Sri Lanka’s apparel exporters have raised concerns that local export trading houses adhering to the United States’ ‘First Sale for Export’ rule may be forced to relocate overseas due to the proposed elimination of the Simplified Value-Added Tax (SVAT).
The move, they warn, could weaken the country’s competitive edge in the global market.
Under the First Sale for Export Rule, manufacturers sell their goods to a trading house based in Sri Lanka, which then facilitates transactions with the ultimate buyer in the US or another intermediary.
These middlemen, who play a crucial role in ensuring quality and compliance, operate within Sri Lanka, thereby keeping value addition and margins within the country. However, the planned removal of SVAT could disrupt this arrangement significantly.
Currently, SVAT allows trading houses to operate without the immediate burden of VAT payments, as they do not have to pay the tax upfront and later claim refunds.
Without this system, trading houses will have to incur VAT costs initially, seek refunds later, and face additional administrative challenges, increasing operational expenses and cash flow issues.
According to Yohan Lawrence, Secretary General of the Joint Apparel Export Forum, Sri Lanka hosts 12 active trading houses, which account for approximately 50% of total apparel exports.
He warns that, if SVAT is eliminated, these trading houses may shift operations to other countries, leading to significant revenue losses for Sri Lanka.
Apparel exporters argue that they operate on narrow profit margins and any additional cost burden could make them less competitive compared to other global players.
The removal of SVAT is part of a broader economic reform program under the International Monetary Fund (IMF), which aims to streamline the VAT process and improve efficiency in the export sector.
However, exporters argue that unless VAT leakages are identified and addressed directly, the new policy may do more harm than good.
Another major concern is that without SVAT, exporters may reduce purchases from local suppliers due to the added tax burden. Domestic purchases would become subject to VAT under the new system, leading to increased costs and delays in recovering tax refunds, discouraging businesses from sourcing locally.
The IMF-backed fiscal reforms have prioritized revenue-based consolidation while continuing to support subsidies in other sectors. For example, the latest budget included a 15% tax on individual service exporters while simultaneously granting fertilizer subsidies to vegetable and rice farmers.
With import restrictions and taxes in place, rice prices in Sri Lanka remain significantly higher—by 40% to 50%—than in neighboring countries.
Impact of SVAT Removal on Apparel Exports
The elimination of SVAT could have a profound impact on Sri Lanka’s apparel industry, which is a key contributor to the nation’s export revenue. With trading houses potentially relocating to tax-friendly jurisdictions, the country risks losing a significant portion of its export value.
Moreover, increased operational costs and cash flow challenges could push apparel manufacturers to reconsider their sourcing strategies, potentially shifting their supply chains to international markets rather than supporting domestic suppliers.
In the long run, this policy change could weaken Sri Lanka’s position as a leading apparel exporter, reducing foreign exchange inflows and employment opportunities in the sector.
