2025 Budget: Indirect tax hikes trigger concerns
The budget of Sri Lanka for 2025 has unveiled some indirect tax proposals that target increasing the revenue of the government and providing economic stability.
These taxes have no direct bearing on the income of people, but it would increase the prices of goods and services, which eventually affects the public.
Some of the notable tax revisions in the budget 2025 included the imposition of an 18 per cent Value-Added Tax (VAT) on digital services extended by non-resident enterprises to Sri Lankan consumers with effect from April, removal of the Simplified VAT (SVAT) scheme and implementing a VAT refund system with effect from October 1, 2025.
The contribution rate to the VAT Refund Fund will increase to 10 per cent from 6 per cent on October 1. These were some of the most significant measures outlined in KPMG’s report of the budget.
The critics contend that the budget disproportionately hurts small businesses and individuals but has an easy time with big business.
A number of opposition politicians and socio-economic activists pointed out that despite a 30 per cent levy on large business, the government did not make any attempt to increase it.
Individual companies and small partnerships saw taxes increase to 15 per cent from 10 per cent while taxes on trust and individual funds increased three times to 30 per cent. Similarly, non-profit organisations, which previously were taxed at 10 per cent, are now taxed at 30 per cent.
“The entire burden of taxation falls on ordinary people and small business, while large business are barely touched,” complained one critic.
Economic experts warned that the new regulation will raise the cost for consumers as businesses pass on the increased expenses to the buyers.
Another major policy shift is the increase in individual capital gains tax (CGT) to 15 per cent. While this is not entirely new, as corporate CGT already stands at 30 per cent, the hike could lead to capital outflows as investors seek tax-friendly alternatives.
At a recent seminar on the budget impact, Athula Ranaweera, Managing Partner of Ranaweera Associates, highlighted concerns regarding taxation policies.
Another contentious issue is the removal of the SVAT system, replaced by a risk-based refund mechanism.
Mr. Ranaweera criticised this as burdensome, requiring taxpayers to register and submit quarterly applications, increasing compliance costs. However, he acknowledged that the new system could enhance compliance by identifying high-risk businesses for audits.
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