๐ข Introduction
For years, Sri Lankan startups involved in import and export activities relied on Temporary VAT Registration (TVR) as a quick gateway to clear goods through Customs without undergoing the rigorous process of Permanent VAT Registration (PVR). However, starting January 2025, the Inland Revenue Department (IRD) has ceased the issuance of temporary VAT numbers, urging all eligible businesses to register permanently.
This policy change marks a pivotal shift in the tax compliance landscape for startups and emerging businesses. Here, weโll explore:
- What the change means
- Why the Inland Revenue is doing it
- Benefits and challenges of moving to permanent VAT
- Strategic guidance for startups
๐ What Was Temporary VAT Registration?
Temporary VAT Registration was a provisional registration mechanism mainly used by:
- New businesses yet to cross the VAT threshold
- Startups engaging in one-off or infrequent imports
- Entities waiting for permanent documents (e.g., audited accounts, lease agreements)
It allowed limited VAT functionality, specifically:
- Import clearance at Sri Lanka Customs
- Temporary tax recognition, but not full input tax claims
However, it did not qualify companies to collect VAT from customers or claim full credits unless upgraded to permanent VAT.
๐ซ Why Temporary VAT Was Removed in 2025
As per the Inland Revenue’s reform strategy, the discontinuation of Temporary VAT serves multiple purposes:
- Strengthen tax compliance: Temporary VAT enabled several loopholes where companies operated indefinitely without moving to proper registration.
- Improve revenue tracking: A permanent VAT registry ensures end-to-end visibility of taxable activities.
- Align with global best practices: Most tax authorities discourage temporary tax identities in the import-export chain.
- Avoid misuse: Some firms used temporary VAT to import goods and disappear without proper filing or tax payments.
Hence, the IRD now requires full compliance via permanent registration.
๐งพ Criteria for Permanent VAT Registration
As of 2025, companies must fulfill the following to register:
- A valid Company/Business Registration
- Proof of business premises (e.g., lease or utility bill)
- Bank account details
- Projected turnover exceeding LKR 80 million (as per threshold)
- Submission of VAT Form 1 with all supporting documents
Note: Even startups not crossing the threshold may voluntarily register if they are involved in taxable imports/exports.
๐ Impact on Startups & SMEs
๐ป Challenges
- Increased compliance burden
- Startups must now prepare and maintain proper documentation.
- Requires appointing accountants or tax consultants.
- Delayed operational kickoff
- Without TVR, businesses must wait for PVR before importing goods.
- Delays in VAT registration may disrupt time-sensitive shipments.
- Financial strain
- Some startups will now need to pay output VAT even before achieving breakeven.
- Failure to file timely returns results in penalties.
โ Opportunities and Benefits
- Full input VAT claims
- Unlike temporary VAT, permanent VAT allows recovery of VAT on imports and local purchases.
- Reduces overall cost of operations.
- Enhanced credibility
- A VAT-registered business is more trusted by suppliers, investors, and international partners.
- Customs clearance becomes streamlined
- Once registered, your details are linked directly with Sri Lanka Customs for faster clearance and fewer audits.
- Long-term sustainability
- Complying from the start builds a strong foundation for growth, especially for those targeting international markets.
๐ง Strategic Recommendations for Startups
โ 1. Register for VAT Early
Even if your turnover doesnโt cross LKR 80 million yet, voluntary registration is strongly advised if you are:
- Planning to import/export
- Dealing with VAT-registered suppliers
- Looking to scale rapidly
โ 2. Seek Tax Advisory Support
Engage with a registered chartered accountant or tax advisor to:
- Prepare documents
- Handle monthly/quarterly VAT returns
- Maximize VAT refunds or credit claims
โ 3. Automate Compliance
Adopt cloud-based accounting tools (like QuickBooks, Xero, or local ERP) that support VAT tracking and e-filing, which will be increasingly important under IRD digital transformation efforts.
โ 4. Educate Your Team
Train your finance and admin team on:
- Issuing compliant VAT invoices
- Monthly VAT return preparation
- Handling VAT refunds and audits
๐ฎ Long-Term Economic Outlook
With the shift to permanent VAT:
- Revenue collection will improve
- Tax evasion will decrease
- Startups will operate more professionally, easing access to credit, investment, and export facilitation
In short, while the short-term pain may be real, the long-term gain is significant.
๐ Final Thoughts
The end of Temporary VAT registration in Sri Lanka is a wake-up call for startups: compliance is no longer optional. Those who adapt early will benefit from full tax advantages, gain access to smoother trade facilitation, and position themselves for growth in a regulated, transparent economy.
Whether you’re importing electronic parts or exporting handmade crafts, ensure your VAT registration is permanent, timely, and compliant โ itโs the only way forward in 2025.
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Need Help With VAT Registration?
Our expert team at 360 Accountants can help you get your company VAT-registered, file monthly returns, and stay fully compliant with IRD policies. Get in touch today!
