The Sri Lankan government has abolished the VAT zero-rate on fabric imports and eliminated the CESS levy from 1 April 2026, introducing an 18% standard VAT rate for both imported and locally supplied fabric in a significant policy shift for the textile industry.
Sri Lanka’s Inland Revenue Department has announced on 8 April 2026 major changes to the tax treatment of fabric imports, effective 1 April 2026, which will impact both importers and local suppliers in the textile sector.
VAT rate increases to 18%
The VAT zero-rate previously applicable to imported fabric has been rescinded, with such imports now subject to the standard VAT rate of 18%. This change follows the Minister of Finance, Planning and Economic Development’s order published in Extraordinary Gazette Notification No. 2478/07 dated 3 March 2026, which revoked the earlier Gazette Notification No. 2095/20 from 1 November 2018.
The new VAT rate applies to both the importation of fabric and its supply in the local market from 1 April 2026 onwards.
CESS levy eliminated
In a parallel development, the CESS levy on fabric imports has been removed effective the same date. The Minister of Industry and Entrepreneurship Development issued Gazette Notification No. 2479/38 on 10 March 2026, prescribing revised goods subject to CESS and rescinding previous notifications, including Gazette No. 2325/06 from 28 March 2023.
Transitional provisions
Fabric imported before 1 April 2026 that was subject to CESS at importation will remain VAT-exempt when supplied locally. However, registered persons must maintain proper and separate records and documentation for these transactions to claim the exemption.
The changes represent a significant shift in tax policy for Sri Lanka’s textile industry, replacing the CESS levy system with standard VAT treatment for fabric imports and local supplies.
