Compelling case for smarter VAT solution for exporters

Sri Lanka’s export industries – especially the apparel sector, have long depended on efficient tax mechanisms to remain competitive in global markets. But one persistent bottleneck has threatened that edge for years: the country’s complex and delayed VAT refund process.

This challenge is not new. In the early 2000s, a major VAT fraud case shook confidence in the system, prompting the Inland Revenue Department (IRD) to tighten its controls. While necessary at the time, the result was an overly cautious and bureaucratic approach that left legitimate exporters waiting months for refunds. For a sector where liquidity and speed are critical, this has had long-term consequences.

In response to these inefficiencies, the Government working with stakeholders such as the Joint Apparel Association (JAAF) introduced a Suspended VAT mechanism in 2005. Administered by the Textile Quota Board, for apparel, and by the EDB for other export sectors, this system removed the need for cash refunds operating on a credit voucher system. It was a practical solution that maintained accountability while easing cash flow burdens on the industry.

From 2005 to 2011, this model significantly reduced refund-related delays and restored confidence in the system. In 2021, the system was brought under the purview of the Department of Inland Revenue and renamed as Simplified VAT Scheme (SVAT). Unfortunately, the scheme was widened to include local construction projects (during their implementation period) as also Special Development projects (SDPs). Although SVAT remained a paper-based process, it helped mitigate fraud risks and was broadly effective in removing the need for upfront VAT payments. Unfortunately, because of the widening of the scheme and the lack of discipline of removing companies after their project implementation periods, the number of both Registered Identified Purchasers (RIPs) and Registered Identified Suppliers (RISs) grew exponentially. 

Abolition of SVAT

Nevertheless, this equilibrium held until 2022, when Sri Lanka’s economic crisis and subsequent IMF program triggered a wave of tax reforms. Among the proposals put forward by the Government, identified as an “enhanced revenue enhancing measure”, was the abolition of SVAT, with the rationale that it was unique to Sri Lanka and inconsistent with international norms. However, this claim does not hold up to scrutiny.

Many peer economies – including Bangladesh, Kenya, India, Vietnam, and Indonesia, operate similar schemes to support their exporters. These systems either zero-rate inputs or provide efficient, technology-enabled VAT relief mechanisms. Sri Lanka’s SVAT is not an outlier in principle; rather, it is one of the few systems still relying on manual processes, making it ripe for reform, not removal.

Abolishing SVAT without a credible, functioning alternative threatens to seriously destabilise exporters’ working capital. Refunds that are legally required to be done within 45 days effectively means the tying up of capital for 75 days, will result in the locking up billions of rupees in cash that businesses urgently need to stay afloat. JAAF estimates that for the apparel sector alone, there will be an added cost of Rs. 2.63 billion annually in interest alone. Meanwhile, the IRD’s own “VAT Compliance Improvement Plan” projects an additional Rs. 191 billion cash flow into Government coffers once SVAT ends, yet it makes no mention of refund timelines or guarantees. That omission raises serious questions about the true intent of the policy: to collect more, without any commitment to return what is owed.

This is not a minor inconvenience, it’s a serious drag on production timelines, competitiveness, and long-term growth. Small and medium-sized enterprises (SMEs), in particular, bear the brunt of these delays, as they often lack the capital reserves to cushion such gaps. Furthermore, the burden is felt beyond direct exporters, affecting the entire supply chain, including suppliers of materials and support services.

Across the board, exporters are united in their view: SVAT must remain in place until a robust, well-tested alternative is implemented. For its part the Government has echoed this sentiment committing that there will be a robust digital refund system in place before the removal of SVAT. 

However, many industry voices, including this one, firmly believe that the current RAMIS system is not fit for purpose and would be unable to deliver in the solution that is required. Introducing new tax technology should not mean layering inefficiencies on top of existing ones. Exporters are not resisting change; they’re calling for systems that actually work.

Sri Lanka’s export sector continues to show resilience in the face of rising global competition, shifting buyer expectations, and domestic challenges. But resilience cannot substitute for good policy. A tax framework that supports liquidity, clarity, and timeliness is essential to drive future growth. Ultimately, this is not just a tax administration issue. It’s about maintaining the country’s competitiveness in international markets. Exporters are not calling for concessions, they’re asking for efficiency, predictability, and reform that supports the realities of modern trade

A better path forward

There is a better path forward. Sri Lanka should prioritise three key steps:

1.Reinstate a simplified VAT suspension scheme for both direct and indirect exporters, drawing on the strengths of the 2005–2011 model. This would ease the administrative burden on businesses and reduce the reliance on slow-moving refund cycles.

2.Fast-track the rollout of e-invoicing – a digital system that allows businesses to issue and share invoices in real time with the IRD. This shift can significantly improve VAT compliance, reduce audit delays, and create greater transparency between taxpayers and the IRD. By linking systems directly, e-invoicing minimises room for fraud, cuts down administrative costs and inefficiencies, and encourages better overall compliance. Most importantly, it builds trust in the VAT refund process, something exporters critically need in the absence of SVAT.

3.Maintain SVAT or an equivalent mechanism until a fully functional e-invoicing system is in place. Policy transitions must be carefully sequenced to avoid disruption. Removing the existing framework without a ready replacement would simply shift the burden back onto businesses at a time when many are still recovering from economic shocks.

Sri Lanka’s export sector continues to show resilience in the face of rising global competition, shifting buyer expectations, and domestic challenges. But resilience cannot substitute for good policy. A tax framework that supports liquidity, clarity, and timeliness is essential to drive future growth.

Ultimately, this is not just a tax administration issue. It’s about maintaining the country’s competitiveness in international markets. Exporters are not calling for concessions, they’re asking for efficiency, predictability, and reform that supports the realities of modern trade.

A VAT system that works for exporters is one that works for the economy. For Sri Lanka to thrive, the focus must shift from control to collaboration – ensuring that tax systems are not a roadblock but a reliable bridge to global opportunity.