ECONOMYNEXT – The removal of a simplified value added tax (SVAT) scheme would hurt Sr Lanka exporters who are already hit by a demand contraction in overseas markets, and discourage domestic input purchases, Joint Apparel Association Forum, representing apparel manufacturers, said.
The SVAT system was introduced to avoid delays in getting VAT refunds from the revenue authorities which had taken as much as 18 months before the system. Sri Lanka is removing SVAT and scraping exemptions as part of moving to a standard VAT system.
Export revenues are zero-rated and the government has to refund VAT paid on local inputs.
“Sri Lanka’s track record on VAT refunds is poor and prior to the introduction of SVAT, exporters had refunds due from the IRD that ran into over 18 months,” JAAF said.
“History has shown that the refund system that existed before the introduction of SVAT had large fraud in the non-export sector, and not among exporting companies.”
“As such they have very little sales locally which reduces the potential for abuse of the system.
“In any event the likelihood of abuse is much higher in a system based on payment and refund as against the SVAT voucher system.
Delays in getting refunds after the SVAT is removed may discourage exporters from purchasing local raw materials, the JAAF said.
Local purchase of raw material lead to higher GDP (domestic valued added).
“Further, the decision has seemingly failed to consider the fact that apparel exporters may be compelled to import raw materials, rather than purchase them from domestic manufacturers and have their cash flows restricted by the VAT refund system,” JAAF said.
“This will lead to increased imports which is detrimental to both the companies and the overall balance of trade, resulting in the loss of the unique vertical integration benefits Sri Lanka apparel has to offer. ”
The full statement is reproduced below:
JAAF says Government decision to terminate SVAT detrimental to apparel exporters
9th June 2023: The Joint Apparel Association Forum (JAAF) expresses its deep concern and disappointment on the recent decision to end the long and well-functioning Simplified Value Added Tax (SVAT) scheme. JAAF, representing the interests of the apparel industry, firmly believes the abolition of SVAT for exporters will have detrimental effects on the sector which is already reeling under the pressure of declining exports. The decision will jeopardize business cash flows and impede efforts of returning to overall growth.
JAAF stated that the abolition of SVAT will create a further burden on an already stressed industry and particularly on company cash flows as funds will be tied up in even the most efficient refund systems. It added that the impulsive and non-consultative decision will have disastrous impacts on the long-term operations of a viable sector.
Whilst recognising the need for Government to achieve its revenue targets, JAAF notes that the abolishing of SVAT is completely revenue neutral to the Department. Removal of SVAT will only lead to increased cash flow between the exporter and the Inland Revenue Department (IRD).
Sri Lanka’s track record on VAT refunds is poor and prior to the introduction of SVAT, exporters had refunds due from the IRD that ran into over 18 months.
History has shown that the refund system that existed before the introduction of SVAT had large fraud in the non-export sector, and not among exporting companies.
Exporters utilize SVAT for the purchase of local inputs, which are subsequently converted into finished products for export.
As such they have very little sales locally which reduces the potential for abuse of the system. In any event the likelihood of abuse is much higher in a system based on payment and refund as against the SVAT voucher system.
Further, the decision has seemingly failed to consider the fact that apparel exporters may be compelled to import raw materials, rather than purchase them from domestic manufacturers and have their cash flows restricted by the VAT refund system.
This will lead to increased imports which is detrimental to both the companies and the overall balance of trade, resulting in the loss of the unique vertical integration benefits Sri Lanka apparel has to offer.
This, over the long term may lead to questions being raised over the viability of companies and the jobs they create.
Furthermore, the reintroduction of a VAT refund system, even under the most auspicious conditions would necessitate the allocation of substantial IRD resources for the constant follow-up and evaluation which a refund system will necessitate. This will only result in increased additional administrative costs for all parties and the misplacement of precious IRD resources.
Therefore, JAAF firmly recommends the removal of SVAT from the export sector be approached with utmost caution. In the current climate of declining exports and its adverse impacts on companies and employees, it is crucial to shield the sector from unnecessary internal shocks that would undoubtedly occur if SVAT were abolished, urging Government to preserve SVAT for the export sector.