Ernst & Young highlights key changes to Risk-Based Refund System and taxpayer risk classification

Friday, 29 May 2026 06:24 - - {{hitsCtrl.values.hits}}

Sri Lanka’s tax landscape is evolving, with an Ernst & Young (EY) Tax Alert indicating that recent amendments seek to change taxpayer risk classification guidelines within the Value-Added Tax (VAT) refund system.

What is the change?

The Inland Revenue Department (IRD) has issued revised guidelines through Gazette Extraordinary No. 2481/17 dated 26 March 2026, introducing new criteria for classifying taxpayers as low-, medium-, or high-risk. These guidelines replace the previous Gazette (No. 2456/02 dated 29 September 2025) and apply retrospectively from 1 October 2025.

This update operates within the Risk-Based Refund Scheme introduced from 1 October 2025, which allows certain VAT-registered businesses, particularly exporters, to receive VAT refunds before a full audit is completed. Under this framework, refunds may be processed within 45 days of submitting the VAT return.

Prior to issuing early refunds, the IRD conducts a preliminary review of the taxpayer’s return and supporting documentation. Taxpayers classified as “low risk” or “medium risk” are subject to a basic review process. Those categorised as “high risk” remain eligible for early refunds, however, they must undergo a more detailed review before any refund is released.

The revised Gazette provides updated guidance on how taxpayers are classified into low-, medium-, and high-risk categories. According to the new guidelines, the IRD will determine the classification based on several factors, including, but not limited to:

The taxpayer’s compliance history, particularly in relation to the filing of returns, accuracy of reporting, and timely payment of taxes
The taxpayer’s history of refunds claimed
Findings from previous tax audits
Abnormalities in operational performance and revenue stability
The reliability of the business, assessed using institutional third-party information available to the IRD
The duration of the taxpayer’s engagement in the business

In applying these criteria, the IRD will consider data covering the last five years.

How will this impact you?

The updated guidelines present taxpayers with an opportunity to reassess their compliance positions and strengthen documentation to support a “low” or “medium risk” classification. Achieving such a classification may help expedite the refund process and reduce the level of scrutiny applied during the review.

However, the revised criteria place significant emphasis on the outcomes of prior tax audits. As a result, a greater number of taxpayers may fall into the “high risk” category.

Taxpayers classified as “high risk” will be subject to a pre-audit before any refund is released. This requirement may lead to delays in receiving refunds beyond the anticipated 45-day period.

Additionally, where taxpayers have outstanding tax liabilities, there may be increased pressure from the IRD to settle such liabilities in order to facilitate the release of refunds.