SRI LANKA Trends and Developments Contributed by: Ayanthi Abeyawickrama, Varners
surplus of 2.5% of GDP, total government revenue of 15.4% of GDP, and an overall fiscal deficit of 5.1% of GDP for 2026. Tax Reform and Incentive Rationalisation Following past criticism for granting ad hoc and non- transparent tax holidays, the government has contin - ued to move towards rules-based, time-bound eligi - bility criteria for tax incentives, displacing the earlier reliance on official discretion. The Economic Trans - formation Act, No 45 of 2024 provides the statutory framework for codified, eligibility-driven incentives, and the 2026 Budget advanced a series of base- broadening measures consistent with the IMF struc - tural benchmarks. These include: • the abolition of the Simplified VAT (SVAT) scheme from October 2025 in favour of a refund-based mechanism; • the phased introduction of risk-based audit selec - tion; and • a National Tariff Policy rationalising customs import duty into bands of 0%, 10%, 20% and 30%. To encourage smaller-scale investment, the minimum investment threshold for enhanced capital allowances was reduced from USD3 million to USD250,000. SOE Restructuring Without Privatisation With the change in administration following the Presi - dential elections in September 2024, the new govern - ment has decisively moved away from privatisation as a policy tool. The previous government’s plans for partial or full divestment of major state-owned enter - prises (SOEs) have been shelved. Instead, the cur - rent administration has expressed its commitment to retaining public ownership of key strategic enterprises while pursuing a programme of internal restructuring and operational reform. The government’s SOE reform agenda focuses on improving efficiency, reducing financial losses, and strengthening governance and accountability mech - anisms within SOEs. Key entities under this reform initiative include: • Ceylon Electricity Board; • SriLankan Airlines;
• Ceylon Petroleum Corporation; • Sri Lanka Telecom; and • Sri Lanka Insurance Corporation.
The goal of the restructuring process is to enhance these entities’ financial performance and service deliv - ery without altering ownership structures. Proposed reforms include the introduction of: • performance benchmarks; • independent oversight boards; • debt restructuring; and • enhanced public reporting requirements. The emphasis is on preserving strategic national assets while ensuring that they operate on sound commercial and operational principles. These SOEs have traditionally operated as monopo - lies or dominant players in strategic sectors but have also been fiscally burdensome. Reforms are expect - ed to improve their operational efficiency, corporate governance and ability to attract investment. Tangible progress has been recorded in the resolution of legacy SOE liabilities, including the completion of SriLankan Airlines’ debt exchange in early 2026. Labour Market Reform The Cabinet has approved significant increases to minimum wage levels. Effective April 2025, the national minimum monthly wage was increased by LKR9,500 to LKR27,000, and the minimum daily wage was raised to LKR1,080. A further increase, to LKR30,000 per month and LKR1,200 per day, took effect on 1 January 2026. These changes aim to improve income security amidst rising living costs. In parallel, the government has reiterated its inten - tion to introduce a consolidated employment law to replace the patchwork of existing employment stat - utes. The proposed reform, which remains at the draft stage, seeks to harmonise disparate legislation – including the Wages Boards Ordinance, the Shop and Office Employees Act and the Industrial Disputes Act – into a single, modernised legal framework. This new law is expected to address long-standing regu - latory inconsistencies, simplify compliance, enhance worker protections, and promote greater formalisation
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