Sri Lanka drops controversial new tea export tax

June 26 (LBO) – A proposal to increase a tax on Sri Lankan tea exports to fund subsidies has been dropped after opposition from producers and exporters, a top official said.

The government proposed increasing the export cess by two rupees to six rupees per kilo in response to demands from small holders to subsidise fertiliser for tea producers.

But the move failed to get the nod of stakeholders such as the Planters Association, Ceylon Tea Traders Association and exporters.

“The proposal, which came from small holders, died a natural death, because the producers and exporters objected,” Tea Board Chairman Lalith Hettiarachchi told LBO.

Smallholders, who now produce 60 percent of the island’s tea crop, wanted a separate cess imposed on tea exports to have a fund to subsidise fertilizer whose prices have gone up recently.

But regional plantations companies and exporters objected, saying the cess on exports of Ceylon tea had been increased only last year and that funds from the cess had not been ploughed back to the industry.

Analysts point out that that taxing products higher up the value chain to fund production costs, which is a current expense, does not make economic sense.

Production costs should be a natural pass-through in any market.

The cess was increased in April 2006 by 1.50 rupees to four rupees per kilo. It is meant for replanting, factory modernization and promotion which give long term returns.

But delays in releasing the cess funds by the Treasury affected not only the Board’s promotional work but also replanting and factory modernization by small holders and corporate sector plantations firms.

The tea industry maintained that it was illegal for the government to withhold funds owed to them from the cess. Such monies must be ploughed back to benefit the industry from which it is collected, unlike a tax which the government can take.

The government earlier this year agreed to release all cess funds owed to the industry.

Last week Colombo Tea Traders’ Association chairman Tyeab Akbarally said the government had also acceded to industry demands and agreed to give it representation in an official body in charge of the funds.