Tea industry challenges: From fertiliser fiasco to abolishing SVAT – a slow demise?

Termination of SVAT would cause liquidity problems for the tea exporters who are already facing many challenges locally and abroad

The estimated impact of SVAT removal on working capital stands at Rs. 4.5–5.0 billion monthly—or over Rs. 55–60 billion annually—for the tea export sector. This added burden would not generate additional tax revenue or domestic value but merely shift liquidity from the export to the financial sector. While it may temporarily improve Government cash flow, administrative costs for both IRD and exporters will likely outweigh any benefit. The abolition will particularly hurt SME exporters—who handle 15–20% of exports—forcing many out of business, which could destabilise auction dynamics and reduce smallholder incomes

By Colombo Tea Traders’ Association

Introduction of SVAT

The Suspended VAT (SVAT) scheme was introduced in April 2011 to support exporters, including the tea sector, by addressing the significant delays in VAT refunds under the previous system. However, the tea industry was formally brought under the VAT regime starting from 1 January 2024.

Tea – a 90% export-oriented commodity

Tea remains one of Sri Lanka’s most vital export commodities, with approximately 90% of total production shipped overseas. In 2024, the country produced 262 million kg of tea, of which 245 million kg were exported, earning $ 1.4 billion. Smallholder farmers, numbering over 480,000, are responsible for around 75% of national tea production—most of whom cultivate less than half an acre in districts such as Sabaragamuwa, the South, and Matara.

Nearly 95% of the tea is sold through Sri Lanka’s weekly Colombo Tea Auction—a highly transparent system that ensures competitive prices. Exporters are mandated to pay producers within six days of purchase, and farmers are paid on the Sri Lanka Tea Board’s reasonable price formula, for their Green Leaf.

Export financing constraints

Given the competitiveness of the global tea market, many Sri Lankan exporters offer extended credit terms of 30–180 days to overseas buyers, even though they pay local Tea Manufacturers in full within six days. In comparison, competitor countries like India, Kenya, and Vietnam extend credit up to 365 days.

This makes the cost of financing a significant component of exporters’ operational expenses, with bank borrowing being their primary funding source. Removing the SVAT scheme would intensify these financial pressures.

Adverse impact of removal of SVAT

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:

1.It can result in 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.

2.The exporters do not have output VAT to set off against the input VAT. Some parts of the VAT components may have to be factored in to the price of export products that may affect competitiveness of Ceylon Tea.

3.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.

4.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.

5.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 decision 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. 

Massive cash flow requirement

The estimated impact of SVAT removal on working capital stands at Rs. 4.5–5.0 billion monthly—or over Rs. 55–60 billion annually—for the tea export sector. This added burden would not generate additional tax revenue or domestic value but merely shift liquidity from the export to the financial sector. While it may temporarily improve Government cash flow, administrative costs for both IRD and exporters will likely outweigh any benefit.

The abolition will particularly hurt SME exporters—who handle 15–20% of exports—forcing many out of business, which could destabilise auction dynamics and reduce smallholder incomes. For context, a smallholder currently earning Rs. 23,000 monthly may lose up to 18% due to VAT cost pass-through. The green leaf price could drop by Rs. 30–35 per kg, severely impacting livelihoods of the smallholder farmers.

Risk-based refund system

The Inland Revenue Department (IRD) proposed risk based VAT refund mechanism in 45 days’ lacks clarity and transparency. As we understand, the export companies categorised as low risk companies only will be eligible for the VAT refund in 45 days. There is no mention about when the VAT refund will be made to the export companies who will be placed under medium or high risk companies. Considering the past experience with IRD, the exporters have no confidence in the proposed 45 days risk based refund mechanism. 

Urgent recommendations for policy makers

In view of these challenges, the following steps are crucial for the survival and sustainability of the tea industry:

• Maintain the SVAT scheme: Continue the current SVAT system to preserve liquidity and competitiveness in exports.
• It can result in undue practices If IMF-driven reforms mandate removal: First, establish a reliable, efficient VAT refund mechanism (with a 2-week turnaround as in India) before phasing out SVAT.
• Alternative tax measures: If SVAT cannot be continued, exempt the tea industry from VAT altogether or reduce the rate to 5%, considering the sector’s export-oriented nature.