Sri Lanka needs to revisit its decision to phase out cess taxation on imported goods, as Sri Lankan exporters are unable to compete with competitor manufacturing destinations that have larger economies of scale, industry representatives speaking on Ada Derana's Rebuild Sri Lanka show said on Thursday (2).
"What we produce in this country is finished goods, not raw materials. There is a small percentage of 20% of raw materials being produced here, but 80% is imported," Sri Lanka United Business Alliance (SLUBA) President Tania Abeysundera said on the ongoing removal of the cess, a specialised tax levied on selected imports, of which 2,634 import goods are to be phased out.
According to officials, the move on the part of the government is in line with internationally recognised World Trade Organisation best practices for trade. Conversely, since the cess is also applied to imported raw materials, its removal is recognised as a means by which exporters can benefit from reduced production costs. However, the industrialists speaking on the show argued that the protectionist benefits the taxation holds far outweigh the advantages that small and medium enterprises stand to gain from the removal.
"If the introduction of the cess removal is based on the apparel sector alone, we know it earns $ 4-5 billion annually, but do you know how much is imported to make this $ 4 to $ 5 billion? We don't know if 20% or 25% of this is retained in profits," said Ceylon United Business Alliance Industry Sub-Committee Chairperson M.R. Jeffrey.
"Then if you consider the removal of this cess taxation, we made the calculation that $ 4 to $ 5 billion of production within Sri Lanka will [have to] be stopped and that will have to be imported."
Speaking on the recent economic volatility experienced by the energy crisis, and its impact on the small and medium enterprise sector, Abeysundera said that Sri Lankan export-oriented businesses continue to operate through precarious conditions, atop an inability to produce at scale, to compete with foreign businesses. "On top of that now there is an electricity tariff hike, the increase in the price of utilities, fuel, which causes a big impact. Then there is the increase in freight costs of imported goods."
According to the Advocata Institute, a Colombo-based think tank, Sri Lanka's trade openness fell from over 100% of GDP in 2000 to 63% by 2019, while exports slipped from 33% to 23% of GDP. By increasing the cost of intermediate goods, the cess made Sri Lankan products more expensive on the global stage compared to competitors with larger economies of scale.
According to the WTO's 2025 Trade Policy Review of Sri Lanka, while the country has made progress, high import costs remain a barrier to further integration into the global economy.
"India hasn't removed this cess, neither has China. This is the only protection for local industries. India and China are countries with economies of scale. Then as a country with no economies of scale, there must be some protection," Jeffrey said.
.jpg)