Tea exporters warn of cash crunch if SVAT is scrapped

Sri Lanka’s tea exporters have urged the government to reconsider its plan to abolish the Suspended VAT (SVAT) system from April 2025, warning that the move will strain working capital, increase borrowing costs, and threaten the competitiveness of the country’s tea exports.

The Tea Exporters Association (TEA) said the SVAT mechanism provides vital relief to exporters by easing cash flow constraints linked to VAT payments on locally sourced inputs. Its removal, they cautioned, would place an additional working capital burden of approximately Rs. 5 billion (US$15.3 million) per month – or over 60 billion rupees annually – on the industry.

“On a macroeconomic level, this will be a credit expansion without any domestic value addition or additional tax revenue to the government, instead will only result in shifting the value from export sector to financial sector,” the TEA said in a statement.

While the move may offer short-term relief to the government’s cash flow, the association argued that the costs associated with VAT collection and refunds would negate any potential fiscal benefits.

“The cost of VAT collection and refund process incurred by IRD and extra administrative expenditure by the tea manufacturers and exporters may negate the whole purpose of implementation of VAT on the tea industry,” it said.

The TEA warned that delays in VAT refunds would force exporters to secure additional bank loans at high interest rates, increasing financial strain and making Sri Lankan tea less competitive in global markets. Smaller exporters, who account for 15%–20% of the country’s total tea exports, are particularly at risk, with potential impacts on both auction prices and demand.

The industry body urged the government to either continue with the SVAT system or, if abolition is necessary under International Monetary Fund (IMF) reforms, implement a mechanism ensuring VAT refunds are processed within two weeks, similar to practices in India.

“If SVAT cannot be continued, the tea industry should be exempted from VAT payment as the tea producers will finally have to face the VAT burden,” it added.

Sri Lanka’s tea industry, a key foreign exchange earner, faces growing challenges amid rising costs, volatile global prices, and economic headwinds, with stakeholders warning that policy changes affecting liquidity could further weaken its position.