The European Union's GSP+ scheme gives 16 poor nations preferential access to the trading bloc in return for following strict commitments on a wide variety of social and rights issues.
Sri Lanka's government has faced almost constant criticism over the past several years because of the way it has conducted a war against the Liberation Tigers of Tamil Eelam (LTTE) separatists.
Government forces have been accused of a host of rights violations including the indiscriminate killing of thousands of Tamil civilians, the murder of aid workers and the execution of surrendering Tamil Tigers during the final days of the war last year when the rebels were defeated.
Sri Lanka gains about $150m annually due to preferential tariffs, according to trade estimates.
The island's clothing industry is the main beneficiary, using the tax breaks to sell to high street retailers in Europe.