VAT impacts start of Colombo Tea Auction; pent up demand buoys prices

By Asia Siyaka 

Commodities PLC

The first Tea Auction for the year originally scheduled for 2 /3 January was delayed by two days and held on 4/5 to enable tea producers to register for VAT/SVAT. Registrations were initially delayed due to internal issues at IRD. Even now many Sellers are operating on temporary documents pending full registration for SVAT. The request of the Colombo Tea Traders Association (CTTA) for intervention by the Sri Lanka Tea Board (SLTB) to enable and ensure registration did add a level of comfort to buyers, who ultimately did participate in the auction, resulting in a positive impact on prices. Increasing registration by sellers in the days leading up to and during the auction, did encourage some buyers to bid actively even though initially there was a strong reluctance to do so.

Buyer exporters who account for almost 90% of teas sold at the auction are already SVAT certified and naturally preferred to purchase teas from producers who were similarly certified. Buyers operating for the domestic market particularly in the dust catalogues reduced their price offers at the Auction to reflect the VAT component that would be added to their purchase price. In many instances these buyers operate for the better teas and pay a significant premium.

The absence of an auction during the traditional holiday break in the last week of the year, added pent-up demand from exporters who had to finalise incomplete orders. Brisk bidding helped keep prices buoyant for a large cross section of teas from all elevations and product categories. 

Some buyers, however, were selective in their purchases and price differences were noticeable for invoices that came from factories without SVAT certification.

Acceleration by Inland Revenue Department is a must

Regional officers of Inland Revenue Department (IRD) are under tremendous pressure and are working long hours to help overcome this backlog. More resources will be needed, however, to complete registration of all tea factories. It is critical that registrations are complete before the next auction which was initially to be held on 9 and 10 January but has been pushed back to 10 and 11 to accommodate late registrations by tea producers. The Regional Plantation Companies (RPCs) are all certified, but the greater volume of private tea factories scattered through all growing regions are seeking registrations from the IRD’s regional centres.

The Colombo Tea Traders’ Association’s working groups have been driving change in documentation, auction By-laws, reporting procedures and most importantly the Digital Trading Platform to ensure minimal disruption to the world’s primary auction centre for sale of Orthodox Black Tea.

Short-term outlook

The onset of the Western quality season should transform the market for teas grown on the Western slopes and Nuwara Eliya. Most of the estates are managed by RPC’s that have already obtained SVAT certification. There should be no impediment therefore, to Exporters operating for these teas and prices will be determined by demand and supply.

A tight supply of Orthodox Leafy Black teas together with low inventory in some markets and seasonal high consumption in some consumer countries, should ensure that demand for these teas remains strong.

The unpredictable weather for the first quarter resulting from forecast conditions could impact supply not just from Sri Lanka but other producer countries as well.

Sharp increases of freight rates and disruption to shipping could add cost to the Sri Lankan exporter and the international importer as well. These costs would ultimately come out of the tea price.

Rising tensions in regions that are key markets for Ceylon Tea remain a source of concern, but tea is an essential product in many countries and there is a tendency for consumers and traders to stock up during these times.