Revised IRD risk rules may slow VAT refunds for exporters: EY

• Authorities tighten scrutiny over taxpayer compliance histories and prior audit findings
• Companies categorised as ‘high risk’ will continue to face detailed pre-refund reviews
• A larger number of taxpayers presumed to fall within ‘high risk’ category

Sulaiman Nishtar

Shehani Paranavitane

Shakthivel Velauthapillai

Sri Lanka’s revised value-added tax (VAT) refund risk-classification framework could delay the refunds for a larger number of exporters, despite the government’s fast-track refund mechanism, according to a new Ernst & Young (EY) Sri Lanka tax alert, as the authorities tighten the scrutiny over taxpayer compliance histories and prior audit findings.
The Inland Revenue Department (IRD), through a revised gazette issued in March, expanded the criteria used to classify the VAT-registered businesses as low, medium or high risk, under the Risk-Based Refund Scheme introduced from October 1, 2025.
The scheme was introduced to improve liquidity for the exporters by allowing the eligible businesses to receive the VAT refunds within 45 days before the completion of a full audit. However, the companies categorised as ‘high risk’ will continue to face detailed pre-refund reviews, potentially delaying the refunds beyond the targeted timeline.
The EY Sri Lanka alert, authored by EY Sri Lanka and Maldives Partner and Head of Tax Sulaiman Nishtar, EY Sri Lanka Partner Tax Shehani Paranavitane and EY Sri Lanka Principal Tax Shakthivel Velauthapillai, said the revised framework places increased emphasis on taxpayer behaviour and past audit outcomes.
“The updated guidelines provide the taxpayers with an opportunity to review their positions and maintain documentation to support a ‘low’ or ‘medium risk’ classification, which may help expedite the refund process and reduce the level of scrutiny applied,” the report said.
However, the report cautioned that the revised criteria place “significant weight” on the prior tax audit findings, increasing the possibility of more businesses falling into the high-risk category.
“As a result, a larger number of taxpayers may fall within the ‘high risk’ category,” the report noted, adding that such taxpayers “will be subject to a pre-audit before any refund is released”.
Under the updated framework, the IRD will assess the taxpayers based on the filing and payment history, refund claims, findings from previous tax audits, operational abnormalities, third-party institutional information and the duration of business operations. The classification process will also consider taxpayer data covering the previous five years.
In the report titled ‘Risk Based Refund System – Update on the Risk Classification of Taxpayers’, EY said the changes provide the businesses with clearer guidance on how the risk classifications would be determined, while also signalling a broader shift towards tighter compliance-driven tax administration. The development comes as Sri Lanka continues revenue administration reforms, under the International Monetary Fund-supported programme, aimed at strengthening tax collection and reducing leakages.
The report also noted that the taxpayers with outstanding liabilities may face increased pressure from the IRD to settle the dues before the refunds are released.