The Sri Lanka exporters community has gone to court challenging the Inland Revenue Department’s decision to abolish the Simplified Value Added Tax (SVAT) without introducing a reliable automated refund system, warning that the move could create liquidity risks and threaten long-term economic stability.
Business chambers take legal action against Inland Revenue’s SVAT abolition
Three of Sri Lanka’s most influential business chambers have filed a writ petition before the Court of Appeal against the Inland Revenue Department’s removal of the Simplified Value Added Tax (SVAT) scheme. The Free Trade Zone Manufacturers’ Association (FTZMA), the National Chamber of Commerce of Sri Lanka (NCCSL), and the Sri Lanka Chamber of Small and Medium Industries collectively argue that abolishing SVAT without a proper refund mechanism is unlawful and harmful to exporters.
The petitioners, representing exporters, deemed exporters, subcontractors, service providers, SMEs, and the wider business sector, highlight that VAT collection from export-related companies without a functioning risk-based refund mechanism violates both legal and constitutional rights. According to them, the government abolished SVAT earlier this year with the promise that a new automated refund system would be operational from October 2025. However, no system or criteria for the risk-based refund channels—Green, Amber, or Red—has been introduced to date.
Concerns have also been raised over the Inland Revenue’s assurances of processing refunds within 45 days. Exporters point out that VAT refunds pending since 2010 remain unsettled, creating doubts about the feasibility of the commitment. They further caution that appointing committees to determine refund-risk channels, instead of using transparent automated systems, increases opportunities for discretion, delays, and corruption.
The chambers also stressed that international best practices favor algorithm-driven refund systems, which minimize risks of abuse. They argue that the proposed manual approach undermines transparency, especially since similar committee-driven processes in Customs have historically caused inefficiencies.
While the Inland Revenue has told the IMF that SVAT was prone to “leakages,” the petitioners note that the system was monitored by the department’s own online platform and no violators were ever identified. Industry estimates suggest leakages were negligible, well under 0.01 percent, proving SVAT was effective. They also clarified that the IMF did not demand the removal of SVAT, and several chambers, including the International Chamber of Commerce, had urged authorities to retain the system until a proven refund mechanism was in place.
The business chambers warn that the abolition of SVAT has effectively restored the cash-refund regime, long criticized for delays and corruption. Exporters fear that the sudden policy change could disrupt liquidity in the export supply chain, trigger foreign exchange shortages, and jeopardize Sri Lanka’s ability to meet external debt obligations by 2028.
Despite repeated appeals from exporters to delay the move, the government proceeded with SVAT removal effective October 1. From this date, exporters are now required to pay VAT on local inputs upfront, with refunds dependent on government processing. This shift, they argue, forces exporters to finance the state at the cost of their own working capital, posing risks to competitiveness and investor confidence.
The case before the Court of Appeal marks a significant escalation in the standoff between Sri Lanka’s business community and tax authorities, with exporters determined to safeguard a system they believe is critical to maintaining liquidity and growth in a fragile economy.