Sri Lanka’s proposed real-time VAT invoicing system could become a major test of whether tax digitalisation expands the country’s revenue base or simply imposes new compliance costs on businesses already visible to the tax authorities.
The concern emerged during questioning by the Committee on Public Finance (CoPF), which repeatedly pressed the Inland Revenue Department (IRD) on how the planned point-of-sale system would work for smaller retailers and businesses lacking sophisticated technology.
The Committee argued that manufacturers and exporters are already relatively visible to the tax administration, while a significant portion of potential revenue leakage could occur further down the transaction chain, particularly in wholesale and retail trade.
Ravi Karunanayake told the Committee that the objective should be an online VAT system rather than a POS arrangement that depends on taxpayers deciding which transactions to enter. He pointed to information indicating that Colombo has around 2,400 restaurants but only 125 paying VAT, raising questions about whether digitalisation is reaching the businesses outside the existing tax net.
Sri Lanka had 36,656 registered VAT taxpayers as at June 30, 2026, excluding 371 taxpayers registered for VAT on financial services. Against that population, only a relatively small group has so far been onboarded.
The IRD said 15 apparel companies and five tea exporters were already connected, with 380 tea-producing entities linked through tea brokers. Authorities were also working to onboard five wholesale and retail companies, 27 other export-oriented companies and 170 other VAT-registered businesses.
For the CoPF, the bigger question was whether a system designed primarily around existing VAT taxpayers could adequately address businesses that remain outside the formal tax network.
The Committee also warned that simply distributing POS machines would not guarantee compliance. Each device, members argued, should be securely identifiable, linked to a location and capable of transmitting transaction data to the IRD in real time.
Up till now the Government has not finalised how smaller businesses will bear the cost of the transition.
The IRD told the Committee that concessions were still being discussed, including possible tax treatment for the purchase of equipment. No final incentive package had been presented.
That uncertainty is significant because businesses may have to purchase devices, upgrade software, change accounting procedures and train staff. Smaller retailers could face a proportionately heavier burden than large companies with existing ERP and digital accounting systems.
The technology gap is already recognised by officials. The proposed system must accommodate businesses using advanced ERP platforms as well as taxpayers still issuing invoices manually. Offline transaction recording is also expected to be incorporated so businesses can continue operating during power or connectivity failures.
Private POS and accounting software providers represent another potential bottleneck. The Committee urged authorities to begin consultations early, noting that businesses use numerous systems that will need to be adapted to IRD requirements.
GovTech is expected to manage stakeholder consultations, while officials said taxpayers and industry representatives had already been consulted.
The CoPF nevertheless called for direct engagement with small retailers and their associations, rather than concentrating discussions on larger taxpayers.
The Committee also pressed for a “faceless” tax system, arguing that reducing discretionary human intervention could limit leakage and improve collection.
But before mandatory implementation, it said the public must be properly informed. Businesses need clarity on costs, equipment, procedures and deadlines before being compelled to invest.
The digital VAT project may ultimately modernise tax administration. But unless the Government addresses affordability, connectivity and the untaxed economy alongside technology, the system risks becoming another compliance layer rather than the broad tax-base reform the country needs.
The post Small Businesses Face Rising Costs as Digital VAT System Advances appeared first on LNW Lanka News Web.
