Tea exporters concerned over government’s move to abolish SVAT scheme

• Say move will create cash flow difficulties for them among several other issues 
• Note that SVAT scheme is well established and operates smoothly
• Govt. maintains that SVAT system has created loopholes leading to tax evasion
• Cabinet Ministers on June 5 decided to scrap paperless SVAT system with effect from January 1, 2024

Sri Lanka’s tea exporters yesterday expressed “deep concerns” over the government’s decision to abolish the Simplified Value-Added Tax (SVAT) system as they fear the move will create cash flow difficulties for them among several other issues.

The Cabinet of Ministers on June 5 decided to do away with the paperless SVAT system with effect from January 1, 2024, saying that a more formal methodology will be introduced in place of the existing one.

Cabinet spokesperson Minister Bandula Gunawardana said the SVAT methodology has created loopholes in the system leading to tax evasion. 

He also said the proposed new methodology would enable the Inland Revenue Department (IRD) to roll out a more strict and effective tax regime. 

Meanwhile, the Tea Exporters’ Association (TEA) yesterday urged the government not to terminate the SVAT system.

“The SVAT scheme is now well established and operates smoothly and therefore, we urge the government to continue with current scheme to facilitate the export trade,” TEA said in a statement. They pointed out that SVAT was introduced in April 2011 to help the export trade as there were long delays, inefficiencies and misuse in settling VAT refunds by the IRD under the previous system. 

“This current simplified system provides exporters with a significant level of ease of doing business, competitiveness, as well as conserves their cash flows towards export operations,” the statement noted. 

Tea exporters fear that the abolishment of the SVAT system could lead to cash flow constraints for them as their funds would be blocked for a longer period, adding to their finance costs.

They also worry that the move would result in increased cost of operations due to additional overheads on documentation and follow ups with IRD and the need to work with intermediaries that would pave the way for corrupt practices.

“Such cost increases affect the ability of exporters to pay better prices at the Tea Auction thus affecting small holder’s livelihood,” the TEA statement said.

It also pointed out that with no output VAT to set off against the input VAT, some parts of the VAT component may have to be factored into the price of export products affecting the competitiveness of value-added tea exports primarily.

“The increased tax burden on the export sector along with the highly volatile exchange rate and rupee appreciation, continued high cost of inputs such as electricity and general costs of living, combined with an inefficient bureaucracy causing delays in import of material for re-exports are already making this sector uncompetitive globally,” the TEA statement noted. 

Acknowledging the government’s attempt to reform the VAT system as part of International Monetary Fund (IMF) conditions, TEA said the removal of SVAT may be done in two stages— initially for all VAT registered persons other than exporters, and once the system of refund settlement is fully tested, streamlined, and implemented.

“Exporters may be included with minimum time delay for refunds of not more than 3 weeks.”

“Exporters who may be classified into star ratings (as done in India) depending on the past records of exports and track record of dealings on the VAT front – may be given a special scheme to use SVAT to be cleared monthly via a special window within the IRD,” the statement noted. 

“We urge the authorities and decision makers in the government to consider the above plea by forming a special committee to study the plight of exporters and the negative effect this may have before implementing such decisions,” it added.

Tea exports annually bring in over US$ 1 billion in foreign exchange to Sri Lanka.