ECONOMYNEXT – Three key Sri Lankan business chambers have challenged a decision by the Inland Revenue Department (IRD) to remove Simplified Value Added Tax (SVAT) for exporters without having a proper refunding mechanism.
The Free Trade Zone Manufacturers’ Association (FTZMA), together with the National Chamber of Commerce of Sri Lanka (NCCSL) and the Sri Lanka Chamber of Small and Medium Industries, has filed a writ application before the Court of Appeal on Tuesday challenging the IRD’s decision to commence collecting VAT from October 1 without first operationalising the legally mandated automated refund mechanism.
The petitioners representing exporters, deemed exporters, sub-contractors to exporters, service providers in the export supply chain, Small and Medium Enterprises, and the broader business community state that collecting VAT from export-related businesses without a proper functioning refund system and publishing the conditions of the proposed risk-based refund scheme in the Gazette, “is unlawful, unreasonable, and a violation of constitutional rights”.
“According to the Petitioners, the Government abolished the Simplified Value Added Tax (SVAT) scheme earlier this year, after it had been postponed by the previous administration at the request of the export community,” the business chambers said in a statement.
“That abolition was accompanied by a statutory requirement that a new automated, risk-based VAT refund scheme be in place from 1 October 2025. To date, no such system has been implemented, nor have the selection criteria for the refund scheme’s Green, Amber, and Red channels been published.”
The chambers questioned the feasibility of IRD assurances of refunding within 45 days, noting that long-outstanding VAT refunds due to exporters dating back to 2010 remain unsettled.
“They (petitioners) further express concern that, contrary to international good practice where refund-risk channels are selected automatically by transparent algorithms, the IRD now proposes appointing a committee to select channels—creating opportunities for discretion, delay, and potential abuse,” the chambers said.
“They (petitioners) cite similar risks observed when committees, rather than automated systems, are involved in operational decisions such as the release of containers by Customs.”
“While the IRD has indicated to the IMF that there were “leakages” under SVAT, the Petitioners note that, despite being administered and monitored through the IRD’s own online system, no violators have been identified or named.”
“On industry estimates, any leakage would have been negligible (well under 0.01%), underscoring that SVAT was an effective and low-risk mechanism.”
The Chambers also said that the IMF has not required the abolition of SVAT.
“Multiple Chambers, including the International Chamber of Commerce, engaged with the IMF and urged against abolishing SVAT without a proven, automated refund system ready to replace it.”
“The Petitioners contend that the IRD’s advice to abolish SVAT has effectively reinstated a cash-refund regime that was historically vulnerable to delays and corruption.”
“The Petitioners caution that an export-supply-chain liquidity crunch could trigger a foreign exchange shortfall and jeopardise Sri Lanka’s capacity to meet international obligations by 2028.”
Sri Lanka exporters collectively urged the government to delay the removal of SVAT last week, but the government has implemented its proposal to remove SVAT.
From October 1, exporters will have to pay interest on cash flow given to the state as a result of charging value added tax on local inputs. Before this, the tax payment system was based on vouchers under the SVAT. (Colombo/October 01/2025)