July 27, Colombo (LNW): As the deadline for abolishing the Simplified Value-Added Tax (SVAT) system approaches on 1 April 2025, Sri Lanka’s Joint Apparel Association Forum (JAAF) is urging the government to reconsider its decision due to the increasing strain on the apparel industry
. JAAF emphasizes that the sector, which constitutes nearly half of Sri Lanka’s export portfolio, is already facing significant challenges, including reduced export figures. The removal of SVAT without an effective refund mechanism could severely disrupt cash flows for exporters.
JAAF’s Sri Lanka Chamber of Garment Exporters Chairman, Bandula Fernando, warns that the policy change could exacerbate financial difficulties for the sector, particularly for small and medium-sized enterprises (SMEs).
Despite legal requirements for VAT refunds within 45 days, many exporters still face delays, with some refunds pending since 2010. These delays, compounded by the Sri Lankan rupee’s depreciation, create severe cash flow issues for both SMEs and larger exporters.
JAAF Secretary General Yohan Lawrence acknowledges the government’s need to meet revenue targets under the IMF program but criticizes the decision to abolish SVAT based on incorrect assumptions.
He argues that the SVAT system does not contribute to revenue erosion as claimed, and its removal may actually lead to increased imports and reduced domestic value addition. The SVAT system has been instrumental in sourcing intermediary goods and promoting backward integration in the industry.
Industry experts note that abolishing SVAT could lead to increased cash flow challenges between exporters and the Inland Revenue Department (IRD), rather than enhancing revenue.
Historical issues with VAT refunds, including significant delays and fraud, highlight the effectiveness of SVAT in mitigating these risks. The system’s voucher-based approach limits potential misuse, unlike the traditional VAT refund system, which has been prone to fraud.
Reintroducing a VAT refund system could compel apparel exporters to import raw materials rather than sourcing them domestically, further straining cash flows and reducing incentives for local value addition. This shift could negatively impact Sri Lanka’s balance of trade and undermine the sector’s viability.
Lawrence also points out that reinstating a VAT refund system would place additional administrative burdens on the IRD and the industry, leading to increased costs and resource misallocation. He argues that the potential inefficiencies and increased costs of a new VAT refund system make it a counterproductive solution.
In summary, JAAF urges the government to reconsider the SVAT abolition to avoid further financial strain on the apparel industry, preserve domestic value addition, and maintain the sector’s competitiveness.
