NCE voices concerns over removal of SVAT system

President Jayantha Karunaratne

Secretary General and CEO Shiham Marikar

The National Chamber of Exporters of Sri Lanka (NCE) has expressed its apprehension regarding the proposed removal of the Simplified Value Added Tax (SVAT) system and its replacement with a streamlined VAT refund mechanism. 

While we commend the Government’s proactive efforts toward digital transformation and economic modernisation, the potential consequences for the export sector necessitate careful consideration and planning.

Exporters remain a cornerstone of Sri Lanka’s economy, contributing significantly to the Government’s ambitious $ 19 billion export target. However, the sector is already grappling with a myriad of challenges, including fluctuating global demand, fierce international competition, and numerous domestic operational constraints. Eliminating the SVAT system without a proven, efficient refund mechanism risks exacerbating these difficulties and imposing undue burdens on exporters.

The current SVAT system provides exporters with a critical advantage by minimising cash flow disruptions through the offsetting of VAT on inputs. This mechanism ensures smooth operations, enabling exporters to maintain competitiveness in the global market. The proposed move to a refund-based system relies heavily on the assumption that digitalisation will guarantee timely and efficient VAT refunds. While the NCE fully supports the Government’s vision of a digital economy, we stress the importance of rigorous testing to ensure the new system operates flawlessly from the outset.

Past challenges with VAT refund mechanisms

Historical experiences with VAT refunds highlight significant concerns. Exporters have faced prolonged delays and cumbersome administrative procedures, often leading to years-long backlogs. These inefficiencies have severely impacted cash flows, forcing exporters to secure high-interest bank loans to fulfil orders, thereby increasing the cost of doing business. 

Such experiences underscore the critical need for a robust and reliable refund mechanism.

NCE’s recommendations

The NCE urges the Government to adopt a phased, carefully-monitored approach to the transition. Our key recommendations are as follows:

• Pilot testing: A comprehensive pilot project should be launched in collaboration with the Export Development Board (EDB) to assess the system’s functionality under real-world conditions. This will allow for the identification and resolution of potential issues prior to full implementation.
• Clear implementation timeline: The Government should establish a detailed timeline, including a transitional period, to enable exporters to adapt to the new system without operational disruptions.
• Stakeholder support and training: Adequate training and technical support must be provided to all stakeholders to ensure seamless adoption.
• Prompt refund assurances: The Department of Inland Revenue must guarantee timely VAT refunds and clearly outline mechanisms to address delays and resolve disputes efficiently.
• Safeguards against system failures: A contingency plan should be in place to mitigate risks and prevent operational setbacks in the event of system inefficiencies.

Avoiding irreversible consequences

Once implemented, reverting from the new system will be impractical. A failed rollout would erode exporters’ confidence in Government policies, further straining a sector already under pressure. Therefore, it is imperative to address all potential risks before making such a significant transition.

A call for constructive dialogue

The NCE urges the Government to engage in constructive dialogue with exporters and other key stakeholders to address these concerns collaboratively. Any changes to the VAT system must align with the overarching objective of bolstering the export sector, which remains a vital driver of Sri Lanka’s economic growth.

As the apex body representing Sri Lankan exporters, the NCE reaffirms its commitment to working closely with the Government to ensure a smooth transition that safeguards the interests of the export sector. Exporters are the backbone of the national economy, and their operational stability and global competitiveness must remain a top priority.