The Inland Revenue Department has clarified that fabric imports and local supplies will be subject to VAT at 18% from 1 April 2026 following the rescission of earlier zero-rate provisions and changes to CESS-related Gazette notifications, while certain pre-existing CESS-based imports will remain VAT exempt subject to record-keeping requirements.
Sri Lankan Inland Revenue Department (IRD) has issued Notice PN/VAT/2026-04/1 on 08 April 2026 to all Value Added Tax (VAT) registered persons, providing clarification on the VAT treatment of fabric imports and supplies following recent Gazette notifications issued under the Value Added Tax Act, No. 14 of 2002.
The notice states that, in the exercise of the powers vested under Section 2A of the Value Added Tax Act, No. 14 of 2002, the Minister of Finance, Planning and Economic Development, by Order published in Extraordinary Gazette Notification No. 2478/07 dated 3 March2026, has rescinded, with effect from April 1, 2026, Extraordinary Gazette Notification No. 2095/20 dated 1 November 2018, under which the importation of fabric was subject to VAT at the zero rate.
It further notes that, by Order published in Extraordinary Gazette Notification No. 2479/38 dated March 10, 2026, the Minister of Industry and Entrepreneurship Development has prescribed the goods on which the CESS levy is applicable with effect from April 1, 2026, and that Extraordinary Gazette Notification No. 2325/06 dated 28 March 2023, including certain other Gazettes, have been rescinded. As a result, the CESS levy previously imposed on the importation of fabric classified under the HS Codes specified in the said Gazette is removed with effect from 1 April 2026.
In terms of Item (XV) of Paragraph (b) of Part III of the First Schedule to the VAT Act (as amended), the notice also clarifies that the supply of fabric subject to a CESS at a specific rate, classified under the Harmonised Commodity Description and Coding System numbers for Customs purposes, instead of chargeability of any other tax on importation at the point of entry into the country, by the Director-General of Customs as specified in a Gazette Notification issued under the Sri Lanka Export Development Act, No. 40 of 1979, is exempt from VAT.
Accordingly, with effect from 1 April 2026, the IRD confirms that the importation of fabric is liable to VAT at the rate of 18%, and the supply of fabric in the local market is also liable to VAT at the rate of 18%. However, the supply of fabric which had been imported, subject to a CESS levy at the importation before 1 April 2026, shall be exempt from VAT, subject to the requirement that proper and separate records and documentation are maintained for such transactions.
