ECONOMYNEXT – Sri Lanka’s Board of Funding is actively engaged in attempting to eradicating the destructive affect on charging worth added tax on domestically produced inputs, which is discouraging backward integration, Chairman Arjuna Herath stated.
Sri Lanka’s attire industries have complained that the removing of the SVAT system which allowed native producers to promote items to exporters in a form of VAT exempt system, has been eliminated, triggering cashflow wants and curiosity prices for exporters.
In nations like Vietnam and Taiwan, gross sales into export corporations in free commerce zones are zero rated, similar to for export. Beneath a zero fee, no VAT is charged, and suppliers are additionally entitled to enter credit score.
Imported inputs are freed from VAT in Sri Lanka like in different competing nations in East Asia.
Attire trade has warned that they should halt backward integration to compete with the remainder of the world.
The attire trade has invested closely in backward integration, the place the zone in Eravur has been set as much as produce textiles, Herath stated.
“Now we have truly submitted a funds proposal this time for the funds to keep away from this anomaly,” Herath stated.
“Now we have taken up with the Inland Income Division as effectively. They’ve acknowledged that, throughout the provisions, whether or not they might have some leeway to have a look at this throughout the zone for deemed exporters on a deemed exporters foundation to do that.
“So, we’re actively engaged on this.”
In counties like Vietnam, and likewise Taiwan which just about invented the idea of free commerce zones within the early Sixties gross sales into corporations in zones together with for providers are zero rated, not solely last exports.
Like Sri Lanka, Taiwan was a rustic that had financial troubles as a consequence of dangerous central financial institution within the Nineteen Fifties export manufacturing couldn’t be achieved as a consequence of import tax safety that hit inputs.
After initially giving tax rebates to recover from the issue of protectionism, Taiwan began free commerce zone close to Kaohsiung port to assist exporters escape protectionism. On the time VAT was not discovered outdoors of Europe it was not an issue for export powerhouses in Europe.
Trendy VAT was invented by France which initially examined it in Ivory Coast in 1954. France adopted it in 1958. VAT later unfold throughout the European Financial Group and the UK adopted it in 1972.
Information of VAT appears to be poor within the US, the place President Trump has criticized it as an unfair export subsidy.
Sri Lanka’s exporters have stated that the removing of the SVAT system has additionally hit native shopping for workplaces.
Like closing backward integration factories, and halting purchases from suppliers outdoors zones, shopping for workplaces may be compelled to maneuver overseas, as a result of removing of SVAT trade, analysts say.
Whereas some export sector could possibly take up the loss, areas with skinny margins like attire, could also be hit worse.
Sri Lanka’s tea producers have additionally stated the should tackle curiosity value via lowered promoting costs the cashflow value that exporter bear when paying VAT upfront even when the refund interval was lowered.
When SVAT was eliminated, tea costs fell by aroud 100 rupees a kilogram, although there are expectations of some restoration in costs when the VAT refunds come.
Not like in industrial items, the place exporters can cease shopping for from native suppliers and simply import inputs, tea plantations and small holders will nonetheless have a market, although costs could scale back to match the cashflow prices of exporters.
Sri Lanka has a historical past of elevating taxes, after stability of funds crises are triggered by the central financial institution which engages in ‘financial lodging’ and ‘eased financial coverage’, which critics say are euphemisms used for inflationary fee cuts or cash printing.
Forex crises has additionally led to rising earnings tax, which has in flip created a requirement for low taxes for international traders and export corporations.
Sri Lanka’s company tax is 30 %, in comparison with 20 % for nations with financial stability in East Asia and likewise Scandinavia. (Colombo/Oct26/2025)
