The Ceylon Chamber of Commerce is urging the Government to reconsider its recent decision to abolish the Simplified Value Added Tax (SVAT) system given the impact it will have on the functioning of the export industry. This comes at a critical time when Sri Lanka has seen a significant dip in exports of over 10% in 2023 so far, along with a staggering 19% decrease in apparel exports with expectation for weak external demand to continue.
The existing SVAT system was implemented in 2011 to address long-standing inefficiencies and delays in the VAT refund process managed by the Inland Revenue Department (IRD).
Before SVAT, many exporters were cash-strapped due to delayed VAT refunds—some for up to five or six years. Alarmingly, a backlog of long outstanding refunds under the SVAT system itself still remains unaddressed.
This raises questions about the Government's capacity to efficiently handle new refund claims in the absence of the SVAT system, thereby casting doubts over the operational feasibility of the planned move.
Eliminating SVAT would immediately affect these exporters and also disrupt cash flow in various downstream industries and suppliers, leading to a ripple effect of financial challenges. The abolition of SVAT is unlikely to enhance revenue and plug leakages. It would be more prudent to improve the existing inefficiency in the RAMIS system particularly regarding VAT returns and invoice matching. Further, the administrative impact of such a move could create more inefficiencies and stretch the IRD with a new wave of refund claims, leading to administrative gridlock and significant delays in VAT refunds.
We urge the Government to consider alternatives such as reverting to the Suspended VAT system that was operational from 2005 to 2011, serving as a transitional arrangement. In the long term, the government could explore international models, such as France's VAT framework, to develop a more robust refund system. Above all, adequate resourcing for the IRD—both human and technological—is paramount for efficient high-volume refund transactions.
The Chamber emphasizes that a decision as impactful as abolishing the SVAT system should not be taken lightly and must be part of a broader, well-thought-out fiscal and economic strategy. Given the current economic climate and the potential ramifications on the export industry, we strongly recommend that the Government engage in diligent planning, continuous monitoring, and a consultative approach that includes all stakeholders before making such a significant change.