With Sri Lanka’s long-running Simplified VAT (SVAT) scheme now officially abolished, businesses particularly exporters and project suppliers are being warned to brace for short-term cash flow pressures as the country transitions to a new Risk-Based VAT Refund Scheme, effective from October 1, 2025.
According to KPMG Sri Lanka, the change represents a significant policy shift from suspended VAT credits to a time-bound, compliance-linked refund mechanism. The firm cautions that companies failing to adapt early could face liquidity constraints during the adjustment period. Exporters, who previously operated under SVAT’s suspension-based relief, must now ensure that their systems are fully aligned with the Revenue Administration Management Information System (RAMIS) for electronic refund processing.
The Inland Revenue Department (IRD), under Section 22(5)(f) of the Value Added Tax Act No. 14 of 2002, has gazetted new regulations governing “The Operation of Risk-Based Refund Scheme” through Gazette Notification No. 2456/02, issued on September 29, 2025. The new system entitles eligible taxpayers to receive VAT refunds within 45 days from the due date of filing, provided returns are lodged electronically via RAMIS.
Eligibility for refunds extends to exporters and suppliers engaged in Strategic Development Projects, Specified Projects, and projects approved under Section 22(7) of the VAT Act. Exporters qualify if zero-rated supplies accounted for more than 50% of their total supplies in 2024, a ratio that will be reassessed annually.
Unlike the SVAT framework, which uniformly suspends VAT at source, the new refund model introduces a risk classification system, dividing applicants into low, medium, and high-risk tiers. Classification will depend on filing accuracy, compliance record, and transaction reliability. Low- and medium-risk taxpayers will enjoy expedited refunds without pre-verification, while high-risk taxpayers will be subject to additional checks. Risk ratings will be reviewed semi-annually by the IRD.
The transition also entails a series of compliance deadlines. By October 15, Registered Identified Suppliers (RIS) must submit supply schedules covering transactions until September 30. Between October 15 and 20, RISs must finalise Schedule 04 amendments, while Registered Identified Purchasers (RIP) are required to approve them and issue credit vouchers through RAMIS. All SVAT schedules must be submitted by October 30, and unused vouchers must be returned to the IRD by November 10.
Further, debit and credit notes linked to suspended invoices issued between April 1 and September 30 must be reported using new formats SVAT 05a for debit notes and SVAT 05b for credit notes and submitted within six months of the original invoice. Corresponding VAT returns must also be updated for adjustment purposes.
KPMG emphasizes that timely refunds will hinge on compliance discipline. Taxpayers maintaining clean records and accurate filings are likely to receive low-risk classifications, ensuring faster refund cycles. Those with inconsistent histories may face verification delays.
To mitigate disruption, KPMG urges firms to begin “housekeeping” immediately: confirming their exporter status based on 2024 VAT data, updating project classifications, and verifying TIN-level contact details for IRD correspondence. Companies are also advised to test-run RAMIS workflows before October filings.
The shift marks a decisive step toward a more transparent, risk-sensitive VAT regime one that rewards compliance but challenges firms to modernize quickly or risk liquidity strain during the transition.
