KPMG experts discuss SVAT abolition and road ahead

Sri Lanka’s tax framework is undergoing a pivotal transformation with the abolition of the Simplified Value Added Tax (SVAT) scheme, effective 1 October 2025. This transition, announced by the Inland Revenue Department (IRD), will replace SVAT with a risk-based VAT refund mechanism under the Value Added Tax Act, No. 14 of 2002, as amended.

At a recent webinar titled “From Theory to Practice – Your Roadmap to SVAT Abolition & Beyond”, hosted by KPMG in Sri Lanka, leading tax professionals unpacked the implications of this shift for exporters, indirect exporters, and SMEs. The session featured insights from Principal – Head of Tax Suresh R.I. Perera, Principal – Tax and Regulatory Rifka Ziyard, and Associate Director – Tax and Regulatory Radhini Thomas.

Abolition of SVAT: A structural reform

Introduced in 2011, SVAT was designed to ease VAT refund delays and reduce fraud by allowing exporters and identified suppliers to transact using credit vouchers. Contrary to popular belief, the abolition of SVAT is not an IMF recommendation. As clarified during the session, the IMF report indicates that this was a request initiated by the Sri Lankan Government.

Suresh Perera cautioned: “The refund-based VAT scheme that replaces SVAT could severely impact Sri Lankan businesses and the broader economy if not implemented efficiently. While it represents a step toward modernising our VAT regime, failure due to administrative inefficiencies or taxpayer unawareness could take us back to the dark ages.”

Risk-based refunds: A new paradigm

From 1 October 2025, VAT refunds will be processed based on a taxpayer’s risk profile:

• Exporters with over 50% zero-rated supplies (as per Section 7 of the VAT Act) will be eligible for refunds within 45 days of submitting a proper return.
• Exporters with less than 50% exports will receive refunds after six months, and only for the export component.
• Suppliers to Strategic Development Projects (with over 50% of supplies) and projects approved under Section 22(7) will also qualify for 45-day refunds.

Rifka Ziyard emphasised: “It is crucial for taxpayers to fall within the low or medium risk categories to receive refunds without pre-verification. Those classified as high risk will only receive refunds after a pre-verification process. Timely refund processing is essential from the IRD’s perspective, while taxpayers must ensure strict compliance.”

Implications for SMEs and indirect exporters

With SVAT removed, SMEs supplying raw materials to exporters (indirect exporters) must now charge VAT upfront. This introduces a new cash flow challenge, especially if there are delays in payment from exporters. Additionally, SMEs purchasing from other local VAT-registered suppliers must settle invoices inclusive of VAT, further tightening liquidity.

Radhini Thomas noted: “Indirect exporters must prepare for a shift in working capital dynamics. The onus is now on businesses to strengthen compliance systems and manage liquidity throughout the refund cycle.”

Key compliance deadlines

As Sri Lanka phases out SVAT, taxpayers must adhere to several critical deadlines:

• 30 September 2025: Last date to issue SVAT credit vouchers
• 15 October 2025: RISs must complete their submissions
• 20 October 2025: RIPs must approve SVAT Form 04
• 31 October 2025: Final SVAT schedules must be uploaded
• 10 November 2025: All unused SVAT credit voucher books must be returned to the IRD
• 20 November 2025: First VAT payment under the new regime is due

The webinar also covered changes to the VAT return format and the discontinuation of SVAT schedules from 1 October.

Rifka Ziyard highlighted the importance of preparation: “Taxpayers must take proactive steps before 1 October—this includes updating invoicing systems, conducting VAT compliance training, performing tax health checks, and establishing robust internal controls.”

Looking ahead

The removal of SVAT is more than a compliance update—it is a structural reform aimed at aligning Sri Lanka’s VAT system with global best practices.

In his closing remarks, Suresh Perera stated: “By December 2025 or January 2026, we expect the first set of VAT refunds to be processed. The first return filing deadline to qualify for the 45-day refund is on or before 30 November 2025. The success of this transition hinges on the IRD’s ability to deliver timely, transparent, and efficient refunds. If done right, taxpayers will embrace the shift from SVAT to a risk-based refund mechanism.”

KPMG experts also advised that further regulations are expected before 1 October 2025, and urged taxpayers to remain vigilant and stay informed.