Inland Revenue Dept. concerned over Govt. decision to defer SVAT abolition by a year

But business bodies and exporter outfits welcome move

The Inland Revenue Department (IRD) has expressed concerns over the Government’s decision to defer the abolition of the Simplified Value-Added Tax (SVAT) by a year claiming that it would have an impact on revenue collection.

A senior IRD official said exporters had raised objections on the removal of the system by January 2024 on the grounds that a proper value-added tax repayment mechanism was not in place.

However, he said that the Department was in a position to implement a proper system for refunds, and could have implemented it by the original target date of January 2024, instead of postponing it to January 2025.

Treasury sources said the IRD had called for a discussion and there was no clarity on the VAT refund system, and therefore it was decided to postpone the withdrawal of SVAT.

With the Cabinet approving a memorandum to defer the removal of the SVAT scheme through a proposed amendment to VAT law this week, business bodies and exporter outfits welcomed the move saying that it was a lifeline to the industries, considering current challenges of declining exports.

“The deferment comes at a critical time for the exporters who have been grappling with declining exports and therefore risk of cash flow disruption if SVAT was removed without a viable refund system being in place,” the Joint Apparel Association Forum (JAAF), one of the leading exporter's outfit, said.

Earlier, a draft bill was published following Cabinet approval to revise Value Added Tax (VAT) including the repeal of the SVAT with effect from January 1 next year.

Following representations made by relevant parties on “drastic issues that may erupt in finance flow in relation to individuals, especially exporters, who have been registered under the current SVAT scheme,” a fresh Cabinet memorandum was submitted on Monday by President Ranil Wickremesinghe in his capacity as Minister of Finance, Economic Stabilisation and National policies, to defer the date for implementation of the scheme till April 2025, according to the Cabinet decisions summary released by the Department of Government Information.

The Sunday Times on September 3 reported that exporters must pay VAT upfront with the repeal of the SVAT.

The JAFF pointed out that even though the current law stipulates a 45-day refund, “a historical review will show that this has not been the case, and exporters have refunds due for well over 12 months.”

The negative impact on the cash flow of the exporters due to delays will be a severe burden in the already weak market environment, the collective body of apparel exporters said.

The current refund system is simply not working, and this is clearly evident through the value of refunds still pending in the system. Therefore, an efficient refund system is needed that is transparent and digitally based, with minimal human intervention. In fact, the GOSL’s commitment to the IMF is just that; “to significantly speed up valid VAT refunds and abolish the SVAT system.” It is imperative that a properly functioning refund system is put in place, before the phase-out of SVAT, the JAFF said.

The JAFF also stressed that nearly a hundred per cent of apparel export proceeds are remitted into the country within 180 days as highlighted by the Central Bank of Sri Lanka (CBSL) and the Governor recently.

Welcoming the SVAT repeal deferment, the Ceylon Chamber of Commerce also noted that this postponement allows businesses and individuals, particularly exporters, ample time to adjust operations to adapt to the impending changes.

“It also affords the government the necessary space to establish a strong tax repayment mechanism,” the collective economic body said while stressing that these efforts would ensure a smoother transition and mitigate the risk of financial instability, thereby aiding in the country’s overall economic well-being.