Rubber Resilience Under Pressure: The Strategic Fallout of SVAT Abolition and the Uncertain Promise of the Risk-Based Refund System

Research at a glance

The recent abolition of the Suspended Value Added Tax (SVAT) scheme in Sri Lanka, replaced by a proposed risk-based refund system, has generated significant concern among rubber products manufacturers and exporters. This paper critically examines the potential operational, financial, and strategic implications of this policy shift for the rubber manufacturing value chain. Key issues include cash flow constraints, administrative inefficiencies, unequal advantages for large BOI enterprises, barriers for SMEs and new entrants, and a potential decline in sectoral competitiveness and investment attractiveness. Drawing on Strategic Choice Theory and Institutional Theory, the article analyses how these reforms influence firms’ decision-making under uncertainty and highlights the structural impact on local primary producers, deemed exporters, and overall value chain dynamics. The findings underscore the need for policy coherence, institutional readiness, and digital innovation to sustain the competitiveness of Sri Lanka’s rubber export sector. This concept paper proposes two potential pathways: reinstating a revised SVAT mechanism with enhanced digital monitoring or implementing a fully integrated, real-time digital VAT refund system. Both approaches aim to reconcile fiscal integrity with liquidity protection, while reinforcing the economic rationale that VAT, as a consumption- based tax, should be levied on final goods rather than intermediate production materials.