VAT hike bolsters mobile phone grey market incurring heavy tax loss for the state

By: Staff Writer

Colombo (LNW): The government’s unprecedented VAT hike is noy only challenging for authorized mobile phone importers but also encouraging parallel imports, or grey market in the country.

Thse illicit racketeers involve the import and sale of branded products in a market without the trademark owner’s consent.

This issue has already caused a tax revenue loss of Rs 3.1 billion (USD 9.4 million) and a Forex outflow of Rs 31.6 billion (USD 96 million) via illegal channels in Sri Lanka.

With the sudden VAT increase, this loss is estimated to rise to Rs.11.9 billion marking a substantial increase in tax revenue loss from illegal imports, mobile hand set importers disclosed.

Additionally, there is a projected further tax revenue loss to the government, amounting to a Rs 2.5 billion decline from legitimate imports. This decline is anticipated due to increased parallel import products driven by the rising prices of genuine products, they added.

Under this critical set up a group of authorized mobile phone importers in Sri Lanka express their deep concern over the Sri Lankan government’s decision to remove mobile phones from the Value Added Tax (VAT) exemptions list, coupled with a simultaneous increase in VAT from 15% to 18%, effective January 1st, 2024.

This dual impact, wherein devices now not only face a sudden VAT imposition, but also at a significant rate of 18%, pose substantial challenges for the industry and the country. The importers urgently call for a critical reassessment by the authorities in light of these compounded challenges.

Moreover, the ramifications extend beyond the economic landscape. Over 10,000 direct job opportunities are now at risk, leaving families dependent on the industry—more than 15,000, including those involved in logistics, printing, branding, advertising, etc.—facing uncertainty.

The policy change also jeopardizes direct Forex investment for market development by principals (ATL/BTL), putting this crucial financial support at risk.

Furthermore, the spectre of a national security threat looms as parallel imports introduce unknown devices to the country, creating challenges in tracking these products.

Authorized mobile importers emphasize the unfortunate timing of removing cellular and electronic devices from the VAT-exempted list and the hike in VAT given the ongoing efforts by legal importers to find solutions for the persistent Parallel Imports (PI) issue.

Accordingly, the industry has put forward practical suggestions and is actively engaged in collaboration with the TRCSL to explore viable solutions .

These solutions include proposing an option for registering already in-use PI devices at a nominal fee, introducing a Tourist SIM for the duration of the incoming visitor’s VISA period, and implementing whitelisting of non-registered IMEI from mobile networks.

These initiatives aim to holistically address the challenges posed by parallel imports, foster regulatory compliance, and contribute to the development of effective policies that strike a balance between industry interests and regulatory requirements.