In a landmark policy shift effective today, the Inland Revenue Department (IRD) has scrapped Sri Lanka’s long-standing Simplified Value Added Tax (SVAT) scheme, replacing it with a new risk-based VAT refund system designed to improve efficiency and transparency.
The move is part of wider tax reforms aligned with IMF-backed fiscal restructuring, but it has triggered serious concerns from the country’s export community over potential cash flow disruptions.
According to the IRD, the new refund mechanism aims to deliver VAT refunds within 45 days of filing, contingent on each taxpayer’s “risk rating.”
Taxpayers will now be categorized as low, medium, or high risk, based on statistical assessment. Low and medium-risk entities will receive refunds without prior verification, while high-risk taxpayers must undergo checks before claims are processed.
The scheme primarily targets exporters and strategic projects, including those under Section 22(7) of the VAT Act, and suppliers to designated Special or Strategic Development Projects, provided these account for at least half their total sales.
The IRD insists the reform will curb fraud, enhance accountability, and make refunds more predictable. Any discrepancies in submissions, however, will suspend the refund timeline until corrections are made a move that could stall liquidity for some firms.
The outgoing SVAT scheme, introduced in 2011, has long been a pillar of Sri Lanka’s export incentive framework, enabling smooth operations by offsetting input tax without upfront payments.
Yet, it has faced criticism for enabling tax evasion and fraud. The IRD points to historical cases including the early 2000s VAT scandal, when fraudulent refund claims cost the Treasury over Rs. 357 million to justify the overhaul.
Despite these intentions, exporters warn of a looming crisis. At a recent industry briefing, leading associations representing apparel, IT, rubber, and spice sectors warned that without a fully tested refund system, the transition could lock up nearly 8% of export revenue, or about $80 million monthly, severely straining cash flows.
They argue that while reform aligns with global best practices, the lack of administrative readiness could undermine the sector’s $19 billion export goal for 2025.
Tax experts acknowledge the strengths of a risk-based model faster refunds for compliant taxpayers and reduced fraud exposure but caution that its success depends on the IRD’s capacity to manage verification efficiently. Delays or misclassifications could disproportionately penalize exporters, the backbone of Sri Lanka’s foreign exchange earnings.
Ultimately, while the reform reflects a push for modern, transparent taxation, its rollout will test whether Sri Lanka can balance compliance, efficiency, and business confidence in a fragile economic recovery.
