SVAT repeal expected to add Rs.191bn annually to VAT coffers

The upcoming repeal of the Simplified Value Added Tax (SVAT) regime is projected to significantly bolster Sri Lanka’s Value Added Tax (VAT) revenue, with an estimated additional Rs.191 billion expected to flow into state coffers annually. 

This forecast comes from an Inland Revenue Department (IRD) note titled “VAT Compliance Improvement Plan 1 – SVAT Participants Post Repeal 2026.”

The IRD’s plan outlines the transition for Registered Identified Suppliers (RIS) and Purchasers (RIP) as they move away from the SVAT system, which is set to be discontinued from October 1, 2025. The Rs.191 billion figure specifically represents the anticipated annual contribution to VAT cash flows from businesses currently operating as RIS, once they are no longer under the SVAT framework.

The “VAT Compliance Improvement Plan 1” focuses on managing the risks and facilitating the transition for these businesses. According to the IRD note, as of February 2025, there were 3,519 RIS and 1,074 RIP. The plan acknowledges that this change represents a significant shift from long-established compliance requirements, as SVAT has been in place since 2011.

The IRD’s strategy highlights that businesses with the highest turnovers present the major revenue risk and are likely to require close compliance monitoring. The plan details a multi-faceted approach including education, taxpayer service, monitoring, and support to ensure a smooth transition and mitigate potential revenue loss.

A breakdown of the turnover profile for RIS businesses indicates that 1,011 registrants with turnovers exceeding Rs.1 billion are expected to contribute the lion’s share of this additional VAT, amounting to Rs.157.6 billion. 

Another 2,161 registrants with turnovers greater than Rs.50 million are projected to contribute Rs.32.8 billion, while 347 businesses with turnovers up to Rs.49 million are expected to add Rs.460 million.

The IRD’s compliance improvement plan aims to address potential challenges such as timely filing, accurate reporting, and timely payment of VAT, as businesses adapt to settling their business-to-business VAT transactions with cash instead of SVAT credit vouchers. 

The department intends to implement a communications campaign, conduct reporting accuracy checks, and initiate payment monitoring programs, particularly for the largest taxpayers, to ensure adherence to the new VAT obligations.

However, the move has sparked considerable concern within the private sector, particularly among exporters. Key anxieties revolve around potential cash flow disruptions due to upfront VAT payments and subsequent refund claims, a departure from the SVAT system’s immediate offset. 

Exporters fear that inefficiencies or delays in the new refund mechanism could strain working capital, increase borrowing costs, and ultimately erode their competitiveness in global markets. Many are calling for a thoroughly tested, transparent, and efficient refund system to be firmly in place to mitigate these risks and ensure a smooth transition for export-oriented industries.