxable Income | Tax Rate |
|---|---|
| Up to Rs. 1 Mn | 6% |
| Rs. 1 Mn – 1.5 Mn | 18% |
| Rs. 1.5 Mn – 2 Mn | 24% |
| Rs. 2 Mn – 2.5 Mn | 30% |
| Above Rs. 2.5 Mn | 36% |
Comments
- While rate stability is welcome, failing to adjust thresholds for inflation effectively raises the real tax burden.
- With rising costs of living, middle-income earners are left with declining purchasing power, undermining consumption and savings potential.
Value Added Tax
- The VAT registration threshold has been proposed to be reduced from Rs 60 million to Rs 36 million per annum, with effect from 1st April 2026.
- It is proposed to remove the VAT exemption granted to imported coconut and palm oil, removing the Special Commodity Levy ( at the point of imports ) to align treatment with local producers, with effect from 1st April 2026.
- Similarly, it is proposed to remove the VAT exemption granted to imported fabric, with the existing flat CESS on weight basis ( at the point of imports ) to be abolished, with effect from 1st April 2026.
- Government continues pilot rollout of electronic invoicing under VAT, although no fixed timeline for full nationwide implementation
Comments
- The reduction in the VAT registration threshold is intended to broaden the tax base and include more SMEs into the VAT net. While this boosts short-term revenue, it imposes compliance costs on small firms. The imposition of VAT may erode profit margins especially in sectors unable to pass on VAT to consumers.
- The imposition of VAT on imported coconut and palm oil corrects a disparity, whereby local manufacturers were required to pay VAT, whereas importers were exempt. This proposal seeks to level the playing field.
- Imposition of VAT on imported fabrics significantly raises input costs for the garment industry, particularly for export-oriented and local manufacturers who rely on competitive margins. This may worsen inflationary pressures in the textile industries which is already under strain. Without complementary relief measures, this policy risks hampering growth in a sector vital for Sri Lanka's foreign exchange earnings.
- E-invoicing is conceptually sound but practically premature in Sri Lanka, considering how the SVAT scheme was administered. Without a robust digital infrastructure, it risks increasing compliance pain rather than efficiency.
Social Security Contribution Levy
- The SSCL registration threshold has been proposed to be reduced from Rs 60 million to Rs 36 million per annum, with effect from 1st April 2026
- Rates remain unchanged as follows :
| Category | Rate |
|---|---|
| Importers (at point of import) | 2.5% |
| Service Providers (including Rent) | 2.5% |
| Local Wholesale / Retail (including imported products) | 1.25% |
| Distributors | 0.625% |
| Manufacturers | 2.125% |
- It is proposed to impose SSCL on vehicles, at the point of imports and manufacture, and exempt such vehicles from SSCL at the point of sales, with effect from 1st April 2026.
Comments
- Similar to reducing the VAT registration threshold, this proposal will increase administrative cost and compliance fatigue on smaller firms, and increase their tax burden.
- SSCL is a cascading tax, with no input tax credit available. This will see a further increase of prices to the end customer, and further compound to the rising inflation rates.
- The changes proposed on the SSCL mechanism for vehicles will simplify tax collection and administration, as taxes will be collected at source itself.
Customs Duty and Para Tariffs
- Customs duties will now follow a four-band structure of 0%, 10%, 20%, and 30%, starting April 2026, aligning with global tariff practices.
- The government has again pledged to phase out para-tariffs gradually—a commitment repeated in several previous budgets without tangible action.
- The structural update aligns with global norms, but credibility is low given the repeated unfulfilled promise to eliminate para-tariffs
Tax Administration
- Government announces RAMIS 3.0 upgrade for Inland Revenue Department systems.
- Tax audit process to be risk-based and data-driven.
- Officials to be trained for transparency and efficiency.
- The Inland Revenue officials' aggressive approach continues to frustrate taxpayers, completely contrary to the IRD stated vision of "being a taxpayer friendly tax administrator delivering excellent service to the tax paying public, with well trained and dedicated staff"
- Using the present IRD RAMIS system is a painful exercise, plagued with slow performance, time-out errors, unresolved bugs and general user-unfriendliness.
- Without a genuine shiftin culture and investmentin reliable systems, the digitisation sloganswill mean little. The IRD systems and personnel need urgent funding and modernization to support fair, efficient tax administration
The 2026 Budget signals fiscal continuity rather than reform. It leaves tax structures intact and fails to introduce meaningful measures for private-sector recovery.
We are of the view that the government's narrow focus on revenue generation, without equal emphasis on efficiency and fairness in tax administration, may erode the Country's long-term growth prospects.
- May we emphasize that the proposals need to be given legal effect by Parliamentary procedure, before they come into law.
- The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
- Please feel free to contact us should you require any clarification on this document