As proposed in the 2025 Budget, the Simplified Value-Added Tax (SVAT) scheme, introduced in April 2011, was abolished on Wednesday (1). It will be replaced by a risk-based refund scheme designed to facilitate timely and efficient Value-Added Tax (VAT) refunds for eligible exporters and projects.
However, many exporters and industry stakeholders have been urging the Government to retain SVAT due to concerns about potential delays in refund payments and the unpredictability of an upfront VAT system.
Risk-Based Refund Scheme
According to the Inland Revenue Department (IRD), the Risk-Based Refund Scheme (RBRS) aims to issue refunds within 45 days, subject to certain conditions.
Speaking to The Sunday Morning Business, IRD Deputy Commissioner General B.K.S. Shantha confirmed that the RBRS was effective from 1 October.
When asked about the refund process, particularly in light of exporters’ concerns, he stated that VAT refunds would be processed through the established digital system, the Revenue Administration Management Information System (RAMIS), similar to other procedures.
Industry concerns
Stakeholders have warned that removing SVAT could severely disrupt cash flow, especially given their past experience with long delays in VAT refunds. They argue that without a reliable and timely refund process, companies may face liquidity shortages that could hinder operations and competitiveness.
Numerous industry chambers and business groups, including those in the apparel, rubber, and tea sectors, have released statements sharing their concerns. Some chambers have even initiated legal action against the removal of SVAT.
In a recent statement, the Tea Exporters’ Association (TEA) noted that the industry faced continued uncertainty regarding the consequences of upfront VAT payments. The association cited the potential for cash flow issues and a drop in tea prices following the abolition of SVAT.
The Colombo Rubber Traders’ Association (CRTA) issued a similar statement, highlighting potentially severe consequences. It noted that removing SVAT without a tested and operational refund mechanism could trigger widespread financial distress across Sri Lanka’s natural rubber industry, threatening the livelihoods of smallholders, the viability of Small and Medium-sized Enterprises (SMEs), export competitiveness, and foreign exchange inflows.
Meanwhile, the Joint Apparel Association Forum Sri Lanka (JAAFSL) has called for a proven and effective VAT refund mechanism to safeguard the stability of the country’s export sector.
In this light, The Sunday Morning Business reached out to stakeholders for insight on the next best options and the full extent of their concerns.
Export competitiveness concerns
Speaking to The Sunday Morning Business, Imperial Teas Group Chairman and Managing Director Jayantha Karunaratne, a former President of the National Chamber of Exporters (NCE), noted that the consequences were significant.
He explained that since the industry was unaware of the amount of additional cash required for day-to-day business, finding extra money could be costly, especially if borrowing was necessary. This, he explained, would lead to a reduction in competitiveness in the global market.
Karunaratne also noted that if prices could not be increased, exporters may have to seek raw materials at a lower price, which would also affect the selling price for producers. He identified these as severe consequences that could impact competitiveness, reduce raw material prices, and result in lost profits or even job losses.
He expressed his belief that SVAT was the most suitable option for exporters. However, with the decision to remove it, he pointed out that the next best option would be a guaranteed refund system.
“People are not confident in the refund system, given that billions in VAT need to be settled by many exporters. There is a lot of uncertainty surrounding this,” he said.
Calls for postponement
Following the decision, several business chambers filed a case challenging the collection of VAT without a proper refund system and the abolition of SVAT.
The Free Trade Zone Manufacturers’ Association (FTZMA), the National Chamber of Commerce of Sri Lanka (NCCSL), and the Sri Lanka Chamber of Small and Medium Industries filed a writ application with the Court of Appeal on Tuesday (30 September). They are challenging the IRD’s decision to begin collecting VAT from 1 October without first activating the legally mandated automated refund mechanism.
The petitioners, who represent exporters, deemed exporters, subcontractors, and service providers in the export supply chain, SMEs, and the broader business community, stated that collecting VAT from export-related businesses without a functioning refund system and without publishing the conditions of the proposed RBRS in the gazette was unlawful, unreasonable, and a violation of constitutional rights.
The chambers also warned that immediate VAT collection without an automated refund system would create severe cash flow stress across the export ecosystem, potentially pushing many firms, particularly SMEs and indirect/deemed exporters, towards insolvency.
Speaking to The Sunday Morning Business, FTZMA Chairman Dhammika Fernando stated that the best option would be to maintain the current system. He noted that previous refund mechanisms had been problematic due to past delays and VAT scams, with some exporters still awaiting refunds from as far back as 2010.
“With the decision to remove it, the next best option would be complete automation. However, the problem is that there will be categories to determine the refund period through a committee, which has the potential for biases and influences. The third option would be to postpone this for another year until the system is ensured to be effective and successful,” he said.
Explaining the potential immediate implications, Fernando noted that if refunds were not made within 45 days, which he considered to be a long time in itself, cash flow would be blocked. He stated that due to similar issues in the past, some exporters had refunds due amounting to billions of rupees.
“Therefore, running a business with such cash flow and working capital issues is not feasible if the refunds are not made on time. Additionally, only one category will be refunded within 45 days, while others might have to wait as long as six months. These issues directly impact business viability.
“What we are advocating for is a proper, accountable system, and if such a system is not in place, the process should be postponed until it is. Furthermore, if the IRD fails to refund within the given period, there should be compensation for those affected,” he added.
Fernando also noted that suppliers to exporters, or indirect exporters, were among the most impacted in the supply chain. This is because this group does not receive any input VAT, and therefore the output VAT cannot be reimbursed when supplying to an exporter. He noted that this could cause severe issues for indirect exporters in maintaining their businesses.
An anonymous source from the indirect exporters’ community added that while they were not directly impacted, if VAT refunds were not received on time, it would take a long time for repayment. He noted that such delays would cause significant cash issues in the industry and added that, ideally, there should be a pilot run of the refund system to identify its operational capabilities.
Adding to cost burdens
In a statement, Sri Lanka Shippers’ Council Chairman Trisherman Frink noted that it was imperative to carefully evaluate the unintended consequences that this change would impose on exporters.
The statement read that the removal of SVAT was expected to impact high-value, labour-intensive export sectors such as textiles, garments, and food processing. To avoid disruption, it also highlighted that the transition should include clear communication, adequate grace periods, and stronger tax refund processing.
Accordingly, it noted that rather than dismantling export support mechanisms, the Government could strengthen revenue by improving VAT administration, broadening the tax base, and tackling evasion.
It added that a formal forum for ongoing dialogue between exporters, tax authorities, and policymakers was also needed to ensure balanced taxation policies. Noting that exporters remained committed to compliance, it stressed that digitalising and verifying SVAT would help protect revenue integrity while safeguarding competitiveness and liquidity.
The Sri Lanka Shippers’ Council urged policymakers to reconsider the removal of SVAT in the national interest, as weakening the export engine by removing SVAT would jeopardise national progress and delay the journey to prosperity.
Furthermore, speaking to The Sunday Morning Business, Frink explained that the removal could lead to a substantial impact on exporters, particularly because of the already high costs of production, logistics, and utilities. He noted that the costs had minimised Sri Lanka’s competitiveness in the global market, with exporters struggling for survival.
“With SVAT removal, there will be an additional cost on exporters, with a substantial impact, severely affecting cash flow as well as future orders. There have been many cases in the past where refunds were not made on time, with severe delays. Therefore, if the authorities fail to refund, there should at least be compensation, perhaps with interest,” he said.
While the authorities have stated that refunds will be made in a timely manner, stakeholders question the system’s readiness to ensure this. Frink also noted that since many related authorities operated in silos, the documentation process for refunds would be affected.
Multiple risks
Meanwhile, speaking to The Sunday Morning Business, KPMG Sri Lanka Tax and Regulatory Division Principal Suresh R.I. Perera explained that the SVAT system, unlike the normal VAT system, being a cashless mechanism revolving around credit vouchers, resulted in reduction in opportunities for fraud.
On the other hand, since it is a cashless system, he noted that irregularities discovered upon carrying out IRD audits did not result in cash flows to IRD coffers, leading to a reduction in tax rewards and incentives available to IRD officers. Hence IRD officers refrain from carrying out tax audits of SVAT taxpayers. Perera noted that this in turn resulted in SVAT taxpayers relaxing and deviating from strict compliance requirements as they were not subjected to tax audits.
With exporters registered under the SVAT scheme to be divided into eligible exporters, non-eligible exporters, and other exporters, he highlighted that all three categories would now be exposed to cash flow constraints.
“To fund their working capital requirements, they will have to depend on bank loans for their expenses and interest costs will increase. Whilst strong entities may survive, most SMEs will struggle, facing severe liquidity problems, with increase in working capital requirements threatening some SMEs with collapse and delays further exacerbating SME financial distress.
“Moreover, if VAT refunds are delayed to direct exporters, this will impact their ability to make timely payments to indirect exporters and indirect exporters too will face a cash crunch,” he said.
According to Perera, the main consequences for exporters include serious liquidity problems, disruption of the export supply chain, reduced competitiveness in international markets, and threats to SMEs. This means exporters have to pay VAT upfront on local inputs without timely refunds, which ties up capital and hampers operations. He highlighted that this situation risked shrinking foreign exchange inflows, reducing export volumes, and even shutdowns of export firms.
“Sri Lanka should consider delaying or deferring the abolition until a reliable and automated VAT refund system is operational. Abolishing SVAT abruptly, without a smooth refund process, reinstates a cash-refund regime prone to delays and corruption and disrupts export supply chains with liquidity crunches. Phasing out SVAT gradually or improving the refund mechanism before abolition appears to be the more suitable approach to avoid damaging the export sector and foreign exchange earnings,” he noted.
“Exporters are less competitive internationally due to higher costs and cash flow constraints from paying VAT upfront on local inputs. The lack of a reliable, automated VAT refund system raises supply chain risks and could reduce export volumes and demand.
“Moreover, the export supply chain liquidity crunch caused by SVAT removal risks triggering a foreign exchange shortfall. Exporters facing delays in getting VAT refunds could curtail exports, reducing foreign currency earnings. This could jeopardise Sri Lanka’s capacity to meet international obligations and create macroeconomic instability.”
Furthermore, he noted that due to the VAT fraud that occurred in 2006, IRD officers had been extra cautious in processing VAT refunds and carrying out 100% audits for issuance of refunds. As per the International Monetary Fund (IMF), this has led to an undue delay in issuing VAT refunds, resulting in the system breaking down. In order to provide relief for exporters due to cashflow difficulties, the SVAT system was introduced.
Perera also pointed out that the repeal of SVAT had been recommended to the IMF by a mysterious source and the IMF, without seeking opinions from wider stakeholders, had accommodated the request in its report, clearly demarcating that the recommendation stemmed from “Sri Lankan authorities”.
“Who will take responsibility if it turns out to be a national disaster? When a decision of this magnitude is being taken, it should be subject to a comprehensive cost-benefit analysis. Hence, in this move, the Government and the Cabinet are ill advised. The repeal of SVAT and introduction of cash refunds would again provide opportunities for the introduction of a rent-seeking culture. There are no safeguards against that,” he said.
He also noted that repealing SVAT did not necessarily have any benefits, other than the “weak” excuse that Sri Lanka was the only country adopting this system. “The repeal of SVAT is not a gamble one would take at this juncture of the economy. The root cause of this is that the Finance Ministry lacks a proper tax policy unit to evaluate decisions pertaining to tax policymaking.”