ECONOMYNEXT – Sri Lanka’s Board of Funding is actively engaged in attempting to eradicating the damaging impression on charging worth added tax on domestically produced inputs, which is discouraging backward integration, Chairman Arjuna Herath mentioned.
Sri Lanka’s attire industries have complained that the elimination 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 companies in free commerce zones are zero rated, identical to for export. Beneath a zero charge, 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 mentioned.
“Now we have truly submitted a price range proposal this time for the price range to keep away from this anomaly,” Herath mentioned.
“Now we have taken up with the Inland Income Division as properly. They’ve acknowledged that, inside the provisions, whether or not they could have some leeway to take a look at this inside 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 in addition Taiwan which nearly invented the idea of free commerce zones within the early Nineteen Sixties gross sales into companies in zones together with for providers are zero rated, not solely last exports.
Like Sri Lanka, Taiwan was a rustic that had financial troubles on account of unhealthy central financial institution within the Fifties export manufacturing couldn’t be achieved on account 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.
Fashionable VAT was invented by France which initially examined it in Ivory Coast in 1954. France adopted it in 1958. VAT later unfold inside 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 mentioned that the elimination of the SVAT system has additionally hit native shopping for places of work.
Like closing backward integration factories, and halting purchases from suppliers outdoors zones, shopping for places of work can also be compelled to maneuver overseas, because of the elimination of SVAT trade, analysts say.
Whereas some export sector could possibly soak up the loss, areas with skinny margins like attire, could also be hit worse.
Sri Lanka’s tea producers have additionally mentioned the should tackle curiosity value by decreased promoting costs the cashflow value that exporter bear when paying VAT upfront even when the refund interval was decreased.
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.
In contrast to 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 charge cuts or cash printing.
Foreign money crises has additionally led to rising revenue tax, which has in flip created a requirement for low taxes for overseas traders and export companies.
Sri Lanka’s company tax is 30 p.c, in comparison with 20 p.c for nations with financial stability in East Asia and in addition Scandinavia. (Colombo/Oct26/2025)
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