The state is expecting to raise 5.2 billion rupees from the tax in 2013.
Value added tax is expected to be a neutral simple tax with minimal exemptions and exports to be zero rated so that citizens only pay a part (usually about 20 percent) of the value added to the state finally.
But the VAT regime has buckled under Sri Lanka's heavy interventionism with a bewildering array of exemptions to many sectors with politically powerful special interest groups and multiple rates.
In the current budget locally made products out of coconut waste, import of bowsers, bulldozers, girders, fire fighting vehicles, road tractors for semi-trailers, raw material for energy saving bulbs have been made exempt from VAT.Supplies made by the Central Bank, some services of public corporations have also been exempted from tax.
A regime that was in office until 2004 also reduced tax transparency by changing the VAT law to hide the tax from ordinary citizens who were not registered to recover it.
There have also been high profile value added tax frauds involving claims based on inflated export values.
But Sri Lanka's inland revenue office had started co-ordinating with customs authorities to assess import volumes match reported exports. A so-called SVAT scheme has also been started to give credit for tax paid at the point of import instead of a refund.