ECONOMYNEXT – Sri Lanka tea auction prices plunged for the second week with prices down over 100 rupees kilogram as buyers reduced purchases to avoid keeping stocks for which value added tax had to be paid upfront, tea sector officials said.
The most badly hit are ex-estate sales (high growns), linked to regional plantations companies, industry sources said.
At the auction on October 14/15 tea prices fell around 20 to 50 rupees across elevations on top of a fall of 50 – 80 across rupees the previous week, broker data show.
“Exporters now have to pay VAT upfront so the cost of finance is be passed down to us,” a senior regional plantations company official said.
“Buyers do not want to hold stocks after paying VAT. So they cut down purchases to reduce stocks and the hit of interest costs. As a result, we have seen higher volumes of unsold tea after the auction. Prices have fallen about 100 rupees a kilogram.”
Another tea official said if the Inland Revenue makes a quick refund of VAT, there may be more confidence among exporters to buy tea in the next few weeks and price could recover some.
President Anura Kumara Dissanayake had also assured sector officials that cash would be given back within two weeks, at a recent meeting, he said, and so there could be some improvement with time.
“But whether they refund cash in six weeks (two weeks after the end of the month), or even two weeks, exporters are not going to pay the interest on VAT financing of tea stocks,” a tea producer said.
“That is quite definite. Even the cost of two weeks of financing VAT will be passed down to producer as lower prices. Absolutely no question of that. We have to pay the cost through lower prices.”
Tea exporters have to buy local supplies to export, so even at a lower price tea producers can hope to sell their products.
However, SMEs which supply other industrial exporters are now disadvantaged over imported inputs.
Some other industrial exporters can buy inputs from abroad, on which they do not have to pay value added tax.
Final exporters no longer have any incentive to buy inputs made in Sri Lanka as they are penalized for ‘backward integration’.
“The industry set up a zone in the East to make inputs,” a senior apparel sector official lamented. “Now we have to pay Value Added Tax up front on these inputs.”
“If we imported that material we would not have to pay tax upfront get into a mess. Margins are thin and competition is cut-throat.”
“I hope the IMF will not now force us to pay VAT on imported inputs as well. If the IMF clamps down on imported inputs and forces up to pay cash on VAT that will be further blow to exporters. That will end the concept of a free zone.”
The SVAT system extended the concept of a free trade zone to the small producers who were outside, an official said.
The official strongly denied that the SVAT system led to corruption.
‘It is nonsense that SVAT leads to corruption,” he said. “There is no cash in SVAT. Without cash there cannot be corruption. It is now that corruption will emerge now that cash had been paid upfront.
“Already we are seeing retired officials offering consultancy on how to get cash fast.”
Instead of blocking SVAT, which emerged as a stop gap method to government inefficiency in Sri Lanka, the IMF should have studied the system closely and replicated it in other countries, an official said.
“They should have followed the principle of ‘If it ain’t broke, don’t fix it,’” the official said.
Sri Lanka had to set up free trade zones, because after independence, central bank money printing led to balance of payments crises which then triggered ad hoc changes to the tax system and an increase in protectionism to ‘save foreign exchange;.
The ad hoc tax changes after each balance of payments crisis underminied rule of law (predictability of the operating environment) hurting investors while capital decumulation taxes (higher income and property taxes) destroyed domestic capital formation to fix budgets, while the economy slows.
The first such balance of payments crisis was triggered around in 1952/3 (at the time the central bank was legally barred from depreciation and the IMF Articles also discouraged it since the objective of setting up the Fund was to prevent depreciation) which led to ad hoc import and income tax surcharges which were later made permanent.
The central bank at the time also suggested that tax holidays be given as the country’s income tax regime was no longer competitive.
In the ensuing years the cycle has repeated endlessly. And now tax holidays are also discouraged though income tax rates are about 50 percent higher than East Asian nations with monetary stability.
Sri Lanka’s revenue authorities have announced value added tax on services as part of efforts to get the country out of default. However among taxes announced are VAT on Paypal and Stripe.
There have been warnings that taxes on stripe and Paypal would lead to a 36-pct tax on services purchases including inputs for small software exporters including plug-in and payments made to freelancers abroad.
(Colombo/Oct16/2025)