Tea exporters express concern over 18% VAT imposition

The Tea Exporters Association (TEA) yesterday expressed concern over the Government’s move to bring the commodity under the 18% Value Added Tax (VAT) from 1 January 2024 as opposed to being exempted.

“While it is understood that in order to resurrect the country’s financial stability, we have to widen the tax net and the VAT, the high VAT on a commodity of which over 90% is produced and sold purely for exports, wherein all of the VAT will need to be refunded to stay competitive in the world market, the imposition of VAT on tea has caused grave concern amongst the industry,” TEA said in a statement.

It said the tea industry value chain involves a number of stakeholders; over 400,000 tea smallholder farmers who account for over 70% of the tea production, 21 regional plantation companies, about 600 tea manufactures who are the sellers of tea as well, over 300 tea exporters/buyers and eight brokers who conduct the weekly tea auction. 

Each weekly tea auction sells between five to six million kg of tea divided into about 10,000 lots or different types and grades of teas. Buyers are required to settle the full value of tea within seven days from date of purchase to ensure that tea farmers/growers get their payment without any delay. On behalf of the tea manufacturers/sellers the invoices are issued by the eight brokers only making it very much convenient for both sellers and buyers in respect of administering the weekly tea selling and buying. This transparent system has been there for over 125 years and secured the best possible prices for Ceylon Tea that enable the country to receive about $ 1.3 billion of foreign exchange from tea exports annually.  

TEA said, at present only tea exporters are registered for VAT and SVAT but according to the new VAT Bill that was approved by the parliament a few days ago, the 600 tea producers/factories in the tea industry should get themselves registered for VAT and SVAT to be eligible to issue of VAT invoices to the buyers of tea. Instead of the current system where the exporters/buyers are dealing with eight brokers, in future the exporters will have to deal with about 600 tea factories that may create huge administrative challenges including additional cost. 

The industry stakeholders under the umbrella body of Colombo Tea Traders Association has made a submission to the Plantation Minister and to State Minister of Finance and Commissioner General of Inland Revenue last week requesting for more time for registration of tea factories for VAT and SVAT as it may be impossible to register all of them by 1 January 2024. They have also requested to allow the brokers to be the contact point for issue of invoices for easy communication between IRD and the producers. 

The last tea auction of the year concluded on 19 December 2023 and the next tea auction is scheduled for 3 January 2024. The exporters are skeptical about the ability of tea factories getting the VAT/SVAT registration before 1 January and the fate of the first tea auction of 2024. The tea manufacturers who are unable to get the VAT registration by 1 January will not be able to issue VAT invoices and may have to keep away from the auctions until the registrations are completed. This may have multiple effects on tea exports, income of smallholder farmers etc. Even foreign buyers may keep away from tea auctions temporarily that could affect the tea prices. 

According to the Government gazette notification even the green leaves are subject to VAT, however we have been assured that green leaves may not be liable for VAT payment as it is a basic agricultural raw material. 

TEA said it understands the necessity to enhance the VAT network under the current economic situation of the country but it urged the Ministry of Finance and Inland Revenue Department to introduce a mechanism to register all tea manufacturers for VAT in the next few days to ensure that tea supply/tea value chain may not collapse over the VAT issue. 

“Tea industry is a unique industry and needs special attention by the IRD.  While the country needs to reform its taxation, the VAT on export commodities at such a high rate of 18% only to be refunded after going through a lot of administrative procedures in the private sector as well as the Government sector seems to be unproductive. Better consultation with the stakeholders, well in time before implementing such sweeping changes will help the industry to sustain in the current challenging global environment,” TEA added.