SVAT to risk-based refunds: Turning point in Sri Lanka's tax policy

AS Sri Lanka stands just weeks away from the abolition of the Simplified VAT (SVAT) scheme on 1 October 2025, the country is preparing to transition to a risk-based VAT refund system. This marks a significant shift in the VAT landscape one that will impact exporters, tax administrators, and the broader economy. While the Inland Revenue Department (IRD) has made efforts to create awareness on the anticipated changes and its impact, the question remains: Are both taxpayers and officials truly ready for this transformation?

- By Rifka Ziyard

A historic shift in VAT administration

The roots of Sri Lanka's Suspended VAT (SVAT) system date back to the early 2000s, sparked by a significant VAT fraud scandal that severely damaged public and institutional trust in the tax administration. In response, the Inland Revenue Department (IRD) adopted a more cautious and rigid approach to managing VAT, which resulted in prolonged delays in refund processing. This issue particularly affected exporters, whose businesses rely heavily on swift liquidity, thus creating operational challenges and financial strain for many legitimate export companies.

To address these challenges and improve efficiency, the 'Suspended VAT (SVAT) scheme' was introduced in 2005. Initially managed by the Textile Quota Board for apparel exporters and the Export Development Board (EDB) for other sectors, SVAT replaced direct cash refunds with a credit voucher system. This allowed exporters to carry out their operations without needing to make upfront VAT payments, thereby striking a balance between ensuring accountability and meeting the practical needs of export-driven businesses.

From 2005 to 2011, the Suspended VAT system was a vital element in Sri Lanka's export support system, facilitating better cash flow management and enhancing the competitiveness of local industries in the global marketplace.

In 2011, the SVAT system was transferred to the Department of Inland Revenue's oversight and rebranded as the Simplified VAT Scheme. While the core paper-based and cashless process remained unchanged, the scheme's scope was expanded to cover local construction projects during their execution phases, as well as Special Development Projects (SDPs).

The SVAT scheme allowed exporters and strategic projects to operate without upfront VAT payments. Instead, transactions were recorded using SVAT credit vouchers and suspended tax invoices, easing cash flow burdens and reducing refund delays.