Wednesday Oct 01, 2025
Wednesday Oct 01, 2025
Wednesday, 1 October 2025 00:27 - - {{hitsCtrl.values.hits}}
The Inland Revenue Department (IRD) has announced a major overhaul of Sri Lanka’s VAT refund system, replacing the Simplified Value Added Tax (SVAT) scheme with a risk-based refund mechanism effective today.
The IRD stated that the new mechanism aims to facilitate faster and more efficient VAT refunds for eligible exporters and projects while reducing opportunities for fraud and errors.
Under the new system, refunds will generally be issued within 45 days of submitting a proper VAT return, depending on the taxpayer’s risk rating. Eligible VAT registrants will be assessed using a statistically robust risk-based methodology and classified into three categories: low, medium, and high risk. Low and medium risk taxpayers can expect refunds without prior verification, while high risk taxpayers will undergo pre-verification before refunds are processed.
According to the IRD, eligible recipients include exporters with direct exports exceeding 50% of their total supply in the preceding year, approved projects under Section 22(7) of the VAT Act, and suppliers to designated Special Projects (SP) and Strategic Development Projects (SDP), where such supplies constitute over 50% of their total supply.
The IRD noted that any non-compliance or errors detected in submitted schedules will pause the 45-day refund timeline until rectification, ensuring accountability in the process.
The SVAT scheme, introduced in 2011, has been a cornerstone of the country’s taxation framework, particularly supporting exporters and strategic projects. However, the move to replace SVAT comes amid growing concerns over VAT compliance and past instances of large-scale fraud.
Notably, Sri Lanka experienced the largest VAT fraud in South Asia in the early 2000s, resulting in a loss of around Rs. 357 million due to unlawful refunds to non-existent companies.
The Government and IRD face a critical challenge in ensuring that the new refund mechanism is robust, transparent and resistant to corruption. With past VAT and income tax refund systems proving vulnerable, policymakers will need to balance efficiency with stringent verification to safeguard public funds.
On 26 September, leading export associations voiced deep concerns and warned of a looming cash flow crisis that could choke the country’s $ 19 billion export target for 2025. At a joint press briefing, representatives from a range of key export industries stressed that while the move is framed as aligning with International Monetary Fund (IMF)-backed reforms, the absence of a tested and functioning VAT refund mechanism threatens to withhold nearly 8% of export earnings or about $ 80 million each month from the sector (https://www.ft.lk/front-page/Exporters-fear---80-m-monthly-cash-crunch-if-SVAT-removed-and-no-refund-system/44-782189).
