With just days to go before the abolition of Sri Lanka’s Simplified VAT (SVAT) regime, leading export associations are warning of a severe liquidity shock if the Inland Revenue Department’s new risk-based VAT refund system is not fully operational from day one. Industry estimates point to a monthly cash squeeze of about US$80 million locked in unpaid input VAT across the export supply chain, a level that could weaken working capital, delay supplier payments and blunt the country’s fragile export recovery.
Exporters accept that ending SVAT has been signalled for months. The concern is execution. Refunds for fully zero-rated exporters are, in law, due within 45 days, but past practice has often stretched much longer. Apparel leaders and other sector bodies argue that removing SVAT without a proven, time-bound refund pipeline repeats a known policy risk: tax cash gets trapped inside the system just when firms need it most to buy raw materials, meet payroll and ship orders. They are calling for a phased transition that runs only after e-invoicing and workflow tests demonstrate refunds at scale within the statutory window.
What changes on 1 October
Under the new framework, SVAT certificates disappear and firms revert to the standard VAT regime with refunds processed on a risk basis. Exporters with more than 50% zero-rated supplies qualify for 45-day refunds. Entities with less than 50% exports get refunds only for the export component and often after a longer interval. The IRD has published guidance tied to the wider VAT reform roll-out, including electronic submissions and refund request flows. The intent is sound: reduce abuse, align with global practice, and return cash promptly to bona fide exporters. Delivery remains the live question.
Where the US$80m pressure comes from
Industry math is blunt. Once SVAT ends, exporters will pay 18% VAT upfront on local inputs. Apparel alone estimates around Rs. 12 billion of VAT outflows per month that must be refunded later. Multiply that by multiple export verticals and their tier-two suppliers, and the liquidity parked with the tax authority quickly rises. If refunds slip beyond 45 days, the do-nothing cash cost escalates. Firms will either draw costly bank lines, tighten payment terms on SMEs, or cut back orders to manage cash. None of those choices help competitiveness.
Knock-on risks for SME suppliers and rural incomes
SVAT insulated thousands of small suppliers who sell into export value chains. Without it, tea smallholders, fabric and trim vendors, packaging printers, transporters and ancillary service providers face immediate cash gaps as VAT is charged and then “waits” in the system. Tea associations have warned of withheld cash at any time in the billions of rupees if refunds lag. In a sector already hit by price volatility, that risk transmits straight to leaf collectors and estate workers, tightening rural liquidity.
Timing collides with external headwinds
The refund transition is arriving during a period of soft global demand and tariff uncertainty in key markets. Apparel and rubber exporters are managing thinner margins and longer payment cycles. Adding a domestic liquidity shock increases the probability of missed shipments and lost re-orders, just as Sri Lanka seeks to defend market share. A small operational delay in refunds can force large balance-sheet decisions on inventory and payroll.
What exporters are asking for
Export bodies are not seeking to retain SVAT indefinitely. They are asking for three practical assurances:
- A tested refund pipeline. Run an end-to-end, live-volume trial before switch-off. Publicly demonstrate that properly filed claims hit bank accounts within 45 days at industrial scale. Publish weekly dashboards for transparency.
- Phased implementation with safety valves. For the first 3–6 months, allow risk-rated fast-track lanes for certified compliant exporters and deemed exporters in long supply chains. Keep a limited SVAT-like mechanism or provisional credits for the most cash-sensitive SME nodes to avoid breakage.
- E-invoicing and documentation readiness. Make e-invoicing mandatory only after vendors can issue, match and reconcile invoices reliably. Provide simple checklists, sample files and support lines, and resolve early bugs before penalties kick in.
Policy context: IMF alignment without self-inflicted harm
Commentary notes that the IMF program does not require an abrupt removal of SVAT absent a functioning refund system. The objective is to modernise VAT while protecting revenue and reducing fraud. Rolling out risk-based refunds with credible service standards meets that objective without choking the export engine that earns foreign exchange. Sequencing matters more than symbolism.
What the IRD must do now
- Confirm the legal service standard. Re-state the 45-day statutory deadline and the evidentiary requirements for a “proper” claim so that the clock is clear and enforceable.
- Publish operational SLAs. Set daily and weekly targets for claim intake, risk scoring, audit selection rates and disbursement volumes. Share a backlog tracker.
- Guarantee payment rails. Ring-fence refund cash, prioritise exporters and deemed exporters, and deploy payment batches multiple times a week during the cutover.
- Create an appeals fast lane. If automated flags hold back refunds, allow rapid human escalation for compliant taxpayers with export urgency.
What firms should do this week
- Tighten invoice hygiene. Ensure suppliers issue VAT-compliant tax invoices with accurate item lines, HS codes where relevant, and correct VAT numbers. Errors will stall refunds.
- Segment suppliers. Map exposure to SME vendors and smallholders. Where feasible, offer shorter payment terms or interim advances to prevent supply disruption while refunds cycle.
- Pre-fund working capital. Line up short revolving facilities for 60–90 days to bridge the first refund cycles. Model worst-case delays of 8–12 weeks and stress-test payroll and shipment plans.
- Join industry data rooms. Share refund performance data via associations to keep pressure on service standards and spot systemic bottlenecks early.
Bottom line
Ending SVAT can be fiscally clean and economically neutral only if refunds replace it without friction. The export economy runs on velocity: of cash, inputs and documents. A US$80 million monthly cash freeze is not a rounding error; it is a constraint that will ripple from factories and estates to ports and banks.
Sri Lanka can avoid that hit by sequencing the reform: test the plumbing, prove the 45-day promise, and only then switch the valve. If policy makers and industry align on that simple order, the country can keep credibility with both investors and the IMF while protecting jobs and foreign exchange. If not, the cost will show up quickly in cancelled orders, stretched supplier ledgers and a weaker external account.
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