Apparel exporters fear over US$1 bn loss as SVAT abolition looms

• Inland Revenue Department currently in final stages of developing a risk-based refund system
• JAAF cautions if proposed system comes into effect industry will take measures to move the trading houses overseas
• Says IMF has denied any involvement in this

By Nishel Fernando

Sri Lanka’s apparel exporters are expressing serious concerns that the impending abolition of the Simplified Value Added Tax (SVAT) system could lead to a significant downturn in their export earnings, potentially exceeding US$1 billion. 

This apprehension stems from the anticipated increase in finance costs associated with exports under the proposed new system.

The Inland Revenue Department (IRD) is currently in the final stages of developing a risk-based refund system, which is slated to replace the existing SVAT system starting in October this year. According to the IRD, the new system is 77 percent complete and on track for its October 1st launch.

However, the Joint Apparel Association Forum (JAAF) voiced strong reservations about the proposed new system during the 25th Exporters’ Forum held at the Export Development Board (EDB) premises in Colombo on Monday.

“Even if all export companies in the sector are categorised as lower or medium risk and receive refunds within 45 days, the interest cost to the industry will amount to Rs. 212 million per month, or Rs. 2.6 billion annually,” said Yohan Lawrence, Secretary-General of JAAF.

He further elaborated on the potential ramifications, stating, “This will lead to three primary consequences: a shift away from local purchasing, a move away from local subcontracting, and the relocation of trading processes overseas.”

Under the proposed risk-based system, companies will be categorised as high, medium, or low risk. Medium- and low-risk companies will be eligible for refunds without requiring pre-verification, within 45 days.

Lawrence highlighted that there are currently 12 trading house operations in Sri Lanka, which account for approximately 50 percent of the total expenditure in the sector.

“If this proposed system comes into effect as the solution to this problem, the industry will take measures to move the trading houses overseas, resulting in revenue being generated overseas,” he cautioned.

Adding to the concerns, another apparel exporter claimed that the abolition of the SVAT system was not a condition mandated by the International Monetary Fund (IMF).

“We had discussions with the IMF; they denied any involvement in this. This appears to be an initiative by Treasury officials to address a temporary cash flow issue,” the exporter said.

According to this exporter, Sri Lanka currently produces over US$ 1 billion worth of fabrics for exports.

Apparel exporters also warned that micro, small, and medium-sized enterprises (MSMEs) involved in subcontracting could become unintended victims of the SVAT system’s removal.

During the 25th Exporters’ Forum, a total of 110 issues were presented for discussion. Of these, 79 were raised directly by individual companies, while 31 were submitted through industry associations and trade chambers such as the Exporters Association of Sri Lanka (EASL) and the Ceylon Chamber of Commerce.

A significant number of these issues are currently being addressed by referring them to the relevant institutions through the Export Facilitation Task Force. Furthermore, 37 key issues, categorised under 17 topics, were prioritised for discussion during the forum.