The Rules That Keep SMEs Small

By Dhananath Fernando

Originally appeared on The Morning

Small and Medium-sized Enterprise (SME) development is a favourite topic of every government. This week, the Ceylon Chamber of Commerce held Scale Up 2.0, its National SME Forum for 2026. The attention is understandable. SMEs form the bulk of Sri Lanka’s businesses and provide a large share of employment across agriculture, manufacturing, and services.

The response from governments is also familiar. We offer concessional loan schemes, often with multilateral agencies. We organise technical training programmes and build institutions such as the Ministry of Industry, Industrial Development Board, and National Enterprise Development Authority. Private banks have SME desks and special credit schemes. We then encourage entrepreneurs to export, enter global markets, and become more competitive.

All this may be useful. But we rarely ask the harder question: do Sri Lanka’s SMEs remain small because they lack support, or because our regulations make growth too expensive?

Diagnosing the ailment

We usually describe the SME problem as a financing problem. But it may be more accurate to call it a scaling problem.

For a small business, scaling means hiring the next worker, importing a new machine, opening another branch, registering for another tax, or supplying a larger company. At each stage, the business encounters another licence, approval, report, or compliance requirement.

Large firms can hire lawyers, consultants, accountants, and retired officials to navigate the system. A small entrepreneur often has to do it alone. Every day spent following up on an approval is a day taken away from customers and production. Every delay ties up working capital.

The regulation may appear neutral on paper, but its cost is not neutral. A fixed compliance cost is much heavier for a small company than for a large one. In practice, it becomes a ‘size tax’ on SMEs.

Sometimes this tax appears suddenly. When a business crosses a particular turnover or employment threshold, it may face a new set of taxes, audits, reports, or labour regulations. Growth then becomes a cliff. The rational response may be to remain informal, split the business, avoid the next employee, or decline a large order.

We then offer the same entrepreneur a concessionary loan to grow. But a loan cannot solve regulatory uncertainty. It can finance a machine, but it cannot guarantee that an approval will arrive on time. A development bank cannot compensate for a business environment that punishes firms when they expand.

This does not mean businesses should be exempt from tax, labour, environmental, or consumer protection laws. Good regulations are essential for a functioning market. But every regulation must address a clear and measurable harm, and it should do so at the lowest possible cost.

Treating the underlying problems

Many Sri Lankan laws still carry an old assumption: commercial activity is suspicious unless the State permits it. A modern economy should begin from the opposite position. Economic activity should generally be allowed unless it causes measurable harm to another person or the public.

A law is not necessarily bad simply because it is old. But an old legal framework can become a serious problem when it governs a modern economy.

The Customs Ordinance No.17 of 1869 is a good example. It has been amended many times, but its basic legal architecture was designed for a paper-based trading world. Documentary requirements, broad officer discretion, uncertain timelines, and complex penalties all increase the cost of importing and exporting.

Large companies can spread these costs across many shipments. A small exporter cannot. One delayed shipment can mean losing a buyer, missing a season, or facing a cash-flow crisis.

Sri Lanka needs a modern Customs act built around electronic documentation, risk-based inspections, clear statutory timelines, transparent rulings, and proportionate penalties. For an SME, faster Customs clearance is not merely a matter of convenience. It can determine whether the company is competitive enough to export.

Free trade agreements can provide valuable market access. But market access is useful only if Sri Lankan firms can reach those markets competitively. Rules of origin, certification, and buyer requirements also carry costs. If an SME must first struggle through expensive and unpredictable regulations at home, a trade agreement alone will not make it an exporter.

Land is another part of the same problem. For many small entrepreneurs, land is the most valuable asset they own. But unclear ownership, weak titles, and long delays in settling disputes make it difficult to use that land as collateral. Improving land titles, digitising records, and resolving commercial disputes faster would address part of the financing problem at its root.

Instead, we often leave the underlying problem untouched and create another loan scheme to treat the symptom.

Regulatory clean-up crucial

Sri Lanka needs a serious regulatory clean-up. Every licence, permit, and approval affecting a business should be reviewed. The institution responsible should explain what harm the regulation prevents and whether the same purpose can be achieved more simply.

New regulations should disclose their likely cost to a small firm. Low-risk approvals should have firm deadlines. If an agency fails to respond within that period, approval should be granted automatically. Rules that no longer serve a clear purpose should expire.

In a healthy economy, SMEs will always be large in number. Some entrepreneurs will choose to remain small. Others will become suppliers to larger companies, join export value chains, and slowly climb the ladder. A few may eventually become large Sri Lankan companies.

The objective is not to eliminate small businesses. It is to make remaining small a choice, rather than a regulatory destiny.

Sri Lanka’s SME problem is not simply that our entrepreneurs think small. Too many of our laws make scale expensive, uncertain, and permission-based. If we genuinely want SMEs to grow, we should not offer only another loan, institution, or seminar.

We must remove the rules that make hiring the next worker, buying the next machine, and entering the next market unnecessarily difficult.

Fixing the checkout bottleneck

By Dhananath Fernando

Originally appeared on the Morning

• Time to modernise e-commerce taxation

Delays in delivery and regulatory confusion around e-commerce platforms have become a pressing concern for consumers and small businesses across Sri Lanka. As parcels pile up at Customs and prices surge unexpectedly, it is time to take a step back and understand the root of the problem – and the economics behind it – before rushing to find solutions.

Many wonder how e-commerce platforms like Temu, AliExpress, and eBay offer such a vast variety of goods at prices far below those in local retail shops. The answer lies in a concept known as ‘long tail economics,’ popularised by Chris Anderson in 2004. 

Unlike traditional retail models that rely on selling large quantities of a few popular products, long tail economics thrive by offering a wide range of niche items in small volumes. Digital platforms are well suited for this, as they don’t bear the physical storage and shelf-space constraints that burden brick-and-mortar stores.

In conventional retail, stocking niche items is often unprofitable; they take up space and sell slowly. But online marketplaces can list millions of such products without significant overheads. Their costs are further reduced by economies of scale in shipping, especially when handling a large number of small parcels.

Until recently, Sri Lanka allowed such parcels to enter under a simplified flat-rate tariff system – typically around Rs. 850 per parcel – based on weight rather than the Harmonised System (HS) code. For low-weight or low-value items, some tariffs were not imposed at all. 

This system made cross-border e-commerce accessible and affordable, and in doing so, empowered many Sri Lankan entrepreneurs and gave consumers access to a wider variety of goods at lower prices.

However, it also led to concerns. The simplified system was being exploited by some to bring in commercial-scale shipments disguised as personal use, thereby bypassing higher taxes. Customs officials and industry stakeholders raised questions about revenue loss and the legality of weight-based tariffs under the Customs Ordinance. 

As a result, authorities moved to tighten the rules: now, all parcels must be declared by HS code and taxed accordingly, regardless of weight.

The unintended consequence? Long delays at Customs, consumer frustration, rising costs, and uncertainty for both consumers and e-commerce platforms. The system, simply put, is not ready to handle such granular processing at high volumes.

So what is the way forward?

The answer isn’t to block e-commerce; it’s to build a smarter system.

Create a legal framework for vendor tax collection

Globally, many countries have adopted a vendor collection model, where e-commerce platforms collect taxes at the point of sale and remit them to the authorities. But in Sri Lanka, this isn’t legally possible yet. First, the Government must establish a clear legal mechanism for platforms to collect tariffs and remit them to Customs or the Inland Revenue Department.

In implementing a vendor collection model, Sri Lanka can also introduce a minimum threshold, requiring only platforms that handle a certain number of parcels per month to participate in the scheme. This ensures that the system is manageable and initially applies to larger platforms with sufficient volume and technical capacity, avoiding undue burden on small or infrequent operators.

Integrate Customs tariff systems via API

Even if legally allowed, platforms must be able to accurately determine the applicable tariff at the time of purchase. That is where Application Programming Interface (API) integration becomes essential. 

Most e-commerce platforms already tag products with HS codes. If Sri Lanka Customs’ Automated System for Customs Data (ASYCUDA) system is integrated with these platforms via API, tariff rates can be automatically calculated during checkout. 

The buyer would then see the full landed price, including taxes, before paying. The platform would act as a collection agent and remit the amount to Customs, minimising leakage and increasing transparency.

Simplify and rationalise tariffs

At the heart of the issue lies another critical challenge: Sri Lanka’s tariff structure is overly complex. We apply Customs duty, PAL, CESS, and VAT, often with wildly varying rates depending on product specifications. 

For example, tissue paper and wet wipes carry different rates, and the difference is even starker between wet wipes with fragrance and those without. This complexity makes compliance difficult and systems integration nearly impossible.

A long-term solution would be to rationalise and simplify tariffs, bringing rates down and harmonising classifications. Simpler tariffs would mean lower prices for consumers, less room for manipulation, and more efficient revenue collection. In fact, a digital tax model could bring in more transparent revenue over time.

Let the consumer decide

Some argue that e-commerce platforms threaten local manufacturers or offer low-quality goods. But quality is a judgement for the consumer to make. If an item is poor in quality, buyers won’t return to it. 

Attempts to block platforms in the name of protectionism will hurt entrepreneurs who use these platforms and rob consumers of choice. A better approach is to let competition and transparency decide what thrives in the market.

The real issue isn’t e-commerce; it’s outdated regulation. With the right legal and technological framework, Sri Lanka can embrace global trade, empower local businesses, and ensure fairness in taxation. It’s time to stop punishing what works and modernise the system that supports it.