Business
VAT hike in Sri Lanka: Who really pays the price?
The recent VAT revisions have hit the poorest the hardest, whereas the bottom 10% of income group households now spend about 10% of their income on VAT.
The VAT burden has risen by approximately 50%, primarily due to theremoval of VAT exemptions on around 100 items. This blog offers potential solutions for easing the VAT burden in Sri Lanka.
Priyanka Jayawardena is a Research Economist at IPS with research interests in skills and education, demographics, health, and labour markets. Priyanka has around 15 years of research experience at IPS. She has worked as a consultant to international organisations including World Bank, ADB and UNICEF. She holds a BSc (Hons) specialised in Statistics and an MA in Economics, both from the University of Colombo. (Talk with Priyanka – priyanka@ips.lk)
By Priyanka Jayawardena
Earlier this year, Sri Lanka introduced major changes to the Value Added Tax (VAT) system. The VAT rate increased from 15% to 18%, and tax exemptions were removed for 97 items, including essential goods such as gas and stationery. While these revisions aimed to boost government revenue, they have also significantly increased the tax burden on low-income households, making life even more challenging for the most vulnerable during this ongoing crisis. This blog offers a comprehensive overview of the recent VAT revision and potential solutions for easing the VAT burden in Sri Lanka.
The Rise in VAT Burden
The VAT rate hike from 15% to 18% has translated into a 20% rise in VAT payments overall. A VAT simulation analysis based on Household Income and Expenditure Survey (HIES) 2019 data reveals that when combined with the removal of tax exemptions, the average VAT burden has increased by about 50%. However, this burden is not evenly distributed. The poorest 40% of households face an approximate 60% rise in VAT payments, while other income groups experience around a 50% increase.
Who Bears the Brunt of the VAT Revision?
The harshest impact of these VAT revisions has fallen on the lowest-income households. The bottom 10% of households now pay around 10% of their income as VAT, up from 6% under the previous VAT system (Figure 1). In comparison, other households spend about 6% of their income on VAT payments. This disproportionate impact is primarily due to the removal of tax exemptions on widely-use items, which are essential for all.
Indirect Taxes as a Share of Income
Source: Author’s calculations, based on HIES-2019 data from the DCS.
Removing VAT exemptions on 97 items out of the previously exempted 138 has made essential purchases more expensive. Low-income households typically allocate a greater portion of their budgets to essential items that were previously exempted from VAT but are now taxed. These include fuel, gas, telecommunication services, as well as various food products made from locally cultivated grains, locally produced coconut milk, and certain locally produced dairy products.
Comparing VAT with Other Indirect Taxes
VAT applies to a wide range of goods and services, affecting all consumers. However, its impact is regressive, taking a larger proportion of income from poorer households compared to richer ones (Figure 2). In contrast, excise taxes on products like alcohol and tobacco are less burdensome on lower-income groups. The top 20% of households contribute 43% of alcohol taxes and 44% of tobacco taxes, while the bottom 40% of households account for 19% of alcohol taxes and 14% of tobacco taxes. Additionally, VAT applies to basic commodities that everyone needs, whereas excise taxes apply to tobacco and alcohol, which are harmful products that contribute to non-communicable diseases (NCDs). In this sense, higher taxes on tobacco and alcohol act like an upfront investment in public health, helping to offset future healthcare costs.
What Can Be Done?
While the VAT hike was designed to stabilise Sri Lanka’s finances, it disproportionately affects vulnerable populations. This highlights the need for more balanced and fair fiscal policies. A more equitable approach would ensure that taxation doesn’t disproportionately affect those least able to afford it, preserving economic fairness during difficult times. Addressing the uneven impact of VAT requires exploring policy alternatives, such as reintroducing exemptions for essential goods if necessary. Increasing excise taxes on tobacco and alcohol is a favourable policy option. This could help create a more just system while reducing long-term healthcare expenses.
By Ifham Nizam
Australian High Commissioner to Sri Lanka Matthew Duckworth described Omega Traders’ latest investment in a modern dhal-processing facility as a strong example of how cross-border supply chains can translate into productive investment, local value addition and new business opportunities in Sri Lanka.
The investment, which adds a 150-metric-tonne-per-eight-hour-day processing capacity to Omega Traders’ operations, marks a significant expansion of the company’s manufacturing footprint as it celebrates 45 years in Sri Lanka’s food commodity industry.
Speaking at the inauguration of the new Lentil and Orid Dhal Processing Factory in Wattala, last Friday, H.C. Duckworth said the facility represented more than an increase in production capacity, pointing to the wider economic value created when Australian agricultural production is connected with Sri Lankan processing and distribution.
‘This facility is not operating on its own. It is part of a long supply chain and a trade partnership between Sri Lanka and Australia, Duckworth said.
His comments placed the Omega Traders’ investment within a broader commercial context: Australia brings agricultural production and established export capabilities, while Sri Lanka provides processing capacity, labour, market access and opportunities for further value addition.
The investment comes as Sri Lanka continues to look towards greater domestic processing and value-added manufacturing rather than relying solely on the import and distribution of finished commodities.
Dr. (Mrs.) Siddhika G. Senaratne, Director General/CEO of the Sri Lanka Standards Institution (SLSI), who attended the inauguration as Guest of Honour, highlighted the importance of quality assurance in food processing and the role of standards in maintaining confidence across the supply chain.
The facility is equipped with new-generation cleaning, processing, sorting and quality-control machinery, including advanced colour-sorting technology, automated systems and an in-house quality-control laboratory.
The additional capacity will support Omega Traders’ three principal Mysoor Dhal brands — Rainbow Jumbo Dhal, Komas Dhal and Rozanna Dhal — which serve different segments of the Sri Lankan market.
But the investment also has a distinctly local agricultural dimension.
Through its Orid Dhal operation, Omega Traders plans to source locally grown black matpe from Sri Lankan farmers and process it at the new facility.
That creates a domestic value chain linking farmers to industrial processing and consumers, while potentially increasing demand for locally produced agricultural commodities.
Duckworth said this type of business partnership could generate benefits for both countries.
‘Australia produces some of the world’s best agricultural products and we are very efficient and very capable at trading them. But that alone is not going to bring success to Australia. Just as building a factory like this is not going to bring success to Sri Lanka, he said.
‘It’s when we bring these entities together that our products produced in Australia can be processed in excellence here in Sri Lanka that enables this to be a success, the H.C. explained.
The investment therefore combines two complementary supply streams: imported agricultural commodities, including Australian-origin products, and locally produced black matpe for the Orid Dhal operation.
For Sri Lanka, the business significance extends beyond Omega Traders itself. Increased processing capacity creates demand for logistics, packaging, distribution, services and agricultural inputs, while supporting employment within the food-processing ecosystem.
HR-led transformation places people, culture and business performance at the heart of the organisation
Ideal Motors (Pvt) Ltd,has achieved a significant milestone by securing multiple prestigious workplace and organisational culture accolades in 2026, reinforcing its position as an employer of choice in Sri Lanka’s automotive sector.
Among its latest achievements, Ideal Motors has been recognised as one of the 20 Great Workplaces for Young Talent in Sri Lanka 2026, ranked No. 1 and awarded the Gold Medal in the Small and Medium category of Best Workplaces™ in Sri Lanka 2026, and ranked No. 18 among Best Workplaces™ in Asia in the Medium Scale category—the highest-ranked Sri Lankan organisation in the category. The company also received Industry Excellence for Workplace Culture – Trading Industry.
The Young Talent recognition was presented at the Great Place To Work® CXO Forum 2026 held on 10 September 2026 at Cinnamon Life, Colombo. The recognition followed an evaluation of more than 100 certified organisations and highlights workplaces that create meaningful opportunities for employees under 35 to develop, contribute and grow.
At the Best Workplaces™ in Sri Lanka Awards Gala 2026, held on 11 September 2026 at Cinnamon Life, Colombo, Ideal Motors achieved another historic milestone by entering the Best Workplaces Sri Lanka list for the first time and securing the No. 1 Gold Medal in the Small and Medium category. The company also achieved No. 18 in Best Workplaces™ in Asia, reflecting the strength of its workplace culture beyond Sri Lanka.
These achievements represent more than a collection of awards. They reflect the transformation taking place within Ideal Motors, where people, culture and business performance are increasingly viewed as interconnected drivers of sustainable growth.
Over the past few years, the organisation’s HR function has evolved from a predominantly administrative role into a strategic business partner, with greater emphasis on employee experience, capability development, engagement, performance, communication, wellbeing, diversity and inclusion, and data-driven HR practices.
The Automobile Association of Ceylon (AAC) conducted a seat belt safety awareness programme in front of its headquarters and along Galle Face Centre Road, encouraging motorists and passengers to make seat belt use a habit on every journey.
AAC staff, working alongside officers of the Sri Lanka Police Traffic Division, distributed specially designed hanging tags and stickers to drivers. The material carries a clear reminder that seat belts protect drivers as well as passengers in both the front and rear seats.
The public awareness drive was held ahead of the requirement taking effect on 20 September 2026, under which seat belt use becomes mandatory for every occupant of a vehicle travelling on an expressway.
AAC emphasized that the regulation should be understood as a life-saving measure rather than only a legal obligation. Wearing a seat belt can help prevent occupants from being thrown inside or from a vehicle during a collision and can lessen the severity of injuries.
The Association said road safety legislation must be supported by sustained public education, visible enforcement and responsible behaviour by all road users. The participation of the Traffic Police helped the campaign reach motorists directly in a busy part of central Colombo.
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