VAT 18 shutting down Sri Lanka’s coconut industry

In just a few weeks since the newly imposed 18 per cent VAT, the coconut industry in Sri Lanka is right now in dire straits as oil millers have slowed down operations to about a few days a week resulting in over 50,000 workers losing jobs. Even "punnakku" is liable for VAT!

For an industry that was exempted from taxes, about three weeks ago coconut oil millers in the medium and large scale sector have been asking workers to report to work for only about three days a week. Nearly 1,200 large and medium scale companies are in the domestic market and some have closed operations on all seven days.

Oil millers are imposed the VAT on manufacture that came into effect from January 1, 2024 and as a result the prices of coconut oil have been increased. VAT is imposed on all other byproducts manufactured for the local market, the Joint Coconut Industry Association (JCIA) said.

Some of the millers closed previously due to shortage of coconuts in the last two years but now the rest of the millers are also closing down operations, President of the Oil Millers Association R.M. Ratnatunga said.

Unable to purchase coconuts at a lower price that could hurt the growers, manufacturers are compelled to purchase at market rates. As a result they would be compelled to increase prices in the end product.

But this would mean locally manufactured coconut oils would not be able to compete with the imported brands that are not subject to the VAT component that will in time become less expensive than the locally produced coconut oil.

Furthermore, interestingly the “punnakku” or oil cakes (animal feed) produced as a byproduct by the millers is also subjected to VAT and this has led to a complete halt on its exports to India due to their inability to find adequate crop and high processing costs involved. Animal feed is also likely to increase in price locally. This animal feed was exported to India over the last three years.

The industry’s joint body highlighted that if they needed to export and sell their product in April, May and June then they would have to market them now else there would not be anyone to buy.

Producers complain that consumers have changed their purchasing pattern from buying processed coconut products to fresh coconuts not subject to VAT.

The coconut substrates like coco peat are also charged VAT but since the local market prices are lower and cannot be matched with this new tax increase the manufacturers are compelled to absorb this price increase.

Growers are also impacted by this sudden increase in VAT with the taxes in the fertiliser that has sent prices skyrocketing from Rs.1500 in 2021 to Rs.12,750 today but the farm gate price of coconuts has only changed by a few rupees from

Rs.62.85 to the current Rs.68.65. And the ban on chemical fertilisers by the state and high prices meant coconut production has dropped due to the non-application of fertiliser for a period of three years.

VAT has also been imposed on agriculture machinery, irrigation systems and renewable energy making the use of these today unaffordable to the grower.

Coconut growers insist that they too be afforded the same benefits as the paddy farmer as this crop is also a staple diet of the local people. About 2 billion fresh nuts are consumed locally and around 500 million used for processed products while 1 billion nuts are used for export products.