Unseen and undervalued: Sri Lanka's SMEs fight to stay in the game

FOR decades, Sri Lanka’s apparel industry has stood as a national success story—one that stitched together foreign investment, ethical manufacturing, and export resilience.

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But behind the glossy factory floors of major exporters lies another story: that of small and medium enterprises (SMEs) struggling to stay afloat under mounting costs, tightening regulations, and shrinking access to finance.

These smaller players form the invisible backbone of the apparel ecosystem—supplying trims, accessories, small-batch production, and specialised value-added services that help larger firms compete globally. Yet, despite their vital role, many SME producers now feel increasingly cut off from the support they need to survive.

VAT dilemma: A blow to competitiveness

One of the most pressing challenges today is the newly imposed VAT requirement. Until recently, imported materials for exporters were exempt from duty. Now, SMEs must pay 18% VAT upfront tying up already limited cash flow and eroding competitiveness.

“Earlier, raw materials came duty free for export production. Today we’re paying 18% VAT, even when the end product is destined for export,” says an apparel manufacturer from Katunayake. “Most BOI companies have fallen into the 1,300 list and are not entitled anymore. There’s no level playing field; its the Government duty to protect exporters, large or small.”