18% penalty for being Sri Lankan

• Why our own manufacturers deserve a level playing field against foreign suppliers to BOI exporters

By the Free Trade Zone Manufacturers’ Association

Picture a Sri Lankan manufacturer trying to supply some raw materials to a BOI industry. Yet every time he quotes, he loses the order to a supplier abroad. Not because the foreign product is better. Not because it is cheaper to make. But because the Sri Lankan Government adds eighteen percent to his price as VAT the moment he quotes, while the same item arrives from abroad at zero VAT.

When a BOI exporter imports a raw material from abroad, the input enters at zero VAT and zero customs duty. When the same exporter buys the equivalent item from a Sri Lankan supplier next door, eighteen percent VAT is added at the point of sale. Before the local supplier even quotes a price, they are underbid by eighteen percent. The order leaves the country. The foreign exchange follows it out.

It costs the Treasury nothing to fix. It needs only one gazette notification.

“This is not a request for protection, and it is not a request for subsidy. It is a request for fairness. We are not asking the Government to favour Sri Lankan suppliers. We are asking it to stop penalising them. An eighteen percent tax that applies only when the seller is Sri Lankan is not industrial policy. It is a structural disadvantage we have lived with for too long,” says Chairman Dhammika Fernando.

This is not an apparel issue. The bias applies uniformly across every BOI export sector that earns this country its dollars, rubber and tyres, electronics, engineering, pharmaceuticals, packaging, chemicals, food processing, and apparel. The imported quote arrives at base price. The Sri Lankan quote arrives at base price plus eighteen percent. The procurement decision is made on price, and it has been made the same way, against Sri Lankan suppliers, for over twenty years.

Various administrative schemes have been tried over the years to soften the impact of VAT on local supplies to exporters. Suspended-VAT vouchers under the Simplified VAT scheme, deferred refunds, and most recently a Risk-Based VAT Refund Scheme introduced on 1 October 2025. None of them has ever delivered the only thing that matters: a Sri Lankan quote that reaches the exporter’s desk at the same price as the foreign quote.

Procurement decisions are made on the price that appears on the quotation, not on the price that may eventually result after a refund is processed weeks or months later. As long as eighteen percent appears on the local invoice and zero on the import bill, the order will go the same way it has always gone. Refund speed, voucher design and reconciliation rules are administrative questions. The structural question is whether the eighteen percent appears on the quote at all. Nothing short of zero-rating at source answers it.

The fix is not novel. Every comparable export economy in our region settled this question years ago.

Malaysia, under Schedule C of the Sales Tax (Persons Exempted from Payment of Tax) Order 2018, allows registered export manufacturers to acquire raw materials, components, packaging and manufacturing aids free of indirect tax whether the source is local or imported. Local and foreign suppliers compete on price alone. Today Malaysia’s electrical and electronics export sector exceeds USD 120 billion, with deep local component integration.

Bangladesh moved earlier and more boldly. Its Deemed Export VAT exemption, introduced through SRO 154 of 2005 and clarified again by the National Board of Revenue as recently as October 2025, treats goods supplied locally to one-hundred-percent export-oriented industries as exports themselves and zero-rates them at the point of sale. Before that reform, the country’s knitwear sector was almost entirely dependent on imported fabric. Today, local mills meet seventy-five to eighty percent of the fabric demand of that sector, according to the Bangladesh Textile Mills Association. The reform did not subsidise those suppliers into existence. It simply stopped penalising them, and capital followed.

Vietnam codified the same principle into formal law with effect from 1 July 2025, giving its on-spot export transactions a zero percent VAT rate by statute. India runs Deemed Export status for sales to Export Oriented Units and Special Economic Zones. Indonesia operates the KITE facility for the same purpose. The mechanism varies, the principle is identical. If an export is zero-rated on its way out, the inputs that go into that export should be zero-rated on their way in, regardless of whether the input crossed a border or crossed the street.

Sri Lanka stands alone among comparable export economies in continuing to apply a tax that systematically disadvantages its own suppliers in the competition for export orders.

The transactions being zero-rated would otherwise have been imports. Those imports already enter at zero VAT. The Treasury is not foregoing revenue it was ever going to collect. It is simply allowing that zero-rated transaction to happen with a Sri Lankan supplier instead of a foreign one. There is no subsidy, no Treasury outlay, no new spending. What the Treasury does gain, over time, is corporate income tax, PAYE, EPF and ETF contributions from the small and medium enterprises that scale up to serve the export sector. The reform is not revenue-neutral. It is revenue-positive.

Sri Lanka’s foreign exchange position remains the central economic question of the day. Reserves are recovering, but the recovery is fragile, and every dollar that leaves the country to pay for an import that could have been sourced locally is a dollar working against that recovery.

Sri Lanka has, sitting in its provincial industrial estates and around its free trade zones, a registered base of domestic suppliers across packaging, chemicals, engineering services, electronics components, processed inputs and machine parts. Capacity exists. Capability exists. What is missing is the price signal that makes it commercially rational for an exporter to choose the Sri Lankan supplier. Eighteen percent is a price signal pointing the wrong way.

A gazette notification under the existing zero-rating provisions of the VAT Act, treating qualifying local supplies to BOI exporters with verified positive Net Foreign Currency Contribution status as zero-rated supplies in their own right. The Minister of Finance already has the authority to issue such an order. No new Act of Parliament. No new institution. No new IT system.

A Digital VAT Exemption Certificate within RAMIS, the system that already processes zero-rated transactions on the import side every day. Local supplier invoices are tagged at source. Export reconciliation is automatic against the bill of lading. Any input that does not end up in an exported product is recovered with penalty. A single, universal rule, applied from gazette date to every eligible BOI exporter. No pilot, no phased rollout.

If a Sri Lankan exporter pays zero VAT to import an input from anywhere abroad, that same exporter should pay zero VAT to buy the identical input from a Sri Lankan supplier. Nothing more. Nothing less.

This is not a quarrel with the Treasury, the Inland Revenue Department, or any external partner. It is a request to remove a tax that should never have existed in this form, that no comparable export economy still maintains, and that costs Sri Lanka foreign exchange every working day it remains in place. What stands between Sri Lanka and the supplier ecosystem the rest of the region has been quietly building for two decades is one Cabinet decision and one gazette notification. The country can afford that decision. It can no longer afford to keep postponing it.

(The Free Trade Zone Manufacturers’ Association represents export-oriented manufacturers under BOI across Sri Lanka)