ECONOMYNEXT – Sri Lanka’s export trading houses which comply with the United State ‘First Sale for Export’ rule will be forced to shift abroad to maintain competitiveness after the so-called SVAT is scrapped, apparel exporters have warned.
Under the First Sale for Export Rule, factories sell to a trading house domiciled in Sri Lanka who has the connection with the ultimate buyer in the US or to some other buyer who has the contract with the final buyer.
In international trade middlemen who are familiar with the needs of the ultimate buyer can farm out production or buy from different suppliers and ensure that standards are met.
However, for US customs purposes the value of the first sale is used. Under the current process, the margin or the value added by the trading house remains in Sri Lanka.
After SVAT is scrapped, the trading house will have to pay the VAT, requiring additional financing costs and then file claims to get the money back pushing up costs and administrative hassles.
“Right now there are 12 trading house operations that are operating in Sri Lanka,” Yohan Lawrence, Secretary General of the Joint Apparel Export Forum said at a exporters forum organized by the Export Development Board.
“They account for about 50 percent of the total exports. As a solution to the problem the industry will take will be to move the trading house overseas, which means that revenue goes overseas.”
READ MORE: US First Sale Rule Declaration
Exporters say they are working on thin margins to compete with the rest of the world and additional costs makes operations difficult.
RELATED Sri Lanka export finance costs to rise due to removal of SVAT: Apparel Exporters
Under the International Monetary Fund program, Sri Lanka has been asked to end SVAT which appears to be a bit unorthodox in terms of standard VAT treatment but make the export sector efficient by eliminating cash being tied up government process, exporters say.
If there are any real leakages of tax through the process, that has to be proved and the miscreants prosecuted, some exporters have said earlier.
Removing SVAT will also discourage exporters buying from domestic suppliers as local purchases are subject to VAT under the new scheme and then they have to be recovered.
The IMF has pushed so-called revenue based fiscal consolidation with no check on spending.
In the latest budget for example, individual services exporters were taxed at 15 percent and vegetable farmers were given a fertilizer subsides for the first time. Rice farmers already get fertilizer subsidies.
As a result of import controls and taxes rice is 40 to 50 percent more expensive than the rest of the region. (Colombo/Mar25/2025)
