Sri Lankan tea exporters concern over implementation of VAT on tea

Sri Lanka’s tea industry which is exempted from VAT until now is subject to an 18 percent VAT from January 1, 2024 which is detrimental to the industry, a key stakeholder has said.

While it is understood that in order to resurrect the country’s financial stability, the tax net and VAT has to be widened, the high VAT on a commodity of which over 90 per cent 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 tea industry stakeholders, the Tea Exporters Association (TEA) said in a statement on Wednesday.

The tea industry value chain involves a number of stakeholders – over 400,000 tea smallholder farmers who account for over 70 per cent of the tea production, 21 regional plantation companies, about 600 tea manufacturers who are the sellers of tea as well, more than 300 tea exporters/ buyers  and eight brokers who conduct the weekly tea auction.

Each weekly tea auction sells between 5-6 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 more than 125 years and secured the best possible prices for Ceylon Tea that enable the country to receive about US$1.3 billion of foreign exchange from tea exports annually, the 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 for 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 the Colombo Tea Traders Association has made a submission to the Minister of Plantation and to the 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 January 1. 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. 

“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,” the statement said. 

The TEA understands the necessity to enhance the VAT network under the current economic situation of the country but it urges the Ministry of Finance and Inland Revenue Department (IRD) 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.

The 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 per cent 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.