Sri Lanka’s new risk-based Value Added Tax (VAT) refund system has released approximately Rs. 82.4 billion to taxpayers, but its first seven months have exposed a widening divide between rapid payments to low- and medium-risk claimants and mounting delays affecting high-risk businesses.
The Inland Revenue Department (IRD) introduced the system following the abolition of the Simplified Value Added Tax (SVAT) scheme on 1 October 2025. According to the Ministry of Finance, Planning and Economic Development, the refunds covered claims filed between October 2025 and April 2026 and processed up to 15 July 2026.
Of the total, Rs. 22.15 billion was paid to low- and medium-risk taxpayers, while Rs. 60.3 billion went to high-risk taxpayers. Although the figures suggest substantial progress, the contrasting performance raises questions about whether the new system can maintain revenue protection without creating cash-flow pressures for businesses dependent on timely refunds.
The legal framework requires refunds to be issued within 45 days of a correct VAT return being filed by the due date. Low- and medium-risk claims are processed without additional checks, while high-risk claims undergo verification before payment.
The first category has performed strongly. The IRD issued 99.98% of the Rs. 22.15 billion claimed, with an average turnaround of 29 days. Monthly on-time issuance improved from 87% in October 2025 to 99% by April 2026.
The high-risk category presents a more troubling picture. The IRD issued 97% of the Rs. 61.9 billion claimed, but only Rs. 45.98 billion—74.3% of the value issued—was paid within the statutory 45-day period. On-time issuance fell from more than 90% between October 2025 and January 2026 to just 48% by April.
The Ministry attributed the delays to taxpayers’ failure to submit required information and supporting documents, alongside errors, data mismatches and incomplete information in VAT returns. Such deficiencies, it said, require further clarification before payments can be authorised.
However, the explanation also highlights a structural challenge. High-risk taxpayers are subject to additional scrutiny precisely because the Government seeks to prevent fraudulent or improper refunds. If verification procedures are not supported by accurate taxpayer data and efficient electronic systems, legitimate businesses may bear the cost of stronger enforcement.
Overall, the IRD processed 3,432 VAT refund claims within 45 days and paid Rs. 78.83 billion during the period. The Ministry described the system’s initial performance as strong and expects faster documentation, fewer return errors and improved electronic verification to reduce delays.
The real test, however, is whether the Government can distinguish genuine risk from administrative weakness. A refund system that protects revenue but delays legitimate payments can undermine business liquidity, while one that pays too quickly without adequate checks risks public funds. Sri Lanka’s challenge is to achieve both objectives without allowing either to become an excuse for failure.