“THE VAT HIKE THREATENS THE PROFITABILITY OF THE SECTOR AND CONTRADICTS THE GOVERNMENT’S OBJECTIVE TO BOOST DAIRY PRODUCTION BY 53 PERCENT- AIDA

• Cautions failure to reconsider will have far-reaching, detrimental consequences on local dairy sector
• Asserts additional burden of increased VAT could further strain affordability of dairy products, leading to a decline in consumption
• Requests to increase VAT gradually with support measures, allowing sector space to adjust 

Sri Lanka’s dairy stakeholders urged the government to reconsider the decision to increase the Value Added Tax (VAT) and cautioned that failure to do so would have far-reaching, detrimental consequences on the dairy sector and the overall health and wellbeing of the Sri Lankan population.   
The All Island Dairy Association (AIDA) asserted that the move, which was intended to broaden the tax base, could have severe repercussions for the dairy sector, a vital contributor to the nation’s GDP and a cornerstone of rural livelihoods.    
“The dairy sector, which witnessed a substantial growth with a peak of over 400 million litres of milk production from 2017 up to 2021, is facing a precarious situation. The VAT hike threatens the profitability of the sector and contradicts the government’s objective to boost dairy production by 53 percent,” the AIDA said in a statement to the media. 
Fresh milk production and fresh milk-based products were previously VAT-exempt, providing essential support to around 300,000 small-scale farmers and over two million dependants, directly or indirectly involved in the sector.  
In 2022, the sector experienced a 1.33 percent decline, indicating its sensitivity to economic fluctuations. The VAT increase would exacerbate this vulnerability, leading to a more pronounced decline in production and real income losses for farmers, the AIDA cautioned. 
Between 2013 and 2022, the cost of producing a litre of milk surged by 174 percent, due to the rising input costs such as feed ingredients. The retail prices followed suit, increasing by 168 percent in the same period. 

“The additional burden of increased VAT could further strain the affordability of dairy products, potentially leading to a decline in consumption. This has dire consequences for public health, particularly among vulnerable groups, intensifying the nation’s existing malnutrition problems,” the AIDA cautioned. 
While pointing out that its membership is not fully against the VAT, it suggested the increase could be rolled out gradually, with support measures, as it would allow the sector to adjust while ensuring relief for essential inputs.  
To enhance productivity and reduce local production costs, the AIDA proposes facilitating the import of feed ingredients.  
Another crucial recommendation involves strengthening cooperatives and promoting the production of value-added dairy products to enhance profitability within 
the sector.  
The AIDA emphasised the importance of proactive monitoring and consumer awareness initiatives,

assigning the Animal Production and Health Department the responsibility of tracking the VAT’s impact, suggesting policy adjustments and conducting consumer awareness campaigns. This comprehensive set of recommendations aims to safeguard the interests of the dairy sector and ensure sustainable growth in the face of the proposed VAT increase.  
The members of the AIDA are key stakeholders in Sri Lanka’s dairy sector, contributing to the collection of nearly 60 percent of the nation’s daily milk produced by the farmers and processing 200 to 250 million litres of fresh milk annually.