Top business chambers challenge VAT collection without refund system

• Say decision was “unlawful, unreasonable and a violation of constitutional rights”
• Question IRD’s assurances that refunds would be made within 45 days, given that long-outstanding refunds dating back to 2010 remain unsettled

Three leading business chambers in Sri Lanka have filed a writ application in the Court of Appeal, challenging the Inland Revenue Department’s (IRD) move to collect the Value Added Tax (VAT) from October 1, without first implementing the legally mandated automated refund mechanism.

The Free Trade Zone Manufacturers’ Association, National Chamber of Commerce of Sri Lanka and Sri Lanka Chamber of Small and Medium Industries said the decision was “unlawful, unreasonable and a violation of constitutional rights”.

The petitioners, representing the exporters, deemed the exporters, sub-contractors, service providers in the export supply chain, small and medium enterprises (SMEs) and wider business community, said collecting the VAT from export-related businesses without a proper functioning refund system and without publishing the conditions of the proposed risk-based refund scheme in the gazette, is unlawful.

They noted that the abolition of the Simplified VAT (SVAT) scheme earlier this year was tied to a statutory requirement for a new automated, risk-based refund system to be in place by October 1, 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 said.

The chambers questioned the IRD’s assurances that the refunds would be made within 45 days, pointing out that long-outstanding refunds dating back to 2010 remain unsettled. 

“Contrary to international good practice where the refund-risk channels are selected automatically by transparent algorithms, the IRD now proposes appointing a committee to select the channels—creating opportunities for discretion, delay and potential abuse,” the petitioners said.

They added that similar risks had been seen when committees, rather than automated systems, handled operational decisions such as Customs container releases.

Defending the SVAT, the chambers said the system “functioned smoothly and transparently because it avoided cash transactions” by relying on the IRD-issued vouchers exchanged within the IRD’s online system between the buyers and sellers.

They added, “While the IRD has indicated to the International Monetary Fund (IMF) that there were ‘leakages’ under the SVAT, the petitioners noted 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 percent), underscoring that the SVAT was an effective and low-risk mechanism.”

The petitioners stressed that “the IMF’s revenue objective for Sri Lanka is to raise government revenue to 15 percent of GDP; the method of achieving this is a policy choice for the government. The IMF has not required the abolition of the SVAT”.

They argued that the IRD’s advice to abolish the SVAT has “effectively reinstated a cash-refund regime that was historically vulnerable to delays and corruption”.

Warning of broader risks, the chambers said, “Immediate VAT collection in the absence of an automated refund system will create severe cash-flow stress across the export ecosystem, pushing many firms—particularly the SMEs and indirect/deemed exporters—towards insolvency. This threatens employment, curtails domestic value addition and undermines export competitiveness.”

The statement cautioned that such cash-flow stress could “trigger a foreign exchange shortfall and jeopardise Sri Lanka’s capacity to meet the international obligations by 2028”.

Comparing the decision to previous controversial policies, the petitioners said, “Dismantling the SVAT without a ready, automated refund alternative could inflict even greater economic damage” than the fertiliser ban introduced by the former administration, without an impact assessment.

The petitioners are represented by Attorney-at-Law Boopathi Kahathuduwa, with Sachintha Perera.