Tea Exporters warn of industry collapse following Corporate Income Tax increase
Sri Lanka tea export sector, one of the major foreign exchange earners for the country bringing a revenue of around 1.3 billion annually in to the country is in the brink of crashing due to government’s economic mismanagement and short sighted ill conceived policy decisions, industry stalwarts claimed.
Several leaders of Tea Exporters Association (TEA) complied that the government’s fiscal policy decision of imposing 30 percent corporate income tax will seriously hinder the industry efforts for revival.
The association appealed to the government to maintain the concessionary corporate income tax rate of 14 percent for the tea export sector for its long term sustainability, which will ultimately bring in much higher growth dividends for the economy.
The sector is currently going through a challenging period due to a number of internal and external issues and this increase of corporate income tax by more than 100% from this month could further aggravate the plight of tea exporters.
Some of the internal issues tea exporters are grappling with are; the decline in tea crop by about 20 percent during first eight months of the year that has restricted the tea export volume, primarily due to the fertilizer shortages;
Uncompetitive high interest rates that have increased the financial cost with the large amount of working capital required for purchase of tea for cash at the weekly auctions, which fund the tea producers and the small holders’ livelihood and sustainability.
The external issues faced include, Russian- Ukraine conflict, sharp depreciation of Turkish Lira together with financial sanctions on Iran and some other leading tea importing countries in Middle East.
Although India has introduced “Indian Rupee Trading” mechanism to overcome certain financial sanctions and increase her tea exports to Iran and Russia, Sri Lanka has no such mechanism to overcome these obstacles.
Despite all these challenges the tea exporters have earned $ 819 million during the first eight months of the year and are hopeful that it could bring about $ 1.2 billion by the end of the year.
This move by the government to more than double the corporate income tax rate will impact all-important net foreign exchange earning of Tea industry mainly in three ways.
It would deplete sri lanka tea exportsecyor competitiveness in the world market against some of our key competing countries such as India and Kenyaand destroy the industries capability to invest for growth and maintaining such competitiveness, they said.
It will also reduce our ability to pay the best prices for the Tea growers including the large population of small holder farmers.
When more funds should be made available at the disposal of exporters for dealing with internal and external challenges it is rather surprising that government has decided the other way around without giving much consideration to the plight of tea exporters.
The proposed increase in corporate income tax up to 30 percent will have multiple implications on the sector especially on investment in machinery for developing and modernizing the tea processing factories for improvement in efficiency and optimizing cost of operation, enhancing value addition of tea, and marketing of Ceylon Tea brands abroad etc.
The available funds from profits for such activities / investments would be severely curtailed with the revision of corporate income tax from 14 to 30 percent tea exporters said, adding that it may also affect generating employment opportunities for the youth due to low investment in the industry further affecting the competitiveness of Ceylon Tea as some of the competitors like Kenya has lower income tax rate of 16 percent on export trade.
The new Kenyan government is looking at providing Ksh 800 million ($ 6 million) for developing orthodox tea manufacturing factories to compete with Ceylon orthodox teas. Contrary to this, all investments for modernisation or development of tea factories in Sri Lanka are borne by the private sector.
The Indian government offers INR 10 per kilogram for manufacture of orthodox tea, once again to compete with Ceylon orthodox tea.
When the Sri Lankan government is not providing such incentives or investments the best they can do is to lower the corporate income tax on the export sector to help investment and marketability of Ceylon Tea by the private sector.
According to tea industry experts the increase in corporate income tax could affect the overall efficiency in the tea industry and the burden may sooner or later could felt through the entire supply chain including the tea smallholder growers.