The SVAT mechanism was introduced to suspend VAT Payable by such persons, so that the liquidity position was unaffected and to remove the refunds with the use of Vouchers issued by the IRD. Due to massive refund buildups in the past, the room opened for fraud and corruption in relation to VAT refunds as well. Prior to implementation of the SVAT system, taxpayers including exporters, Zero-rated service providers, persons engaged in any specified projects, registrants under Section 22(7) under the Act who are entitled to claim input tax and VAT refunds pending commencement of taxable supplies, Manufacturers supplying to exporters, providers of specified services to exporters and many other taxpayers who had refunds from the IRD suffered due to the inefficiencies of the tax office to process refunds on a timely manner. Inefficiencies in processing the VAT refunds in a timely manner result in building up of massive VAT refunds leading to working capital of the taxpayers being held up at the tax office, causing extremely adverse impact on the cash flows of the taxpayers. The efficiency of processing of VAT refunds is critical for successful implementation of VAT. This article analyses the impact of this proposal to abolish the SVAT scheme. The question is what prompted the IMF officers to include this proposal in the said document? Obviously, it’s a misguided representation that was made to the IMF delegation in this regard, though there could be different opinions in relation to this matter. Hence the origin of this proposal that would adversely impact the tax regime of Sri Lanka could be traced to above said IMF report. ‘Appendix 1 – Tax Reforms to be implemented for 2022 - 25/1’ document of IMP reads “Take measures to significantly speed up valid VAT refunds and abolish the SVAT system, with effect from January 1, 2024”. (Request for an extended arrangement under the Extended Fund Facility (EFF) – press release Staff report and statement by the executive director for Sri Lanka issued in March 2023 – IMF Country Report No. The Cabinet has endorsed the proposal to abolish the SVAT scheme, due to the same proposal being part of the IMF’s tax roadmap for Sri Lanka. Whilst the Cabinet’s other decision pertaining to rationalisation of Value Added Tax (VAT) exemption, is a welcome move, the decision to abolish the SVAT scheme with effect from 1 January 2024, could have drastic adverse repercussions on taxpayers as well as the tax administration. It was reported in the news recently that the Cabinet has approved a decision to abolish the SVAT scheme, which was originally introduced with effect from 1 April 2011, under the Section of 2(2) of the Value Added Tax Act No. Though there is much room for improvement in the current SVAT system, it is a fact that the home-grown system has resolved and provided much relief to many taxpayers
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