• Gem and jewelry sector, previously exempt from VAT, will now face the revised rate of 18 percent starting January 1, 2024
• Industry requests govt. to consider charging VAT on the value addition component, which is estimated at 20-30%
• About 70% of the industry’s exports, consisting of cut and polished stones by lapidaries, and gem-studded jewelleries, rely on imported rough stones
• Says industry will become uncompetitive with 18% VAT as Sri Lanka’s direct competitors maintain single-digit VAT rates
• Cautions VAT could compel some industry players to relocate their operations overseas
• Highlights the absence of a VAT refund scheme at the country’s airports and ports as an additional hindrance

• By Indika Sakalasooriya

The imposition of an 18 percent Value-Added Tax (VAT) on Sri Lanka’s gem and jewellery sector poses a threat to its sustainability, increasing the risk of the industry moving into the informal sector, shattering the government’s objective of boosting its tax revenue, according to senior members of Sri Lanka Gem and Jewellery Association (SLGJA).

The gem and jewellery sector, previously exempt from VAT, will now face the revised rate of 18 percent starting January 1, 2024, following the removal of most VAT exemptions, with only a few essential products and services being excluded.
Also, the Cabinet of Ministers recently approved a resolution to bring down the VAT threshold to Rs.60 million per annum from Rs.80 million.

The government maintains that increasing the VAT rate and removing the exemptions is essential to meet revenue targets set by the International Monetary Fund (IMF) under the US$ 3 billion Extended Fund Facility (EFF) programme.
“As civic minded citizens, we understand the predicament the government is in, and we are not against paying the due taxes. But, our request is to charge VAT on the value addition component, which is estimated at 20-30 percent,” SLGJA members told Mirror Business. 

They said that 70 percent of the industry’s exports, consisting of cut and polished stones by lapidaries and gem-studded jewelleries, rely on imported rough stones due to various commercial factors, such as cost, availability, and customer preference.
In this context, SLGJA members believe that the industry will become uncompetitive with an 18 percent VAT, as Sri Lanka’s direct competitors such as Thailand, India and Dubai maintain single-digit VAT on their gem and jewellery industries.

“This could threaten the livelihood of about 600,000 people who are directly and indirectly employed by the formal sector,” they said.
The industry is already paying income tax of 30-36 percent, 2.5 percent Social Security Contribution Levy and 1 percent Tourism Development Levy.

SLGJA members also warned that the VAT could compel some industry players to relocate their operations to other already established hubs such as Thailand and Hong Kong or emerging hubs such as Dubai. 
Some Sri Lankan industry players have already established operations in some of these places with the help of the expatriate Sri Lankan industry personnel and labour, who have left the country due to the challenging environment.

“This is a unique industry and the authorities really need to understand how it operates. This is an industry that could go underground easily. That’s one of the reasons why it was placed under the VAT exemption list for a long time,” SLGJA members highlighted.
They also observed that the 2024 budget proposal, which suggested drafting and implementing a framework plan for the gem industry in collaboration with the private sector within three months, has not been implemented as of now.

In the first 10 months of this year, Sri Lanka witnessed a 16 percent year-on-year (YoY) increase in earnings from gem, diamond, and jewellery exports, totalling US$ 439.6 million, despite the overall export earnings dipping over 10 percent YoY.

At the same time, the country recorded a YoY surge of 26.9 percent in expenditure on diamond, precious stones, and metals imports, amounting to US $ 223.2 million, while the overall import expenditure fell over 12 percent YoY.
According to SLGJA, Sri Lanka generates approximately US$ 500 million annually from gem, diamond, and jewellery exports, with an additional estimated US$ 1 billion generated through the sale of such items to tourists and expatriates.

“With 18 percent VAT, it doesn’t make sense for tourists and expatriates to buy our products any more. Currently, after accommodation, the next highest expenditure that tourists incur in Sri Lanka is on buying gem and jewellery products,” SLGJA members pointed out.
They also highlighted the absence of a VAT refund scheme at the country’s airports and ports as an additional hindrance.
The decision to raise the VAT rate and eliminate nearly all exemptions has faced criticism from both the public and businesses. 

Despite recognising the potential hardships from such a move, the government asserts that achieving revenue targets is essential for sustaining the IMF programme and ensuring the long-term economic well-being of the country. 
The government expects that the VAT rate increase and exemption eliminations will contribute roughly to a 2.5 percent inflationary impact.