Small and Medium Enterprises (SMEs) in Sri Lanka can significantly reduce their tax burden by properly claiming “allowable expenses.” Here is how to keep more of your hard-earned profit.

1. Management & Operational Expenses

Any expense incurred “wholly and exclusively” for the production of income is deductible. This includes:

• Staff salaries and EPF/ETF contributions.
• Rent for office or factory space.
• Electricity, water, and internet bills related to the business.

2. Capital Allowances (Depreciation)

You cannot deduct the full cost of a machine or vehicle in one year. Instead, you claim a “Capital Allowance” over several years.

• Computers/Software: Usually 20%–25% per year.
• Plant & Machinery: 20% per year.

3. Marketing and Advertising

Costs for digital marketing, local newspaper ads, and business signage are fully deductible. Keeping receipts is vital here to prove the expense to the IRD during an audit.

4. New for 2026: VAT Threshold Changes

Note that from April 1, 2026, the VAT registration threshold has been lowered to Rs. 36 million annually (Rs. 3 million per month). If your turnover exceeds this, you must register for VAT, but you can also start claiming “Input VAT” on your business purchases.

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