Imagine walking into your local grocery store, reaching for a packet of locally produced brown sugar, and realising it is vastly more expensive than the imported white sugar sitting right next to it. At first glance, it might seem like a simple pricing difference, but beneath the surface lies a far controversial explanation.
In a surprising move, the Government imposed an 18% Value-Added Tax (VAT) on brown sugar, which is primarily produced within the country, while simultaneously exempting imported white sugar from VAT. This policy has created an uneven playing field, putting local producers at a disadvantage and pushing consumers towards imported alternatives.
Worsening this is the fact that despite attempts by the Ministry of Trade to remove the 18% VAT on brown sugar, the Ministry of Finance is hesitant to do so.
Brown vs. white sugar divide
Sri Lanka’s sugar market is largely dependent on imports, with the country consuming over 600,000 MT annually, while domestic production meets only about 10% of the demand, according to the Sugarcane Research Institute (SRI) and Lanka Sugar Company. The Government’s recent tax policy, however, has made locally produced brown sugar considerably more expensive than imported white sugar.
According to Lanka Sugar Company Pelwatte Unit Chief Operations Officer (COO) Nuwan Dharmarathne, the State-Owned Enterprise (SOE) produces around 40,000 MT of brown sugar annually across its two factories. However, with the VAT applied, the price of brown sugar has increased to approximately Rs. 250 per kg, compared to the Rs. 200-220 per kg price without the tax. In contrast, imported white sugar, free of VAT, is available at a lower price of around Rs. 220 per kg.
However, supermarkets price brown sugar above Rs. 400 per kg while white sugar is priced below Rs. 300 as of now.
Despite being a healthier alternative to white sugar, brown sugar continues to struggle in the market due to consumer preferences driven primarily by price. Dharmarathne acknowledged the challenge in raising awareness about the health benefits of brown sugar.
“Consumers are not fully aware of the health benefits of brown sugar over white sugar. They are making choices based purely on price, and unfortunately, brown sugar is at a disadvantage due to the tax burden.”
The impact of this pricing imbalance has led to operational challenges for Lanka Sugar Company. Currently, the Pelwatte factory is facing a backlog of approximately 16,000 MT of unsold stock, with a total of 18,000 MT accumulating across both the Pelwatte and Sevanagala factories.
“In previous years, these stocks would have been sold by now,” Dharmarathne said, adding that the accumulation of stock had created a space constraint, making it difficult to prepare for the upcoming crushing season. “We are struggling to clear our storage to accommodate the next harvest,” he noted.
Efforts to address the situation by lobbying the Government have so far been unsuccessful. Lanka Sugar Company has made repeated appeals to policymakers to remove the VAT on brown sugar to facilitate market movement and reduce consumer prices. However, Dharmarathne revealed that they had not received a favourable response from the authorities.
“We have informed the Government about this crisis several times and we have requested the removal of VAT on local brown sugar, but there has been no positive response,” he said.
In an attempt to alleviate the situation, the Government has taken steps to reduce retail prices by Rs. 40 per kg in cooperative outlets such as Sathosa. However, Dharmarathne argued that this measure did little to address the core issue.
“Reducing the retail price doesn’t solve the problem for us because it doesn’t reflect the actual cost of production,” he pointed out.
Adding to the company’s woes, the by-product of brown sugar production, molasses, is also facing difficulties in sales. Molasses is typically used for ethanol production, but the market for ethanol has slowed significantly, further exacerbating the crisis.
“We are facing a big challenge because the molasses stock is also not moving and when all our stocks get stuck, we are unable to continue operations at our factories,” Dharmarathne lamented.
The difficulties facing Lanka Sugar Company extend beyond storage and sales issues to the broader supply chain. The company pays a fixed price of Rs. 10,000 per metric tonne of sugarcane to farmers and with crops already planted for the 2025 season, it has an obligation to purchase them.
“We have to buy the farmers’ produce, otherwise they will be in serious trouble,” he added.
Industry Minister Sunil Handunnetti has acknowledged these challenges, warning that unless the VAT on brown sugar is removed, the local sugar industry could face severe operational hurdles.
Import dependency and its economic toll
Despite ongoing efforts to boost domestic production, Sri Lanka remains heavily reliant on sugar imports, primarily from countries like India, Brazil, and Thailand. In 2023 alone, the country imported around 546,488 MT of sugar, incurring an import expenditure of approximately $ 438.73 million, as per data from the Central Bank of Sri Lanka (CBSL).
Further highlighting the imbalance, the SRI reports that in the first four months of 2024, Sri Lanka imported 142,903 MT of sugar while local production stood at a mere 20,394 MT.
Consumers struggle to choose healthier options
Sri Lanka’s sugar consumption patterns have remained steady over the past decade, with per capita sugar availability fluctuating based on import levels. However, health experts continue to push for increased consumption of brown sugar over white sugar due to its natural mineral content and lower levels of processing.
The Government’s taxation policy, however, makes healthier choices more expensive for the average consumer. As the Department of Census and Statistics indicates, rising sugar prices have affected purchasing power, with many households opting for the cheaper, imported white sugar despite its lower nutritional value.
Speaking to The Sunday Morning Business, All Ceylon Restaurant Owners’ Association National Organiser Asela Sampath expressed concern that healthier options in the market were heavily taxed while less healthy options were available at cheaper prices.
He stated: “Despite raising these issues repeatedly, this Government has yet to provide us with a platform for dialogue.”
Sampath observed that the Ministry of Health, if truly concerned about public health, should immediately address this discrepancy. He added that it was disheartening to see the Government seemingly indifferent to the well-being of its citizens.
“Ideally, white sugar should be more expensive than brown sugar, but unfortunately, the system is deeply flawed in Sri Lanka,” he said.
The politics of sugar
Sri Lanka’s sugar industry is no stranger to political manoeuvring. One of the most contentious moments came in October 2020 when the Government slashed the Special Commodity Levy (SCL) on imported sugar from Rs. 50 per kg to a mere Rs. 0.25 per kg.
The move was intended to lower retail prices for consumers, but the CBSL later reported that prices in the local market remained high, leading to a massive Government revenue loss exceeding Rs. 59 billion by the end of 2022.
Critics labelled the event as the ‘sugar scam,’ with parliamentary inquiries revealing that a handful of importers had benefited disproportionately. Investigations found that one company alone had accounted for nearly 39% of Sri Lanka’s sugar imports in the months following the tax cut, amassing substantial profits while consumers saw little benefit.
The Government was subsequently forced to reinstate the higher tax in November 2023, hoping to recover lost revenue and stabilise the local market.
Challenges facing domestic sugar production
Sri Lanka’s domestic sugar industry has long struggled to gain a foothold, despite Government-backed expansion efforts.
The SRI notes that factors such as outdated machinery, low productivity levels, and limited mechanisation have hindered local production. The average sugarcane yield stands at 54.9 tonnes per hectare, with an overall recovery rate of 6.54%, far below global standards.
Labour shortages further complicate production efforts. Studies by the University of Tsukuba and the SRI indicate that an increasing number of agricultural workers are shifting to non-farm sectors, reducing the labour force available for sugarcane harvesting. To address this, industry experts suggest greater investment in mechanised harvesting solutions to maintain production efficiency.
What needs to change?
As pressure mounts from both industry stakeholders and consumer advocacy groups, the Government is considering policy reforms to correct the imbalance. Industry Minister Handunnetti has stated that efforts are underway to seek Cabinet approval for the removal of VAT on brown sugar, which would allow local producers to clear their stockpiles and compete more effectively against imports.
Speaking to The Sunday Morning Business, Deputy Minister of Trade R.M. Jayawardana stated that the Ministry of Industry had proposed the removal of VAT on brown sugar through a Cabinet paper submitted to the Ministry of Finance. However, the response thus far has not been favourable.
“The Ministry of Finance is yet to agree to this decision. In the meantime, we are making efforts to reduce the retail price of brown sugar per kilogramme. However, we will not be able to bring it down to match the price of white sugar,” he explained.
Jayawardana further clarified the rationale behind the imposition of the 18% VAT on brown sugar, stating that the tax was applied as part of a tax policy covering the production of goods and was not specifically targeted at brown sugar.
However, at the end of the day, it is the consumers who are facing the consequences of the Government’s mismatched policies, giving up healthier options for cheaper alternatives amid the high cost of living.