Dilemma over SVAT removal

The proposed withdrawal of the Simplified Value Added Tax (SVAT) with effect from 1 October, 2025, has caused a great deal of apprehension among the country’s business community, particularly exporters. SVAT, which was introduced in April 2011, has won the admiration of exporters and businesses engaged in specified projects. The SVAT system was designed to minimise corruption by reducing human intervention and enhancing transparency in the tax process.

The Ministry of Finance is contemplating to replace SVAT by a refund-based mechanism, which has worried the business community, given the lethargy and inefficiency associated with the public sector. The proposed removal of SVAT was figured prominently at the Exporters’ Forum conducted by the EDB recently. The exporters at the Forum opined that removal of SVAT had been proposed by officials in the Treasury who desire for a temporary cash flow contrary to the widely held view that the changeover is a suggestion of the IMF. In August 2023, a VAT Bill was issued suggesting the removal of SVAT from 1 January, 2024. However, a Cabinet decision in September 2023 by the previous Ranil Wickremsinghe administration deferred this removal to 1 April, 2025, due to the grievances raised by numerous associations. The Department of Inland Revenue is planning to replace SVAT by a refund-based system under which exporters would be categorised as low, medium, and high risk. Low and medium-risk exporters are expected to be given refunds without an audit after the returns are submitted. The current SVAT system has provided exporters with a critical advantage by minimising cash flow disruptions by offsetting VAT on inputs while ensuring smooth operations and thereby enabling the exporters to maintain competitiveness in the global market. SVAT has also reduced the administrative burden on the Inland Revenue Department apart from minimising frauds associated with VAT refunds.

The island’s largest export sector – the apparel industry – has expressed its strongest objection towards the controversial move while pointing out various drawbacks the premier export industry would experience in a no-SVAT environment. According to the Secretary General of the Joint Apparel Exporters Forum (JAAF) Yohan Lawrence, even if all apparel exporters are rated as either low or medium-risk and refunds are made within 45 days, the interest cost to apparel exporters would be Rs. 2.6 billion a year under the proposed refund-based framework. Exporters also fear that they would have to incur further financial burden in the form of underhand payments to corrupt officials to obtain refunds. JAAF had predicted that exporters would stop buying local inputs and working with domestic subcontractors in the event SVAT is repealed as that would become more expensive than sourcing imported inputs or subcontracting for foreign factories. Meanwhile, apparel exporters had cautioned that Sri Lanka’s export trading houses will move overseas to maintain competitiveness after SVAT is done away. According to Yohan Lawrence, there are 12 export trading houses in Sri Lanka that account for 50% of the total exports.

In an environment where exports have demonstrated a recovery, eliminating a system like SVAT, which has served the interest of exporters, is at odds with the Government’s export development agenda. The NPP administration has set a highly challenging export target of $ 36 billion by 2030. 

SVAT was introduced after the infamous VAT refund scam which took place two decades ago when it was revealed that VAT branch of the IRD made unlawful refunds to non-existent companies amounting to Rs. 3.5 billion. The scam was then considered as the biggest VAT fraud in South Asia and senior officials of the IRD were sentenced to jail by the courts after they had pleaded guilty of having been involved in the shameful malpractice which took place during the 2002 to 2004 period. It is often said do not fix it unless it is broken.