Electronic dealers expect the import duty cut on electronic items will less than halve the grey market creating opportunities for legal importers to expand their businesses while making Sri Lanka an attractive shopping destination.
“I think it will shrink down to about less than 20 percent,” says Dinesh Perera, the brand manager at Abans Electricals, the authorized dealer for the Korean consumer durables brand LG in Sri Lanka.
We used to take a huge hit on our margins. We used to price our products on par or less than the grey market price just to kill them price wise. But it was killing our industry,” he added.
Perera estimates the total consumer electricals market in Sri Lanka at 200 million US dollars annually. Half of that, he says are grey market dealers.
They smuggle electronic products in to the country through informal channels or bring them down in hand luggage to avoid taxes and price it to the consumer even below the cost of legal importers.
Singer is the island’s largest retailer of consumer goods. Mahesh Wijewardene, the commercial director at the multi-brand retailer says “the high tax regime was like gold mine to the grey market dealers”.
“High taxes and duties are a real burden on the business. The legitimate businesses are the ones affected because they are compelled to pay the taxes whereas the informal sector is benefiting”, he says.
Prior to the revision, buyer of electronic good paid eight levies which includes a 28 percent customs duty, 20 percent value added tax, 15 percent surcharge, 10 percent CESS, 15 percent excise duty, five percent Port and airport levy, three percent nations building levy and a 1.5 percent social responsibility levy.
A further 40 percent of VAT cost and 2 percent of other costs are also added.
The landed cost of an item costing 100 US dollars would increase to 210 dollars due to taxes, levies and surcharges.
Following the tax revision in June, which included the abolition of the 10 percent CESS and 15 percent surcharge on all imports, and the reduction of several other duties the landed cost of the same product is now 159 US dollars.
Illegal imports mostly occurred in small product categories like DVD players, digital cameras and 21 inch televisions.
“If I took a DVD player my cost would be about 7,000 rupees whereas the grey market would sell it at 6,000 rupees which is under my cost. Sometimes I had to under price my products just to block that guy coming in to the market. I had to do it,” explains Perera.
He says digital cameras saw the biggest dip in prices. Prices of an average branded digital camera will drop 33 percent.
“This camera is selling at above 20,000 rupees …we hope to drop it to about 13,000 rupees which is the same price as in Singapore or Dubai,” says Perera holing up a Cannon digital camera, for which Abans is an reseller in Sri Lanka.
80 to 90 percent of the electronic items available at Abans including the fancy LCD TVs are assembled at its factory in Ratmalana, south of Colombo which employs over 600 people.
According to the tax revision prices of televisions (both CRT TVs and LCD TVs) will drop by 14 percent, other audio and video items such as i-pods and MP4 players by 24 percent. Mobile phones will see a price reduction of 5 percent while refrigerators, freezers and computer products prices come down the least by only 1.75 percent.
A tax consultant at a ‘big four’ accounting firm said the recent revision of the tariff structure will make business meaningless for the grey market dealers.
“It is now meaningless to try to bring these items in luggage,” said Suresh Perera form accounting firm KPMG.
While the grey market will shrink to less than half, the legitimate electronics businesses are forecast to grow over 80 percent. Abans, which operates 360 outlets across the island including 18 in the North and East expects their business to thrive under the new tax regime.
“My company expects to expand 100 percent in the next year”, says Perera.
Shopping attraction
Experts repeatedly pointed out that Sri Lanka’s tax structure is byzantine and costly, something the government also acknowledged but there was little done.
“Our tax system is outdated, complex, narrowly focused and unattractive to investment and business development,” said deputy finance minister Sarath Amunugama using a refrain many of his processors have alluded to in the past during the budget speech.
The budget, presented six months after the fiscal year commenced, didn’t tweak the tax system. Revision of import tariffs were announced a month ahead.
Suresh Perera at KPMG says the revision of the tariff structure was a step in the right direction.
“If we want to develop Sri Lanka at this juncture and if we want to say this is going to be an economic hub and if we want to attract tourists this is the right thing to do. With more electronic items coming here and more tourists coming here for shopping I think it will work,” he says.
Electronics retailers across the island have already revised their prices despite the old stocks they hold. Abans which keeps up to three million rupees worth stocks at any given time at all their outlets have slashed prices despite the 25 percent hit on their margins.
“What we thought was we need to take a hit anyway but we need to pass down the benefit to the customer immediately. We worked out the prices according to the new structure. We thought it would be better for us to clear the stocks rather than holding it,” said Perera.
“Cameras and video cameras will be much cheaper than Singapore and Dubai it is almost duty free. Our overheads in Sri Lanka are much lower than in Singapore or Dubai. A normal retailer there would have to bear a huge overhead cost,” he added.
