TEA shows way forward for tea exports beyond 150 years

The members of Tea Exporters Association are concerned over the current status of Sri Lanka tea industry as tea production is on a declining trend in the last few years due to many issues. According to Sri Lanka Tea Board statistics the tea production has declined by 36 million kg or 11% last year compared to 2015. The tea crop figures registered for the first two months of 2017 also indicate a drop of 8 million kg or 20% against the corresponding period in 2016. 

Though the decline in tea production last year and during the first quarter of this year is largely attributed to the adverse weather conditions prevailed in the country, the overall downward trend in the tea production is due to a number of other factors such as aging tea bushes (on average over 80 years), non-availability of an alternate weedicide and low application of fertiliser, etc.

The tea producers are required to maintain a replanting level of 2-3% of the tea land extent annually but the actual replanting level is less than 1%. Most of the small holder farmers do not replant their tea gardens and it is the plantation companies that undertake some replanting. Sri Lanka crossed the 300 million kg mark in tea production in year 2000 and even after 16 years the country has not been able to reach the 350 million kg mark as yet. Although the Government provides a subsidy for replanting, most small holders are reluctant to undertake replanting as they have to wait for about four years to harvest the tea. However, the global tea production has increased steadily and recorded at 5.4 million metric tons or 5.4 billion kg in 2016. The Sri Lanka share in world tea production has now come down to 6% from 10.5% in 2000. 

The tea export sector cannot grow beyond the available tea crop volume in Sri Lanka. The declining trend in the tea crop has restricted the growth in tea export volume and value. The tea production issue also affects the growth of Sri Lankan tea brands and also the processing of Global Tea Brands by Sri Lankan companies. Since, importation of tea is not allowed the exporters are unable to improve their business and bring more revenue to the country. They are of the opinion that tea sector will find it difficult to achieve the revenue target of $ 5 billion by 2020 under the prevailing situation.

The decline in tea production has also led to increase in cost of production and deterioration of tea quality. The current high tea prices are mainly due to the crop shortage and not due to any enhanced demand for Ceylon Tea from consuming countries. The exporters are of the view that, the current prices are somewhat artificial and make our tea non- competitive in some tea importing countries. The country loses foreign buyers and markets to India, Kenya, and Vietnam etc due to crop shortage and high prices. Once the foreign consumers get used to other origin teas, it would be difficult to regain these markets. In view of the current situation in the tea production front, the exporters strongly request the government to liberalise tea imports at least on a control basis to resolve the current tea production issue in the country.       

The exporters have proposed for liberalisation of tea imports more than 15 years ago. The TEA request was included in the 2016 government budget approved by the parliament. However, it was not implemented due to strong objections from some stakeholder members. The current policy discourages any major investment by tea companies in the tea sector that is needed for expansion of the economic growth in the country. Some exporters are unable to cater to certain market segments due to non- availability of suitable type of tea locally. It has a negative impact on the growth of brands. 

In most markets the importance of origin of tea is gradually phasing out to the strength of brands. The exporters also believe that protection given to tea producers / manufactures does not expose them to real competition. The producer segment will not make any serious effort to improve tea quality, reduce COP and improve management efficiency. They will continue to depend on government protection and subsidiaries that would be a burden on the entire economy. 

The tea exporters are also concerned of the recent developments in Syria which may lead to a bigger military conflict in Middle East. Approximately 52% of Sri Lanka tea exports reach Middle Eastern countries and further escalation of military conflict in the region will have an adverse impact on the local tea industry. Therefore, finding new markets for Ceylon Tea is more important now than before. However, Sri Lanka will not be able to expand their business to more secure Europe or USA without having the right type of tea mix at competitive prices. The retail sale segment in these countries is controlled by hyper markets/ super markets and they maintain the retail prices without any change for 6-12 months. The high cost of production in Sri Lanka does not allow the Sri Lankan tea brands to get in to the mass market segment controlled by super market chains.   

The tea exporters are also worried about the long delay in launching the Global Ceylon Tea Campaign by Sri Lanka Tea Board. The need to introduce a Tea Promotion Levy arose when Government was not allocating any funds for tea promotion activities from the Tea CESS. In 2010, then Minister of Plantation Industries proposed to introduce a levy of Rs. 3.50 per kg to be used only for tea promotion activities. The Minister consulted members of TEA and got their consent to introduce a new levy with the assurance that it would be levied only for a period of five years but collection of levy continues indefinitely.  

Since the establishment of the fund from November 2010 only a few useful promotional activities have been under taken in foreign markets and as a result the accumulation of the fund has now reached Rs. 6-7 billion. TEA members strongly believe that further accumulation of funds may prompt the Treasury to force Tea Board to use the idling funds for recurrent expenditure or for other non-promotional activities. The delay in implementation of the global Ceylon Tea campaign is not due to any fault of the tea exporters but due to strict government tender procedures and other regulations. 

In view of the current situation, TEA has requested SLTB to initiate action to suspend the tea promotion levy until the launch of Global Ceylon Tea Campaign is finalised and the accumulated funds are sufficiently utilised. This would be a relief for the tea exporters who are undergoing a difficult period due to the turmoil in leading tea importing countries in CIS and Middle East. 

The tea exporters also complain of the high taxes imposed on the sector. The CESS and Promotion Levy paid on export of value added teas come to Rs. 7.50 per kg and about Rs. 17.50 per kg on export of bulk tea. In addition, every exporter should renew their license with SLTB annually at a cost of Rs. 500,000.00 for large and medium tea companies and Rs. 50,000 for small companies. The income tax payment, economic service charge and other fees paid to SLTB and other state organisations also add to the operational cost of tea exporters. According to Sri Lanka custom data over Rs. 2 billion per annum is collected from tea exporters as CESS on bulk and value added tea exports. Further, Rs. 1 billion is collected as Tea Promotion Levy by SLTB from the exporters. The total CESS and tea promotion levy paid by the exporters’ amount to approximately 1.5% of the annual tea exports revenue. This may be the highest CESS payments made by the tea exporters in a tea producing country.  

The exporters are also worried about the slow implementation of budget proposals related to tea export sector. It has been proposed  to abolish the Import and Export Control Department Fee of 1% of CIF value on import of tea for re-export purposes to support the tea industry through a more simplified tax and tariff structure in the 2017 Budget.

In fact, Tea Exporters Association had been lobbying for removal of this fee as Tea Exporters pay a license fee of Rs. 5 per kg to Sri Lanka Tea Board also when importing tea for re-exports. The dual taxation on tea import licenses currently applicable for the import of CTC/Green and Specialty teas is negatively affecting the competitiveness of Sri Lanka tea brands. However, this proposal is yet to be implemented by the government. 

Although the Government has deferred the implementation of termination of SVAT system, the exporters strongly urge the government to continue with the SVAT system to facilitate their cash flow requirement. The termination of SVAT will  affect the competitiveness of Sri Lankan tea brands also as the exporters will have to borrow funds from banks at high interest rates which will naturally increase the cost of operation. 

Tea is the most regulated export industry in the country. This has caused delays, increase in operational cost etc. of the exporters. Therefore, the members of TEA urge the government to appoint a committee to look in to deregulating the tea industry to enhance its competitiveness.