Small and Medium Enterprises (SMEs) played a crucial part in the Sri Lankan economy and acknowledged as the country's backbone for industrial growth. However, the recent studies in this sector exhibit that Sri Lanka has not achieved the desired level needed in the modern world compared with other countries, especially within the region. This study examined and reviewed extensive literature, gathering information from experts in the national economic development and science and technology innovation. That helped to identify the major challenges on the National Science & Technology Policy (NSTP) and development of Sri Lankan SMEs, including various contributions to the national economy, with the challenges faced and the initiatives and incentives offered by related authorities. There are several significant factors identified among challenges. They are; lower level of science-based technological innovation, limited skilled of human resources with less commitment, the absence of broad-based scientific knowledge, weak implementation of policies, weak commercialisation of research & indigenous knowledge, poor sustainability of natural resources, lack of expert knowledge, high-cost technology import and leverage of much technology, informal use of technology, the reluctance of rural people to integrate with new technology and hesitance to pay for the technology, lower levels of research & development facilities, a high level of international competition, a high level of private-sector interference with less government involvement, and weakness of national fund gathering and distribution.These lapses suggest that the existing policies are insufficient or may not be delivered effectively to overcome these challenges. This study makes an effort to identify the irregularities of NSTP as a positive step and propose a way forward in formulating a workable framework to upgrade SMEs in Sri Lanka that would be highly effective.