By: Staff Writer
January 31, Colombo (LNW): The Tea Exporters Association (TEA) has raised serious concerns about the Sri Lankan government’s plan to abolish the Suspended VAT (SVAT) system in April 2025. The association warns that this move could have devastating consequences for the country’s tea exports and the livelihoods of nearly 500,000 smallholder farmers.
SVAT, which was introduced in April 2011, serves as a cashless VAT relief mechanism designed to address prolonged delays in VAT refunds. For over a decade, it has provided exporters with crucial cash flow benefits, ensuring smooth operations in an industry heavily reliant on international markets. The tea sector, which became subject to VAT in January 2024, now faces additional financial strain, making the proposed removal of SVAT particularly concerning.
Sri Lanka’s tea industry is overwhelmingly export-oriented, with approximately 90% of its total production sold to foreign markets. In 2024, the country produced 262 million kilograms of tea, exporting 245 million kilograms and generating $1.4 billion in revenue. Smallholder farmers play a significant role in this sector, contributing 75% of total production. More than 60% of these farmers own less than half an acre of land, making them highly vulnerable to financial instability.
The industry relies on a well-established auction system, where around 95% of tea is sold at weekly auctions. This ensures fair pricing, but also places financial pressure on exporters, who are required to pay producers within six days while offering international buyers credit terms of 30 to 180 days. The removal of SVAT is expected to worsen this situation, creating severe cash flow difficulties for exporters and, by extension, for smallholder farmers.
Without SVAT, exporters will have to depend more heavily on bank loans to manage their financial obligations, increasing borrowing costs and reducing Sri Lankan tea’s competitiveness in the global market. Competing nations such as India, Kenya, and Vietnam already provide longer credit periods—sometimes up to 365 days—giving them a distinct advantage. Additionally, since tea exports are exempt from VAT, exporters cannot offset input VAT against output VAT. As a result, some VAT costs may be incorporated into export prices, making Ceylon tea less attractive to international buyers.
The financial repercussions will be particularly severe for smallholder farmers. Lower auction prices, stemming from VAT refund delays, will directly impact the price they receive for green leaf tea. Given that over 60% of smallholders earn an average monthly income of just Rs. 23,000, an estimated 18% decline in earnings could push many into financial distress.
Beyond economic pressures, the potential loss of key international buyers poses a serious threat to the industry. Some global tea brands may reconsider sourcing from Sri Lanka if the tax environment becomes less favorable. Kenya, for instance, took proactive measures in 2023 by eliminating VAT on value-added tea exports to enhance its competitiveness, a strategy that could attract buyers away from Sri Lanka.
Another challenge arising from the removal of SVAT is the increased administrative burden on exporters. The Inland Revenue Department’s VAT refund process is widely regarded as inefficient and prone to delays. Navigating this bureaucratic system will require exporters to allocate additional resources, further complicating an already challenging business environment.
The association warns that without urgent intervention, the removal of SVAT could severely damage one of Sri Lanka’s most vital export sectors, with far-reaching consequences for the economy and thousands of livelihoods dependent on the tea trade.
