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.

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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