The Tea Exporters Association (TEA) has raised concerns over the proposed abolition of the Suspended VAT (SVAT) system from April 2025, warning that it will negatively impact Sri Lanka’s tea exports and the livelihoods of over 480,000 smallholder farmers.
In a statement, TEA highlighted that the SVAT system provides exporters with essential relief by easing cash flow constraints when paying VAT on locally sourced inputs. Originally introduced in 2011 to mitigate delays in VAT refunds, SVAT has been a crucial support mechanism for the export sector. The tea industry was brought under the VAT regime in January 2024, making SVAT even more critical for maintaining competitiveness.
Impact on Tea Industry and Farmers
Sri Lanka exports around 90% of its tea production, with only 10% consumed domestically. In 2024, the country produced 262 million kg of tea, exporting 245 million kg at a value of $1.4 billion. The tea industry heavily relies on smallholder farmers, who contribute 75% of annual production, with over 60% owning less than half an acre of tea land.
About 95% of Sri Lanka’s tea is sold through the weekly tea auction, where exporters must pay producers within six days. However, due to the competitive global tea market, exporters offer credit periods of 30-180 days to international buyers. This makes bank borrowing a key financial tool, and the removal of SVAT will further increase financing costs for exporters.
The introduction of an 18% VAT on tea since January 2024 already places significant pressure on the industry. Without SVAT, exporters will have to factor VAT into tea prices, reducing competitiveness in global markets. This could result in lower auction prices, ultimately cutting income for smallholder farmers. The TEA estimates that farmers earning around Rs. 23,000 per month could see an 18% reduction in their income.
Potential Consequences of SVAT Removal
- Liquidity Challenges: Exporters will face severe cash flow issues, as VAT refunds under the traditional system are prone to delays.
- Market Competitiveness: Sri Lanka risks losing international buyers to competing tea-exporting nations like Kenya, India, and Vietnam, which offer better financial incentives.
- Economic Impact: The tea sector may require Rs. 5 billion in additional working capital per month (Rs. 60 billion annually), shifting financial strain from the government to exporters.
- Burden on SMEs: Small and medium-sized tea exporters, who handle 15%-20% of the country’s exports, may struggle to sustain operations.
TEA has urged authorities to retain SVAT or implement a cashless VAT refund system to safeguard the tea sector’s stability, export revenue, and smallholder farmers’ livelihoods.