Apparel manufacturers fear recent tax policy might affect competitiveness

• Say deeply concerned by recent discussions for the removal of the concessionary rate granted to exporters
• Point out industry already confronting a 25 percent decline in its order books for 4Q22
• Understand the policy is well-intended but fear the resulting consequences will be dire and may have disastrous outcomes

Sri Lanka’s apparel sector is currently witnessing a significant decline in orders, a pattern which the industry fears

may continue indefinitely. The decline, which is attributed to a range of global factors, comes after impressive growth was seen in the first eight months of the year.

In an effort to steer away from the disturbing development, the Joint Apparel Association Forum (JAAF) stressed it is imperative for Sri Lanka to remain competitive, and offer potential and existing investors a competitive investor environment.  

The JAAF noted that one of the recent policies that is impacting the apparel sector is the increased taxation on the industry. It shared that it is deeply concerned by recent discussions for the removal of the concessionary rate granted to exporters, replacing this with a single rate of corporate taxation.  

 “This would mean the rate of corporate taxation doubling for exporters.  The industry has been contributing 52 percent to export revenue continually throughout the crisis, a contribution that is critical to keep the economy afloat, despite challenging internal and external factors.  

“An additional rate of taxation will make the apparel industry very uncompetitive when compared with regional peers,” said JAAF Secretary General Yohan Lawrence in a statement to the media yesterday.
Until September 2022, apparel exporters were liable to pay a concessionary corporate income tax rate of 15 percent (previously 14 percent). 

However, aligned with the IMF staff-level agreement, the government tabled proposals in the 2022 interim budget to increase the standard corporate income tax rate to 30 percent from 24 percent, effective from the 1st of October 2022.

“JAAF is disturbed by this proposed increase as the apparel industry is already confronting a 25 percent decline in its order books for 4Q22 due to the softening of global markets,” Lawrence reiterated.

Speaking on behalf of apparel manufacturers, Lawrence said the forum fully understands and supports the need for the proposed tax reforms as the government is challenged with options to raise much-needed revenue.  

However, while the policy is well-intended, the manufacturers fear the resulting consequences will be dire and may have disastrous outcomes for an industry that is striving to increase export income, local value addition, foreign direct investments, sustaining employee security, and economic growth.  

 “It is crucial that the government takes note of the following concerns prior to implementing the increase in corporate taxation for exporters to 30 percent,” said Larwance,  According to JAAF, stakeholders are of the view that the industry is already heading into uncertainty in the next few months due to rising inflation in the biggest export markets, disruptions in global supply chains, and geopolitical tensions.

“Although the industry is confident this is a temporary predicament and it has the capacity to emerge resilient, the timing is not necessarily prudent and will create a further tough environment for exporters in terms of policy,” he said.

The senior representative stated that as the apparel industry is determined to direct Sri Lanka into prosperity through the creation of a competitive export-oriented market economy, JAAF urges the government to rethink the policy of increasing the corporate income tax rate by 100 percent, which would allow the apparel industry and all exporters to remain competitive and engage in business and investment in the region.