Sri Lankan Manufacturers Fight Back Against Imports

The Sri Lanka Transport Board (SLTB) has announced it will establish two new tyre manufacturing facilities to provide the 14,000 tyres needed for its buses every month while its Ampara tyre factory is being refurbished. The new plants will be located in Matale and Ekala, and SLTB expects to manufacture between 10,000 and 12,000 tyres annually when the first stage of work is complete.

The SLTB’s decision to produce its own tyres rather than import them is perhaps best understood by looking at Sri Lanka’s customs regulations. The SLTB spends Rs 65 million (£308,000) per year on tyre purchases, and each tyre brought into Sri Lanka from overseas is now subject to a tax of Rs 80 (£0.37) per kilogram or 28 per cent of the tyre’s invoiced value, whichever is higher. Assuming a weight of 70 kilograms per tyre, tyre tax, were all tyres to be sourced from overseas, would amount to £62,000. This equates to 20 per cent of total cost.

Indeed, the tax on tyres is a significant revenue earner for Sri Lanka’s government, and one that importers have in the past gone to great lengths to flout. Previously tyre tax was solely calculated at 28 per cent of invoice value, leading some importers to significantly undervalue the incoming products on official invoices. “The customs revenue from tyre imports, which used to be the 7th highest revenue earner for the government, dropped to 17th position,” comments Mr. Chanaka de Silva, chairman of Kelani Tyres Limited, Sri Lanka’s domestic tyre manufacturer.

After studying the problem and determining that some importers were only paying a quarter of the tax they legally owed, the country’s Ministry of Finance and the Customs Department calculated the above mentioned per kilogram import duty. This new system came into effect in May 2007. This more difficult to dodge method of levying taxes is making locally produced tyres more attractive, which is something Mr. De Silva is counting on. “On behalf of our shareholders, I take this opportunity of thanking the government for this proactive action taken which not only will encourage local manufacture but would also enable the government to collect an enhanced fiscal revenue, it is legally entitled to,” he said.

Kelani Tyres transferred its tyre manufacturing assets to a joint venture company, CEAT Kelani Associated Holdings (Pvt) Limited (CKAH), and the company, for which Kelani owns 50 per cent of equity shares, commenced activities on July 1, 1999. The company’s initial performance was not without its difficulties, however the company’s chairman believes those times are “behind us”, and it confident that shareholders will receive a substantial return on their investment in the foreseeable future. The CKAH radial facility, opened in September 2006, now has a monthly output of 15,000 tyres, of which around 8,000 are exported. The joint venture’s profit after-tax had increased 77.27 per cent over the previous year to Rs 60.2 million (£285,000) with a profit share attributable to Kelani Tyres up to Rs 30.1 million (£142,600) from Rs 17 million (£80,600) a year earlier.

“The improvements to the operational performance of the joint venture companies is continuing successfully and I am happy to inform you that the prospects look much better in 2007/08 and the profitability is expected to further improve despite steep raw material price increases,” de Silva said. “We expect to make continuous progress to augment our domestic market share by offering our customers best quality products at most competitive prices,” he said.