Sri Lanka’s apparel exporters are expressing profound anxiety as they face the potential loss of over $1 billion in export earnings due to the impending abolition of the Simplified Value Added Tax (SVAT) system. This concern stems from the anticipated rise in financial burdens that exporters will encounter under the proposed risk-based refund system, which is set to replace the current SVAT.
The Inland Revenue Department (IRD) is reportedly in the final stages of developing this new system, with officials announcing it is currently 77 percent complete. The launch is scheduled for October 1, 2025, and it seeks to categorize exporters into high, medium, or low-risk brackets. This categorization will dictate the speed and manner in which tax refunds are managed.
During the 25th Exporters’ Forum held on March 24, 2025, at the Export Development Board (EDB) premises in Colombo, the Joint Apparel Association Forum (JAAF) expressed serious reservations about the changes. "Even if all export companies in the sector are categorised as lower or medium risk and receive refunds within 45 days, the interest cost to the industry will amount to Rs. 212 million per month, or Rs. 2.6 billion annually," stated Yohan Lawrence, the Secretary-General of JAAF.
Lawrence elaborated on the broader impacts these changes could bring to the apparel sector, noting, "This proposed system comes into effect as the solution to this problem, the industry will take measures to move the trading houses overseas, resulting in revenue being generated overseas."
Concerns have been raised not only about the financial implications for the large-scale exporters but also about the impact on micro, small, and medium-sized enterprises (MSMEs) involved in subcontracting. Many of these smaller firms could become unintended casualties in the transition away from the SVAT system.
Additionally, there are claims from some exporters that the abolition of the SVAT system was not a condition laid down by the International Monetary Fund (IMF). "We had discussions with the IMF; they denied any involvement in this. This appears to be an initiative by Treasury officials to address a temporary cash flow issue," commented an exporter who chose to remain anonymous.
Moreover, Sri Lanka’s textile industry is significant, currently producing over $1 billion worth of fabrics for export. The changes in tax regulation threaten not only large-scale businesses but the entire supply chain tied to the apparel sector.
During the Exporters’ Forum, a staggering total of 110 issues were presented for deliberation. Out of these, 79 were raised directly by individual companies, highlighting the collective concerns of the sector, while 31 issues were submitted through industry associations and trade chambers, including the Exporters Association of Sri Lanka (EASL) and the Ceylon Chamber of Commerce.
A major focus in the discussions was on categorizing 37 key issues under 17 prioritized topics, which are now being addressed through the Export Facilitation Task Force. Addressing such a plethora of issues reflects the critical state of the apparel industry in terms of both economic impact and the survival of various business entities.
As Sri Lanka grapples with these monumental changes in its tax system, the ripple effects could resonate throughout the economy. The apparel sector remains a cornerstone of foreign revenue and employment in the country, and the looming threats could put thousands of jobs at risk, alongside the significant financial implications.
In conclusion, the upcoming implementation of the risk-based refund system presents considerable challenges for Sri Lanka’s apparel exporters. Without adequate consideration and potential amendments to this new policy, the losses may stretch far wider than anticipated, jeopardizing the livelihood of many while raising questions about the future framework of the industry.
