Tea industry challenges: From fertiliser fiasco to abolishing SVAT – a slow demise?

Introduction of SVAT - THE Suspended VAT (SVAT) scheme was introduced in April 2011 to support exporters, including the tea sector, by addressing the significant delays in VAT refunds under the previous system. However, the tea industry was formally brought under the VAT regime starting from 1 January 2024.

- By Cotomso

Tea - a 90% export-oriented commodity

Tea remains one of Sri Lanka’s most vital export commodities, with approximately 90% of total production shipped overseas. In 2024, the country produced 262 million kg of tea, of which 245 million kg were exported, earning $ 1.4 billion. Smallholder farmers, numbering over 480,000, are responsible for around 75% of national tea production—most of whom cultivate less than half an acre in districts such as Sabaragamuwa, the South, and Matara.

Nearly 95% of the tea is sold through Sri Lanka’s weekly Colombo Tea Auction—a highly transparent system that ensures competitive prices. Exporters are mandated to pay producers within six days of purchase, and farmers are paid on the Sri Lanka Tea Board’s reasonable price formula, for their Green Leaf.

The estimated impact of SVAT removal on working capital stands at Rs. 4.5—-5.0 billion monthly—or over Rs. 55-60 billion annually—for the tea export sector. This added burden would not generate additional tax revenue or domestic value but merely shift liquidity from the export to the financial sector. While it may temporarily improve Government cash flow, administrative costs for both IRD and exporters will likely outweigh any benefit. The abolition will particularly hurt SME exporters—who handle 15-20% of exports—forcing many out of business, which could destabilise auction dynamics and reduce smallholder incomes

Export financing constraints

Given the competitiveness of the global tea market, many Sri Lankan exporters offer extended credit terms of 30-180 days to overseas buyers, even though they pay local Tea Manufacturers in full within six days. In comparison, competitor countries like India, Kenya, and Vietnam extend credit up to 365 days.