The tea industry which is exempted from VAT until now is subject to an 18 percent VAT from 1st January 2024. While it is understood that in order to resurrect the country’s financial stability, we have to widen the tax net and the VAT, the high VAT on a commodity of which over 90% is produced and sold purely for exports, wherein all of the VAT will need to be refunded to stay competitive in the world market, the imposition of VAT on Tea has caused grave concern amongst the Tea industry stakeholder.

 The tea industry value chain involves a number of stakeholders – over 400,000 tea smallholder farmers who account for over 70% of the tea production, 21 regional plantation companies, about 600 tea manufactures who are the sellers of tea as well, more than 300 tea exporters/ buyers  and eight brokers who conduct the weekly tea auction. Each weekly  tea auction sells between five to six million kg of tea divided into about 10,000 lots or different types and grades of teas.

Buyers are required to settle the full value of tea within seven days from date of purchase to ensure that tea farmers/growers get their payment without any delay. On behalf of the tea manufacturers/sellers the invoices are issued by the eight brokers only making it very much convenient for both sellers and  buyers in respect of administering the weekly tea selling and buying. This transparent  system has been there for more than 125 years and secured the best possible prices for Ceylon Tea that enable the country to receive about USD 1.3 billion of foreign exchange from tea exports annually.

At present only tea exporters are registered for VAT and SVAT but according to the new VAT Bill that was approved by the parliament a few days ago, the 600 tea producers/factories in the tea industry should get themselves registered for VAT and SVAT to be eligible for issue of  VAT invoices to the buyers of tea. Instead of the current system where the exporters/buyers are dealing with eight brokers, in future the exporters will have to deal with about 600 tea factories that may create huge administrative challenges  including additional cost.

 The industry stakeholders under the umbrella body of Colombo Tea Traders Association has made a submission to the Hon Minister of Plantation and to the Hon. State Minister of Finance and Commissioner General of Inland Revenue last week requesting for more time for registration of tea factories for VAT and SVAT as it may be impossible to register all of them by January 1, 2024. They have also requested to allow the brokers to be the contact point for issue of invoices for easy communication between IRD and the producers.

 The last tea auction of the year concluded on December 19, 2023 and the next tea auction is scheduled for January 3, 2024 . The exporters are skeptical about the ability of tea factories getting the VAT/SVAT registration before January 1 and fate of the first tea auction of 2024. The tea manufacturers who are unable to get the VAT registration by January 1 will not be able to issue VAT invoices and may have to  keep away from the auctions until the registrations are completed. This may have multiple effects on tea exports, income of smallholder farmers etc. Even foreign buyers may keep away from tea auction temporarily that could affect the tea prices.

According to the government gazette notification  even the green leaves are subject to VAT however we have been assured that green leaves may not be liable for VAT payment as it is a basic agricultural raw material.

Tea Exporters Association understand the necessity to enhance the VAT network under the current economic situation of the country but it urges the Ministry of Finance and Inland Revenue Department to introduce a mechanism to register all tea manufacturers for VAT in the next few days to ensure that tea supply/tea value chain may not collapse over the VAT issue.

Tea industry is a unique industry and needs special attention by the IRD.   While the country needs to reform its taxation, the VAT on export commodities at such a high rate of 18% only to be refunded after going through a lot of administrative procedures in the private sector as well as the government sector seems to be unproductive. Better consultation with the stakeholders, well in time before implementing such sweeping changes will help the industry to sustain in the current challenging global environment.

Tea Exporters Association