VAT Compliance Improvement Plan (VCIP-1):What Every Business Needs to Know

With the repeal of the Simplified VAT (SVAT) system effective October 1, 2025, the Inland Revenue Department (IRD) of Sri Lanka has rolled out a targeted strategy—VAT Compliance Improvement Plan 1 (VCIP-1)—to manage the risks and guide businesses through this transition. This article breaks down the plan into an understandable format for businesses, especially Identified Suppliers and Purchasers (RIS/RIP) who were previously under SVAT.

Background & Purpose of VCIP-1

SVAT has been in place since 2010 and was designed to ease VAT payments for exporters and certain approved businesses by replacing actual VAT payments with endorsements. However, with its repeal from October 1, 2025, nearly 20% of VAT registrants (approx. 2,025 businesses) will now need to operate under the normal VAT system.

The purpose of VCIP-1 is to:

  • Identify and address VAT compliance risks.
  • Guide SVAT-affected businesses through the transition.
  • Improve VAT filing, payment, and reporting behaviors.
  • Ensure revenue collection integrity under the standard VAT regime.

The plan covers the 18-month period from October 1, 2025, to March 31, 2027.

Who is Affected? – Segment Profile & Revenue Impact

IRD data shows that once SVAT ends, an estimated LKR 198 billion will shift into the standard VAT payment stream annually. This is based on filings as of February 2023.

Breakdown by Turnover:

Group No. of Entities Turnover (LKR) Expected VAT (LKR)
Group 1: Large suppliers (> LKR 1B) 1,011 1.57 trillion 187.6 billion
Group 2: Mid-tier (LKR 500M–1B) 1,616 320 billion 6.2 billion
Group 3: Small-tier (LKR 40M–500M) 347 46 billion 4 billion
Total 2,974 ~1.94 trillion LKR 198 billion

These businesses are now expected to charge, collect, and remit VAT on actual transactions—unlike under SVAT.

Key Compliance Risks Identified

1. Registration Risks

  • Some businesses have not transitioned to the correct VAT registration category.

2. Filing Risks (Moderate)

  • A large segment (especially mid and small-tier) has poor VAT filing history.
  • Delays and errors were common under SVAT.

3. Reporting Risks (High)

  • Former SVAT filers often made inconsistent and inaccurate declarations.
  • Issues found in output-input matching across supply chains.

4. Payment Risks (High)

  • Under SVAT, no real-time cash payments were made.
  • Businesses now need to adapt to actual tax payments—creating potential for default.

What Will Change? – Compliance Improvement Expectations

With VCIP-1, the IRD expects clear improvements across five VAT touchpoints:

Area Expected Outcome
Registration Proper registration of all qualifying VAT payers.
Filing Increase in timely and complete VAT return submissions.
Payment Higher proportion of on-time tax payments.
Reporting Reduced mismatches and adjustments in return filings.
Collection Improved recovery from newly liable businesses.

IRD Strategy: Risk Treatments & Actions

To support businesses and enforce compliance, the IRD is implementing the following:

Accurate Reporting Strategy

  • Communication campaigns focusing on education.
  • Random reporting accuracy checks:
    • Target: 20 entities per segment (e.g., 20 out of 1,011 in Group 1).
    • Period: Before March 31, 2026.
  • Tailored support to high-risk taxpayers.

Timely Filing Strategy

  • SMS reminders, emails, and calls to encourage on-time filing.
  • Frequent monitoring of past behavior to predict future defaults.

Operational Activities Planned by IRD

The IRD will carry out a number of compliance activities through its VAT CIP Committee, including:

Communication & Education (Total 1,213 instances)

  • Phase-wise campaigns for different taxpayer segments.
  • Sending guides and updates on VAT procedures.

Filing & Reporting Monitoring (2,259 instances)

  • Regular tracking of non-filers and inaccurate reporters.
  • Intervention before and after return deadlines.

Payment Monitoring & Collection Efforts

  • Pre-deadline tracking – 1,921 expected instances.
  • Debt risk monitoring – 1,239 instances to assess likelihood of default.
  • Collection calls – Estimated 223 active calls for follow-up.

Resource Requirements & Support Plan

Staff and Technology Support

  • IRD will deploy targeted personnel for communication and monitoring.
  • Advanced analytics will help identify non-compliance early.

Capacity Building

  • Internal training and external support will be mobilized to handle:
    • Monitoring volume
    • Risk profiling
    • Enforcement procedures

What Should You Do? – Advice for Former SVAT Users

If you’re a RIS/RIP taxpayer, now is the time to:

  1. Verify your VAT registration is current and correct.
  2. Prepare your team for full VAT invoicing and return procedures.
  3. Plan your cash flow for real-time VAT payments from October 2025.
  4. Build a compliance calendar to avoid late filings and penalties.
  5. Engage with the IRD or a tax consultant proactively.

Why This Matters

Ending SVAT is not just a policy change—it’s a complete shift in how your business handles tax. VCIP-1 is IRD’s attempt to manage this responsibly, blending support, monitoring, and enforcement to ensure VAT contributes fairly to the economy while not overburdening compliant taxpayers.

Read More : VAT Compliance Improvement Plan

Request Details

Related Articles