## Box 1. Immediate Next Steps ## Source details **Canonical URL:** [Box 1. Immediate Next Steps](https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024073-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2024/english/tarea2024073-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2024/english/tarea2024073-print-pdf.pdf.json) --- ### Background and context - SVAT introduced in 2011 in response to a 2006 refund fraud; intended to reduce VAT refund processing volume and minimize cash flow impact on exporters. - SVAT participants transact without cash settlement of VAT; bona fide exporters and many SVAT participants who supply exporters may defer VAT on imports and later acquit via refund application to IRD, receiving a credit voucher (CV) to satisfy Customs liability. - SVAT eligibility determination is a point-in-time assessment referencing recent VAT declarations; many current RIP and RIS taxpayers no longer qualify. - Participation expanded to where 60 percent of the ~13,000 VAT registered taxpayers in SRI Lanka acquire or make taxable supplies without monetary payment of VAT. - When SVAT is repealed, only bona fide exporters will qualify for refunds on exports; all others must carry forward any credits they accumulate. - VAT revenue performance: generated just two percent of GDP in 2022 with a C-Efficiency of .27. ### Key statistics from unresolved refund sample (Table 1: Multi-Year Sample of Cash Refund Requests (Greater than LKR 1000) As at January 2024) - First Quarter 2023: Number of Cash Refunds Requested 582; Value of Cash Refunds Requested 732M; Number of Refunds Approved or Rejected 2; Value of Claims Approved or Rejected .042M; Percentage of Claim Value Approved or Rejected 0 - First Quarter 2022: Number of Cash Refunds Requested 858; Value of Cash Refunds Requested 822M; Number of Refunds Approved or Rejected 18; Value of Claims Approved or Rejected 21.7M; Percentage of Claim Value Approved or Rejected 3 - First Quarter 2021: Number of Cash Refunds Requested 1157; Value of Cash Refunds Requested 630M; Number of Refunds Approved or Rejected 37; Value of Claims Approved or Rejected 8.1M; Percentage of Claim Value Approved or Rejected 1 - First Quarter 2020: Number of Cash Refunds Requested 1100; Value of Cash Refunds Requested 782M; Number of Refunds Approved or Rejected 62; Value of Claims Approved or Rejected 26M; Percentage of Claim Value Approved or Rejected 3 - First Quarter 2019: Number of Cash Refunds Requested 2470; Value of Cash Refunds Requested 2021M; Number of Refunds Approved or Rejected 195; Value of Claims Approved or Rejected 224M; Percentage of Claim Value Approved or Rejected 11 - First Quarter 2018: Number of Cash Refunds Requested 2634; Value of Cash Refunds Requested 2020M; Number of Refunds Approved or Rejected 423; Value of Claims Approved or Rejected 423M; Percentage of Claim Value Approved or Rejected 21 - Source: Inland Revenue Department ### Immediate/Short Term Actions (Box 1 items) - Prepare project implementation plan for repeal/transition of SVAT, and transition to risk based VAT Refund program. - Identify bona fide exporter population. - Extract multi-year VAT filing and import information on exporters. - Estimate VAT Refund Account requirements under the redesigned refund program. - Commence risk profiling of the exporters. - Develop post payment validation and verification procedures. ### Supporting immediate actions and rationale (paragraphs 19–24) - Identify bona fide exporters as the sole population qualifying for refunds under the redesigned program; early identification is key for downstream activities and communications. - Extract comprehensive compliance history from RAMIS and ASYCUDA for taxpayers identified as eligible for VAT refunds; complement with system extracts from all tax lines held in RAMIS. This data is foundational to risk profiling. - Begin risk profiling immediately: assign low, medium, or high-risk profiles using the workshop-discussed methodology, local knowledge, industry-specific risks, and Customs trusted trader programs. Detailed filing compliance and import history will inform refund trigger values. Suggested criteria are in Annex II. - Develop post payment verification and periodic audit procedures for low-risk taxpayers to balance timely payment with selective verification; commence immediately after risk profiling. - Estimate funding requirements for the VAT Refund Account by analyzing VAT filing history and Customs import information of the exporter group; current IRD Finance Unit information indicates LKR 660M were paid from the VAT Refund Account holding LKR 6,598M (10 percent of funds available) during 2023, but funding adequacy should not be assumed. Assess whether section 71 of the Value Added Tax Act requires amendment. - The Cabinet Memorandum contemplates increasing the threshold to retain RIP designation before repeal; this could phase in transition but carries reputational and revenue risk if IRD is not ready. Recommendation: reserve such decisions until IRD is confidently positioned for administration of the post repeal program — perhaps late calendar 2024 or early 2025. ### Strategic activities and change management (paragraphs 25–26) - Prepare for a strong, well-prepared launch for taxpayers transitioning out of SVAT: several thousand RIP and RIS must change long-standing VAT filing and compliance behavior on April 1, 2025. - Implement a targeted communications plan and focused compliance facilitation effort aimed at the RIP/RIS population to protect revenue and support taxpayers. Fully support, inform, and monitor this group in the months following transition. ### Compliance facilitation with field presence - Design and preparation of both the communication and compliance projects should commence by April 2024 and be in readiness for December 31, 2024. - Due to the extraordinary proportion of all VAT taxpayers that former SVAT taxpayers represent, the communication and compliance effort should be constructed as a micro version of a new VAT implementation program where the primary thrust is facilitation, not enforcement. - The project should include field presence to help ensure former SVAT taxpayers "get it right from the start." ### Communication and compliance project design - The communication and compliance projects must be prepared in tandem and focus on facilitation over enforcement. - Project readiness target: December 31, 2024. - Project initiation target: commence by April 2024. ### Organizational recommendations for refunds - The three VAT refund operations should be amalgamated and centralized into a single Exporter VAT Refund Unit. - The unit should be organizationally distinct with a narrow mandate of processing VAT refunds to exporters following the SVAT repeal. - Suggested organizational placement: place the Exporter VAT Refund Unit in the LTU. - Staffing caveat: importing existing refund processing habits into the new unit should not be an option; processes, procedures and work culture must not duplicate or resemble those in the existing refund units. ### Refund conditionality and repatriation requirement - The refund conditionality linked to the Central Bank requirement to repatriate export proceeds within six months precludes timely refunds. - Paragraph 3.9 of the Cabinet Memorandum commits to delink or alter this requirement. - Ideally, administration of this monetary policy would not rest with IRD; however, if IRD continues to administer it, the timing of requirements must be adjusted so that payment of refunds is not fettered. ### Proof-of-concept / pilot to build exporter confidence - Consider a proof-of-concept project to improve exporter confidence in IRD’s ability to pay refunds. - One option: apply risk-management approaches and expedite refunds to a small selection of exporters in advance of the repeal of SVAT. - Precondition: only after the risk profiling of exporters (paragraph 21) is complete. - IRD could prioritize and pay outstanding refund requests from 2024 using the risk-based approaches that will be used in the new refund process. - Industry representatives communicated a willingness to take part in proof-of-concept projects. - Benefits: could increase confidence, signal good faith to the exporter community, and serve as a soft launch pilot to iron out processes and procedures. ### Technical assistance (TA) and implementation support - Failure to smoothly launch the Exporter VAT Refund program following SVAT repeal will have serious reputational consequences. - IRD should seek additional TA support during this project. - Recommended TA delivery: a periodic mixture of remote and on-site support throughout the project period. - Key TA priorities: - i) developing a comprehensive project plan and reporting mechanism that is clear on accountabilities and project reporting, - ii) conducting risk assessments on the identified exporter community, - iii) developing post payment validation and verification procedures related to low risk taxpayers, - iv) preparation of communication and compliance project plans, - v) measures to guard against refund fraud. ### Risks to implementation - The project implementation plan should include a table of risks that could threaten the successful implementation of the SVAT repeal project. - A thorough risk matrix may contain a dozen or more items that must be monitored or mitigated. - Project reporting to senior management should always include: - a discussion/or report about the key risks they need to be aware of (top three or four), - the mitigation plans in place, - whether the risk has changed since the last report, - who is responsible for monitoring and reporting on the risk. - A simple risk register example is shown in Annex IV; it has been populated with two risks relevant to the SVAT repeal project but should be expanded while developing the Project Implementation Plan. ### Summary of recommended actions (Box 2) - Prepare a project implementation plan, including project risks, for repeal/transition of SVAT to an Exporter VAT refund program. See Annex III. - Identify the bona fide exporter population. - Extract multi-year VAT filing and import information on exporters. - Estimate future VAT Refund Account requirements for the future VAT refund program. - Conduct risk profiling of the exporter population. See Annex II. - Develop business rules for post payment verification of low-risk refunds. - Develop a communications and compliance plan to ensure smooth transition of RIP and RIS taxpayers to the post SVAT regime. - Establish an Exporter VAT Refund Program independent from other refund processing operations. - Ensure delinking of Repatriation of Export Proceeds requirements from refund conditionality. - Consider a proof-of-concept pilot for expediting 2024 refunds to a small group of low-risk exporters once risk profiling of exporters is complete. - Seek TA support for key aspects of the new refund program development. *IMF Technical Assistance Report* ### Box 1. Immediate Next Steps ___________________________________________________________ 9 ### Box 1. Immediate Next Steps ### Background and context - SVAT introduced in 2011 in response to a 2006 refund fraud; intended to reduce VAT refund processing volume and minimize cash flow impact on exporters. - SVAT participants transact without cash settlement of VAT; bona fide exporters and many SVAT participants who supply exporters may defer VAT on imports and later acquit via refund application to IRD, receiving a credit voucher (CV) to satisfy Customs liability. - SVAT eligibility determination is a point-in-time assessment referencing recent VAT declarations; many current RIP and RIS taxpayers no longer qualify. - Participation expanded to where 60 percent of the ~13,000 VAT registered taxpayers in SRI Lanka acquire or make taxable supplies without monetary payment of VAT. - When SVAT is repealed, only bona fide exporters will qualify for refunds on exports; all others must carry forward any credits they accumulate. - VAT revenue performance: generated just two percent of GDP in 2022 with a C-Efficiency of .27. ### Key statistics from unresolved refund sample (Table 1: Multi-Year Sample of Cash Refund Requests (Greater than LKR 1000) As at January 2024) - First Quarter 2023: Number of Cash Refunds Requested 582; Value of Cash Refunds Requested 732M; Number of Refunds Approved or Rejected 2; Value of Claims Approved or Rejected .042M; Percentage of Claim Value Approved or Rejected 0 - First Quarter 2022: Number of Cash Refunds Requested 858; Value of Cash Refunds Requested 822M; Number of Refunds Approved or Rejected 18; Value of Claims Approved or Rejected 21.7M; Percentage of Claim Value Approved or Rejected 3 - First Quarter 2021: Number of Cash Refunds Requested 1157; Value of Cash Refunds Requested 630M; Number of Refunds Approved or Rejected 37; Value of Claims Approved or Rejected 8.1M; Percentage of Claim Value Approved or Rejected 1 - First Quarter 2020: Number of Cash Refunds Requested 1100; Value of Cash Refunds Requested 782M; Number of Refunds Approved or Rejected 62; Value of Claims Approved or Rejected 26M; Percentage of Claim Value Approved or Rejected 3 - First Quarter 2019: Number of Cash Refunds Requested 2470; Value of Cash Refunds Requested 2021M; Number of Refunds Approved or Rejected 195; Value of Claims Approved or Rejected 224M; Percentage of Claim Value Approved or Rejected 11 - First Quarter 2018: Number of Cash Refunds Requested 2634; Value of Cash Refunds Requested 2020M; Number of Refunds Approved or Rejected 423; Value of Claims Approved or Rejected 423M; Percentage of Claim Value Approved or Rejected 21 - Source: Inland Revenue Department ### Immediate/Short Term Actions (Box 1 items) - Prepare project implementation plan for repeal/transition of SVAT, and transition to risk based VAT Refund program. - Identify bona fide exporter population. - Extract multi-year VAT filing and import information on exporters. - Estimate VAT Refund Account requirements under the redesigned refund program. - Commence risk profiling of the exporters. - Develop post payment validation and verification procedures. ### Supporting immediate actions and rationale (paragraphs 19–24) - Identify bona fide exporters as the sole population qualifying for refunds under the redesigned program; early identification is key for downstream activities and communications. - Extract comprehensive compliance history from RAMIS and ASYCUDA for taxpayers identified as eligible for VAT refunds; complement with system extracts from all tax lines held in RAMIS. This data is foundational to risk profiling. - Begin risk profiling immediately: assign low, medium, or high-risk profiles using the workshop-discussed methodology, local knowledge, industry-specific risks, and Customs trusted trader programs. Detailed filing compliance and import history will inform refund trigger values. Suggested criteria are in Annex II. - Develop post payment verification and periodic audit procedures for low-risk taxpayers to balance timely payment with selective verification; commence immediately after risk profiling. - Estimate funding requirements for the VAT Refund Account by analyzing VAT filing history and Customs import information of the exporter group; current IRD Finance Unit information indicates LKR 660M were paid from the VAT Refund Account holding LKR 6,598M (10 percent of funds available) during 2023, but funding adequacy should not be assumed. Assess whether section 71 of the Value Added Tax Act requires amendment. - The Cabinet Memorandum contemplates increasing the threshold to retain RIP designation before repeal; this could phase in transition but carries reputational and revenue risk if IRD is not ready. Recommendation: reserve such decisions until IRD is confidently positioned for administration of the post repeal program — perhaps late calendar 2024 or early 2025. ### Strategic activities and change management (paragraphs 25–26) - Prepare for a strong, well-prepared launch for taxpayers transitioning out of SVAT: several thousand RIP and RIS must change long-standing VAT filing and compliance behavior on April 1, 2025. - Implement a targeted communications plan and focused compliance facilitation effort aimed at the RIP/RIS population to protect revenue and support taxpayers. Fully support, inform, and monitor this group in the months following transition. *IMF Technical Assistance Report* ### 27. A compliance facilitation project that includes field presence should be planned to ensure ### 27. A compliance facilitation project that includes field presence should be planned to ensure that former SVAT taxpayers get it right from the start. ### Compliance facilitation with field presence - Design and preparation of both the communication and compliance projects should commence by April 2024 and be in readiness for December 31, 2024. - Due to the extraordinary proportion of all VAT taxpayers that former SVAT taxpayers represent, the communication and compliance effort should be constructed as a micro version of a new VAT implementation program where the primary thrust is facilitation, not enforcement. - The project should include field presence to help ensure former SVAT taxpayers "get it right from the start." ### Communication and compliance project design - The communication and compliance projects must be prepared in tandem and focus on facilitation over enforcement. - Project readiness target: December 31, 2024. - Project initiation target: commence by April 2024. ### Organizational recommendations for refunds - The three VAT refund operations should be amalgamated and centralized into a single Exporter VAT Refund Unit. - The unit should be organizationally distinct with a narrow mandate of processing VAT refunds to exporters following the SVAT repeal. - Suggested organizational placement: place the Exporter VAT Refund Unit in the LTU. - Staffing caveat: importing existing refund processing habits into the new unit should not be an option; processes, procedures and work culture must not duplicate or resemble those in the existing refund units. ### Refund conditionality and repatriation requirement - The refund conditionality linked to the Central Bank requirement to repatriate export proceeds within six months precludes timely refunds. - Paragraph 3.9 of the Cabinet Memorandum commits to delink or alter this requirement. - Ideally, administration of this monetary policy would not rest with IRD; however, if IRD continues to administer it, the timing of requirements must be adjusted so that payment of refunds is not fettered. ### Proof-of-concept / pilot to build exporter confidence - Consider a proof-of-concept project to improve exporter confidence in IRD’s ability to pay refunds. - One option: apply risk-management approaches and expedite refunds to a small selection of exporters in advance of the repeal of SVAT. - Precondition: only after the risk profiling of exporters (paragraph 21) is complete. - IRD could prioritize and pay outstanding refund requests from 2024 using the risk-based approaches that will be used in the new refund process. - Industry representatives communicated a willingness to take part in proof-of-concept projects. - Benefits: could increase confidence, signal good faith to the exporter community, and serve as a soft launch pilot to iron out processes and procedures. ### Technical assistance (TA) and implementation support - Failure to smoothly launch the Exporter VAT Refund program following SVAT repeal will have serious reputational consequences. - IRD should seek additional TA support during this project. - Recommended TA delivery: a periodic mixture of remote and on-site support throughout the project period. - Key TA priorities: - i) developing a comprehensive project plan and reporting mechanism that is clear on accountabilities and project reporting, - ii) conducting risk assessments on the identified exporter community, - iii) developing post payment validation and verification procedures related to low risk taxpayers, - iv) preparation of communication and compliance project plans, - v) measures to guard against refund fraud. ### Risks to implementation - The project implementation plan should include a table of risks that could threaten the successful implementation of the SVAT repeal project. - A thorough risk matrix may contain a dozen or more items that must be monitored or mitigated. - Project reporting to senior management should always include: - a discussion/or report about the key risks they need to be aware of (top three or four), - the mitigation plans in place, - whether the risk has changed since the last report, - who is responsible for monitoring and reporting on the risk. - A simple risk register example is shown in Annex IV; it has been populated with two risks relevant to the SVAT repeal project but should be expanded while developing the Project Implementation Plan. ### Summary of recommended actions (Box 2) - Prepare a project implementation plan, including project risks, for repeal/transition of SVAT to an Exporter VAT refund program. See Annex III. - Identify the bona fide exporter population. - Extract multi-year VAT filing and import information on exporters. - Estimate future VAT Refund Account requirements for the future VAT refund program. - Conduct risk profiling of the exporter population. See Annex II. - Develop business rules for post payment verification of low-risk refunds. - Develop a communications and compliance plan to ensure smooth transition of RIP and RIS taxpayers to the post SVAT regime. - Establish an Exporter VAT Refund Program independent from other refund processing operations. - Ensure delinking of Repatriation of Export Proceeds requirements from refund conditionality. - Consider a proof-of-concept pilot for expediting 2024 refunds to a small group of low-risk exporters once risk profiling of exporters is complete. - Seek TA support for key aspects of the new refund program development. *IMF Technical Assistance Report* --- _Source: https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024073-print-pdf.pdf_