EY Sri Lanka sets out guidelines for SVAT phaseout

With the Government abolishing Simplified Value Added Tax (SVAT) from 1 October 2025, EY Sri Lanka has issued guidelines on how businesses can manage the transition and comply with strict timelines. 

The firm has outlined the forms, deadlines, and reporting requirements that Registered Identified Suppliers (RIS) and Registered Identified Purchasers (RIP) must follow to complete the transition.

Sri Lankan businesses face a significant change in their tax compliance obligations with the withdrawal of the SVAT system from 1 October. The end of the SVAT will remove the upfront VAT suspension mechanism that exporters and other registered parties relied on to manage cash flow. 

All supplies and purchases after 30 September will be subject to the standard VAT system, requiring companies to manage refunds through the regular process. EY Sri Lanka has issued detailed guidance for RISs and RIPs, stressing that strict adherence to deadlines is needed to avoid compliance risks.

Suspended tax invoices will not be valid for supplies made after 30 September. Any supply dated from 1 October must be invoiced under the normal VAT system. While SVAT Schedules 04, 05 (a, b) and 07 will cease to apply beyond September, suppliers are still required to complete them for transactions up to 30 September.

SVAT 04 is the reconciliation form that suppliers submit to match sales with corresponding purchases; it must be filed by 20 October and approved by purchasers by the same date, with any rejected entries resubmitted by 31 October. SVAT 05 (a and b) are monthly summary statements of sales and purchases, while SVAT 07 is a consolidated schedule of transactions; both must be filed by 31 October.

Suppliers must also ensure they receive and approve SVAT credit vouchers, which are issued by purchasers in place of cash VAT payments, for transactions up to 30 September. These vouchers must be approved by 20 October and credited by 31 October. 

From 1 October, all invoices must reflect VAT in the normal manner. EY noted that adjustments to SVAT transactions via tax credit or debit notes will not be permitted in future VAT returns. Corrections must instead be reported under the VAT system within six months of the original invoice date.

For purchasers, VAT on transactions with RIS cannot be suspended beyond 30 September. From 1 October onwards, they will need to obtain standard VAT invoices from suppliers. Purchasers are also responsible for submitting SVAT 04 schedules by 15 October, to be approved by 20 October.

They must stop issuing SVAT credit vouchers after 30 September. These vouchers, which effectively served as evidence of VAT being withheld under the SVAT scheme, must be confirmed by 15 October. Unused voucher books must be surrendered to the Inland Revenue Department (IRD) by 20 October. 

Suspended purchases must be declared in VAT returns up to 30 September, while purchases after October must be reported under the normal VAT system, with any adjustments allowed within six months of the original invoice date.

The SVAT withdrawal was initially scheduled for January 2024 but was postponed twice after exporters raised concerns about the lack of a reliable VAT refund system. A senior IRD official said the Department had been in a position to implement such a mechanism by the original target date, but the change was deferred first to January 2025 and later to October 2025.

Exporter groups, including the Joint Apparel Association Forum (JAAF), argued that removing the SVAT without a functional refund process would cause serious cash flow disruptions. They noted that although law provides for refunds within 45 days, in practice, claims have been delayed for more than 12 months, leaving exporters with large sums outstanding. 

The JAAF called for a transparent, digitally based refund system with minimal human intervention, pointing out that the Government has committed to the International Monetary Fund (IMF) to significantly speed up VAT refunds and phase out the SVAT.

The Ceylon Chamber of Commerce had welcomed the deferment, saying it gave businesses more time to adjust and allowed the Government to build a stronger repayment system. It said the postponement would ease the transition and reduce the risk of financial instability.