Wednesday Aug 20, 2025
Wednesday Aug 20, 2025
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As Sri Lanka transitions from SVAT to a risk-based VAT refund system, the importance of a reliable and intelligent computerised infrastructure cannot be overstated
As Sri Lanka stands just weeks away from the abolition of the Simplified VAT (SVAT) scheme on 1 October 2025, the country is preparing to transition to a risk-based VAT refund system. This marks a significant shift in the VAT landscape—one that will impact exporters, tax administrators, and the broader economy. While the Inland Revenue Department (IRD) has made efforts to create awareness on the anticipated changes and its impact, the question remains: Are both taxpayers and officials truly ready for this transformation?
A historic shift in VAT administration
The roots of Sri Lanka’s Suspended VAT (SVAT) system date back to the early 2000s, sparked by a significant VAT fraud scandal that severely damaged public and institutional trust in the tax administration. In response, the Inland Revenue Department (IRD) adopted a more cautious and rigid approach to managing VAT, which resulted in prolonged delays in refund processing. This issue particularly affected exporters, whose businesses rely heavily on swift liquidity, thus creating operational challenges and financial strain for many legitimate export companies.
To address these challenges and improve efficiency, the ‘Suspended VAT (SVAT) scheme’ was introduced in 2005. Initially managed by the Textile Quota Board for apparel exporters and the Export Development Board (EDB) for other sectors, SVAT replaced direct cash refunds with a credit voucher system. This allowed exporters to carry out their operations without needing to make upfront VAT payments, thereby striking a balance between ensuring accountability and meeting the practical needs of export-driven businesses.
From 2005 to 2011, the Suspended VAT system was a vital element in Sri Lanka’s export support system, facilitating better cash flow management and enhancing the competitiveness of local industries in the global marketplace.
In 2011, the SVAT system was transferred to the Department of Inland Revenue’s oversight and rebranded as the Simplified VAT Scheme. While the core paper-based and cashless process remained unchanged, the scheme’s scope was expanded to cover local construction projects during their execution phases, as well as Special Development Projects (SDPs).
The SVAT scheme allowed exporters and strategic projects to operate without upfront VAT payments. Instead, transactions were recorded using SVAT credit vouchers and suspended tax invoices, easing cash flow burdens and reducing refund delays.
However, the system became bloated over time, with its scope expanding to include construction and development projects. This led to administrative inefficiencies due to a lack of audits being carried out by tax officers.
The Government, under IMF-backed reforms, has now opted to replace SVAT with a risk-based refund mechanism, and related amendments to the VAT Law have been enacted.
The new VAT refund system: What’s changing?
From October 2025, all SVAT registrations will be cancelled. As per the VAT Law, the excess input tax of the following persons will be refunded not later than 45 days from the due date of the VAT return submission.
According to the Value Added Tax (Amendment) Act, No. 4 of 2025, an “eligible exporter” is defined as:
“A registered person whose value of zero-rated supplies, as defined under section 7 of this Act, during the preceding calendar year was greater than fifty percent of the total value of supplies made by that person during the same period.”.
This classification is crucial because eligible exporters will be entitled to VAT refunds within 45 days of filing their returns, provided they maintain a compliant tax profile. Businesses falling below the 50% threshold may not qualify for refunds.
The eligible parties for VAT refunds will receive such refunds based on their risk profiling. Those with low or medium-risk profiles may receive refunds within 45 days without any pre-verification, while high-risk taxpayers will undergo pre-verification.
The eligible parties for VAT refunds will qualify for the refunds within 45 days based on:
Taxpayer readiness
1.For eligible parties for VAT refund under the risk-based refund system, especially the eligible exporters, this transition demands a proactive approach.
Brush up on VAT compliance
Understand the new filing requirements, refund timelines, and documentation standards.
2.Assess eligibility
Confirm whether your business qualifies as an eligible exporter under the new rules.
3.Plan for cash flow gaps
Refunds may take up to 45 days. Businesses must prepare to manage finances for up to 75 days, factoring in return preparation and processing time.
4.Engage with banks and stakeholders
Discuss cash flow strategies with banks, creditors, and debtors to avoid liquidity crunches.
5.Train staff on e-filing
Ensure internal teams are trained to use the IRD’s online portal accurately and efficiently or obtain professional help for filing of VAT Returns.
6.Clear outstanding taxes
A clean taxpayer profile improves your risk rating, which directly affects refund speed.
Administrative preparedness: A new challenge for IRD
For the Inland Revenue Department (IRD), the shift from SVAT to a refund-based system is not just procedural—it’s cultural. Under SVAT, audits were rare, and compliance monitoring was minimal. Now, officers must:
The IRD officers have mentioned in public forums that it is committed to conducting nationwide awareness workshops and have begun parallel testing of the new system. However, the success of this reform hinges on whether these efforts translate into real-world readiness.
The need for a robust digital infrastructure
As Sri Lanka transitions from SVAT to a risk-based VAT refund system, the importance of a reliable and intelligent computerised infrastructure cannot be overstated. The success of this reform hinges on the ability of the Revenue Administration Management Information System (RAMIS) to handle complex compliance workflows, automate risk assessments, and process refunds within the promised 45-day window. However, concerns remain about whether RAMIS is technologically equipped to support this overhaul.
Historically, RAMIS has faced challenges in scalability, user experience, and integration with taxpayer systems. A risk-based refund mechanism demands real-time data analytics, automated risk profiling, and seamless communication between taxpayers and administrators—capabilities that RAMIS may not currently offer in full. Without significant upgrades or parallel systems in place, there is a genuine risk that refund delays and administrative bottlenecks could undermine the credibility of the new VAT framework. Investing in a modern, AI-enabled tax administration platform is not just a technical necessity—it’s a strategic imperative for ensuring transparency, efficiency, and trust in Sri Lanka’s tax system.
Let’s hope that the policy makers, along with the tax administrator, have given sufficient thought to the technological capability and whether RAMIS can deliver what the new risk-based refund systems’ success demands.
Transparency and risk ratings: A taxpayer’s right
One contentious issue is the risk rating system. While the IRD uses past compliance behaviour to classify taxpayers, it has yet to confirm whether this process is automated or manual.
Taxpayers argue that:
Transparency in this area is crucial. Knowing one’s rating allows businesses to take corrective actions and plan their finances accordingly.
Cash flow concerns: The export sector’s alarm bells
Exporters have voiced serious concerns about the impact of SVAT removal, particularly regarding its impact on working capital and liquidity management. Under the SVAT system, exporters were able to operate without making upfront VAT payments, allowing them to preserve cash flow and reinvest in operations.
With the shift to the new risk-based refund mechanism, businesses are now required to pay VAT upfront and wait for refunds—potentially up to 45 days after filing their returns (so up to 75 days). This delay could tie up billions of rupees in capital, creating a significant strain on exporters’ financial cycles.
For industries that operate on tight margins and rely on fast-moving supply chains, this change could disrupt procurement, delay production, and weaken competitiveness in global markets. The situation is particularly precarious for seasonal exporters and those with high-volume, low-margin models, where even short-term cash flow disruptions can have long-term consequences.
In response, several industry associations and chambers of commerce have urged the Government to take immediate mitigating steps, including:
Without such safeguards, the transition could inadvertently penalise the very sectors that drive Sri Lanka’s export economy—undermining the intended benefits of the reform.
Impact on the SME sector exporters: A silent struggle
The removal of SVAT is likely to hit Small and Medium Enterprises (SMEs) the hardest. Unlike large exporters with robust financial systems and access to credit, SMEs often operate with tight cash flows and limited working capital. Under SVAT, these businesses benefited from suspended VAT payments, which helped them maintain liquidity and avoid refund delays. With the new system requiring upfront VAT payments and refunds issued only after 45 days, SMEs may face significant cash flow disruptions.
Many lack the financial resilience to absorb this delay and may struggle to negotiate extended payment terms with suppliers or secure short-term financing from banks. Additionally, the mandatory shift to online VAT return filing poses a technological and training challenge for smaller firms with limited digital infrastructure. If not supported through targeted awareness programs and transitional relief measures, the SVAT removal could inadvertently stifle SME growth, undermining a vital segment of Sri Lanka’s export economy.
A better path forward
While the government’s intent to modernise VAT administration is commendable, the transition must be carefully managed. Recommendations include:
nMaintaining SVAT or an equivalent mechanism for exporters until the new system is fully functional.
nIntroduction of an e-invoicing system or pre-printed invoice format/Government-approved invoice format to enhance credibility and compliance and reduce fraud. Countries with robust e-invoicing systems (Italy, Mexico, Brazil) have significantly reduced fraud and refund delays. Standardised invoice formats, whether pre-printed or digital, are essential for transparency and audit readiness.
Conclusion: Reform with responsibility
Sri Lanka’s move to abolish SVAT and introduce a risk-based VAT refund system is a bold reform. But boldness must be matched with readiness, transparency, and empathy. Exporters are not resisting change—they are asking for systems that work.
If implemented well, this reform could enhance trust, improve compliance, and support economic growth. But if rushed or poorly executed, it risks undermining the very foundation of Sri Lanka’s export-driven economy.
As Sri Lanka prepares to dismantle a system that has supported its export economy for nearly two decades, policymakers and tax administrators must recognise that this is not merely an exercise in ticking off an IMF checklist.
The transition from SVAT to a risk-based VAT refund mechanism represents a fundamental shift in the country’s tax infrastructure—one that demands careful planning, institutional readiness, and above all, ownership at the highest levels of government. Unless the Government, particularly the President in his capacity as Minister of Finance, and other key decision-makers, take full responsibility for managing this transition, the reform risks becoming disruptive than transformative. The failure of this single policy decision could have far-reaching consequences—not just for exporters, but for the broader economy that depends on their success.
(The writer is Principal – Tax and Regulatory at KPMG.)
