Friday Jan 31, 2025
Friday Jan 31, 2025
Friday, 31 January 2025 04:30 - - {{hitsCtrl.values.hits}}
Members of the Tea Exporters Association (TEA) yesterday expressed concerns over the proposed abolition of SVAT from April 2025 warning the move will impact exports and income of nearly half a million smallholder farmers.
In a statement TEA said cashless SVAT system (Suspended VAT) provides exporters with a significant level of relief towards the constraints on their cash flow requirements to fund VAT payments on locally sourced inputs. The SVAT was introduced in April 2011 to help the export trade as there was a long delay in settling the VAT refunds by the Inland Revenue Department under the previous system. The tea sector was brought under the VAT regime from 1 January 2024.
In its statement TEA also said the following:
Approximately 90% of the tea produced in Sri Lanka are exported and domestic consumption is estimated to be at around 10% of the annual tea production of the country. In 2024 Sri Lanka produced 262 million kg of tea and exported 245 million kg of tea at an export value of $ 1.4 billion. When the imported tea volume of 5-6 million kg for re-exports is adjusted, 91% of last year’s tea production has been exported.
Tea smallholder farmers numbering over 480,000 account for 75 % of the annual tea production of the country. It is worth noting that over 60% of them own less than half an acre of tea land.
About 95% of the tea produced in Sri Lanka are sold through the weekly tea auction which is very transparent and provides the best prices for the producers. The exporters are required to make the payment within six days to the tea producers from the date of purchase of tea and tea smallholder farmers receive their payment according to the fair price formula implemented by Sri Lanka Tea Board.
Due to the competitive nature of the global tea industry, a number of tea exporters provide export credit facilities ranging from 30-180 days to foreign buyers in certain countries despite paying the full payment to the local suppliers within six days. India, Kenya and Vietnam, three main competitors of Sri Lanka tea, provide 365 days of credit facilities to their foreign buyers.
Hence the finance cost accounts for a significant portion of the operational cost of tea exporters and bank borrowing is the key source of finance for them. The removal of SVAT will aggravate the finance cost position of the tea exporters.
The introduction of 18% VAT for tea products since January 2024 has made it imperative that SVAT or a cashless refund mechanism is in place to competitively continue the export of Tea, which accounts for over $ 1.4 billion of export revenue annually.
The abolition of SVAT and returning to cash refund mechanism of VAT for a 90% export commodity will result in the following:
It can open up undue practices and lack of governance. The continuation with the prevailing SVAT mechanism supports exporters with efficient funding and to be competitive in international markets.
The exporters do not have output VAT to set off against the input VAT. Some parts of the VAT component may have to factor into the price of export products that may affect competitiveness of Ceylon Tea.
Termination of SVAT would cause liquidity problems for the Tea Exporters who are already facing many challenges locally and abroad as their funds would be blocked for a considerable period of time, without a clearly defined tested working refund mechanism that is devoid of delays and corruption.
The auction prices for tea will come down due to reduced demand as well as to adjust for the 18% VAT refund delay causing reduction in the green leaf prices for the 480,000+ small holder farmers thus reducing their income levels.
Some of the foreign tea brands currently buying Ceylon Tea and packing in Sri Lanka will move to other countries where such a burden is not there for tea.
It is relevant to mention that Kenya removed VAT on export of value added teas in 2023 with a view to promoting more tea in this format. Sri Lanka exports approximately 40 % of its total tea exports in value added form and Kenyan decisions directly affect the value added tea exports of the country. India has GST on tea exports but the GST is refunded within two weeks from the date of exports on submission of proof of export documents and Customs department certificate.
Based on current tea production volumes and average tea auction prices at the Colombo Tea Auction the impact of abolition of SVAT will aggregate to an additional working capital requirement of about Rs. 5 billion per month or over Rs. 60 billion per year for the tea export sector. On a macroeconomic level, this will be a credit expansion without any domestic value addition or additional tax revenue to the government, instead will only result in shifting the value from export sector to financial sector.
Although this may improve the cash flow position of the Government in the short term, the cost of VAT collection and refund process incurred by IRD and extra administrative expenditure by the tea manufacturers and exporters may negate the whole purpose of implementation of VAT on the tea industry. The blocking of funds even for a short period would be an added burden on tea exporters as they would be required to borrow for cash flow requirements from Banks at a high cost, and making tea exports uncompetitive. Further, the exporters will have to spend their valuable time on following cumbersome procedures if the SVAT system is abolished/revised.
The SME category tea exporters who account for 15%-20% of the total annual tea export volume of the country too will face serious financial difficulties that may affect their operation and may have an impact on the demand and prices of tea at the weekly tea auction.
In the absence of output VAT for tea exporters, the exporters will be compelled to add the VAT component to the tea cost and pass it down to the producers affecting their income. It is estimated that over 60 % smallholder farmers who are currently producing between 200-300 kg of green leaf, on average, earn a monthly income of Rs. 23,000.00 each. The abolition of SVAT from April 2025 will bring down this income by 18% as the exporters will be compelled to pass down the VAT component to tea producers.
The removal of SVAT will also affect other input suppliers to the tea export industry such as suppliers of packaging material as importing such items through TIEP (Temporary Imports for Export Purposes) scheme at zero VAT would be beneficial to the tea exporters.
Tea Exporters’ request
Considering the above facts, we earnestly request the Government to continue with the SVAT mechanism for the long term sustainability of the tea industry.
If the abolition of SVAT is due to IMF reforms, the Inland Revenue Department should first introduce a mechanism for settlement of VAT refunds to the exporters within 2 weeks on receipt of claim documents (as done in India) prior to abolishing the SVAT system.
If SVAT cannot be continued, tea industry should be exempted from VAT payment as the tea producers will finally have to face the VAT burden.
