All Island Dairy Association Concern About Detrimental Impact of VAT Proposal on Sri Lanka’s Dairy Sector
The All Island Dairy Association (AIDA) has voiced grave concerns regarding the Sri Lankan government’s proposed increase in the Value Added Tax (VAT) from 15% to 18%, set to take effect on January 1st, 2024. This move, intended to broaden the tax base, could have severe repercussions for the dairy sector, a vital contributor to the nation’s GDP and a cornerstone of rural livelihoods.
The dairy sector, which witnessed substantial growth with a peak of over 400 million litres of milk production from 2017 up to 2021, now faces a precarious situation. The proposed VAT hike threatens the profitability of the sector and contradicts the government’s own objective to boost dairy production by 53%. Fresh milk production and fresh milk-based products were previously VAT exempt, providing essential support to around 300,000 small-scale farmers and over 2 million dependents directly or indirectly involved in the sector.
The potential repercussions of the
VAT increase are multi-faceted. The economic stability of the dairy sector, crucial for the well-being of farmers and the broader rural economy, is at risk. The sector experienced a 1.33% decline in 2022, indicating its sensitivity to economic fluctuations. The proposed VAT increase could exacerbate this vulnerability, leading to a more pronounced decline in production and real income losses for farmers. Furthermore, the cost of producing a litre of milk has surged by 174% between 2013 and 2022, primarily due to rising input costs such as feed ingredients. Retail prices have followed suit, increasing by 168% in the same period. The additional burden of increased VAT could further strain the affordability of dairy products, potentially leading to a decline in consumption. This has dire consequences for public health, particularly among vulnerable groups, intensifying the nation’s existing malnutrition problems. The economic implications extend beyond the dairy sector itself.