By Gayantha Dehiwatte –

Gayantha Dehiwatte

This analysis takes an in-depth look at the controversial budget proposals, focusing on how the new VAT amendments may shape the future of Sri Lanka’s small businesses.

The inaugural budget presented by President Anura Kumara Dissanayake, in his capacity as Minister of Finance, has ignited intense debate over the country’s economic trajectory. Many observers describe it as a right-leaning budget marked by strict fiscal discipline and crafted in line with International Monetary Fund (IMF) guidelines. But what is the real story behind these statistics and goals? Will this budget bring the promised relief to the common man, or will it tighten the noose around small and medium-sized enterprises—the backbone of the national economy? Let’s take a closer look.

The New Face of VAT and Its Impact on the Small Business Sector

Among the most debated proposals in the budget is the move to lower the threshold for Value Added Tax (VAT).Under the new proposal, the government will reduce the current annual turnover limit, making even those earning three million rupees a month liable for VAT.

As critics point out, the core issue is that both large-scale businesses with monthly turnovers exceeding 600 million rupees and small traders earning just 3 million rupees are treated on the same footing. A large-scale businessman has the capacity to influence market prices, secure substantial discounts through bulk purchasing, and reduce per-unit production costs. In contrast, the small businessman often depends on the pricing decisions of larger competitors and struggles to remain competitive.

Is this the beginning of the end for small and medium-sized enterprises?

Small and medium-sized enterprises (SMEs) account for over 50% of Sri Lanka’s businesses and employ roughly half of the country’s workforce, including a significant number of women. SMEs are the backbone of the country’s economy. Being required to pay roughly 20% of their profits in taxes under the new proposals would be a severe and potentially crippling burden. According to the government, the policy is fair, as both large and small businesses, regardless of VAT registration, charge similar prices for their goods. However, this argument is deceptively simple. When production scale, costs, and market power are taken into account, the tax severely erodes the profits of small business owners while having minimal effect on large-scale enterprises.

The economy remains trapped in a cycle of debt.

Faced with this new tax pressure, numerous small businesses are forced to take on more debt to keep their operations running. Reports indicate that, compared to 2019, the debt owed to small and medium-sized businesses has already surged by approximately 300%. Imposing additional burdens on those already trapped in debt will only deepen their financial woes. Moreover, obtaining a bank loan is far from easy for these small business owners.

Soaring Costs of Living in a Stagnant Economy and the Care Economy

While the budget includes a salary increase for public servants, it offers no measures to ease the rising cost of living for ordinary citizens. With an increasing number of goods and services brought under VAT, the prices of essentials such as food, fuel, and healthcare are set to climb further, placing additional strain on household budgets. This burden is particularly heavy for low- and middle-income families, who already spend a large portion of their income on daily necessities. The impact extends beyond personal finances, affecting the care economy as families struggle to meet the needs of children, the elderly, and other dependents. The consequences are clear: reduced purchasing power, a slowdown in trade and small business activity, and ultimately, further stagnation of the national economy, undermining both social welfare and long-term economic growth.

From Digital Ambitions to Harsh Economic Realities

While the budget introduces futuristic proposals such as digitalization and land reforms, critics question the value of pursuing these “digital dreams” without first addressing the country’s fundamental economic and social challenges. As the sarcastic saying goes, “We can’t download an onion just because we’ve gone digital.” With pressing problems like medicine shortages, doctors leaving the country, and dwindling food sovereignty, can a digital identity card truly be a priority?

Even if the budget meets its fiscal targets, it carries the risk of significant social costs. Small and medium-sized enterprises may be pushed deeper into debt, households could grapple with rising prices, and essential public services may remain under pressure. Ambitious initiatives such as digitalization and land reforms risk becoming mere symbolic gestures if pressing issues—like medicine shortages, the exodus of doctors and other professionals, the migration of skilled workers, food insecurity, and widening inequality—are left unaddressed, turning fiscal success into a burden on social stability and livelihoods.

A Budget of Fiscal Gains at Social Costs

Income inequality is widening, concentrating the country’s wealth in the hands of a few powerful individuals. In this system that favors the so-called “chosen whales,” small business owners and ordinary citizens are left vulnerable and powerless. The strain extends beyond the economy, affecting the care economy as households struggle to provide for children, the elderly, and dependents amid rising costs and stagnant incomes. Critics argue that this budget reinforces claims that the party is moving away from the promises made during the election campaign, highlighting the risk that fiscal success may come at the expense of social stability, livelihoods, and the very foundation of the nation’s welfare.