📈 18% Penalty for Local Suppliers: FTZMA Demands Level Playing Field

The Free Trade Zone Manufacturers’ Association (FTZMA) has urged the Sri Lankan Government to remove the 18% VAT disadvantage imposed on domestic manufacturers supplying Board of Investment (BOI) exporters. • The Structural Issue: Foreign suppliers import raw materials into BOI zones at 0% VAT and zero customs duty. However, local suppliers face an 18% VAT at the point of sale, pricing them out of procurement contracts for over 20 years. • Broad Economic Impact: This tax bias impacts all major dollar-earning sectors, including apparel & textiles, rubber and tyres, electronics, engineering, pharmaceuticals, packaging, chemicals, and food processing. • Failed Mechanisms: Administrative remedies like Suspended-VAT vouchers, deferred refunds, and the Risk-Based VAT Refund Scheme (introduced 1 October 2025) fail because procurement decisions are made on upfront quote prices rather than delayed refunds. • Regional Comparisons: Peer export nations zero-rate local inputs at source. Consequently, Bangladesh's "Deemed Export VAT" helped local mills secure 75%-80% of knitwear fabric demand. Malaysia, India, Indonesia, and Vietnam (effective 1 July 2025) operate similar tax-free local sourcing models. • Proposed Solution: The FTZMA requests the Minister of Finance to issue a single gazette notification to zero-rate qualifying local supplies to BOI exporters at source. • Economic Outlook: The reform requires no Treasury outlay or new Parliament Acts. It is projected to be revenue-positive by boosting corporate income tax, PAYE, and EPF/ETF contributions from expanding domestic SMEs, while conserving fragile foreign exchange reserves.