VAT uncertainty looms over tea industry

The uncertainty regarding the consequences of Value Added Tax (VAT) payments in the tea industry with the abolition of SVAT (suspended VAT) from October 1, 2025 and possible cash flow issues, drop in tea prices have sent concerns through the entire supply chain of the local tea industry.

- By TEA EXPORTERS ASSOCIATION

At the tea auction in Colombo, on average five to six million kilogrammes of teas are sold every week. Based on the current average tea auction prices, the 18 percent VAT payment on tea sales amount to Rs.4 billion per month. Due to the competitive nature of the global tea industry, most tea export companies operate on low margins and will have to resort to bank borrowings to cover the additional cash flow requirements that arises from the imposition of the VAT on the tea industry.

The interest component on the additional bank borrowings is estimated to be about Rs.480 million per month or Rs.5,760 million per year. In a competitive global tea market, the VAT liabilities cannot be passed on to the foreign buyers and as a result, the exporters will be compelled to pass it down the supply chain, causing a negative impact on the tea auction prices.

It is estimated that the tea auction prices could come down by Rs.20.00 per kilogramme, affecting the income of all tea producers, especially the tea smallholder farmers numbering more than 480,000.