Monday, August 29, 2011

Sri Lanka tyre firm seeks tighter protection

Aug 29, 2011 (LBO) - Sri Lanka's Kelani Tyres, which has transformed itself from being a state-run tax arbitrage 'import substitute' scheme to a vibrant exporter with Indian collaboration, is asking for tighter protection at home.

Kelani Tyres, a listed firm started as a state enterprise catering to the local market, largely as an 'import substitute' or 'domestic manufacturing' scheme with import duty protection.

The firm which now has a joint venture with India's CEAT said production rose to 14,972 metric tonnes in the year to March 2011 from an average of 7,400 metric tonnes from 1999 to 2002.

The group's passenger car tyre, CEAT Radial, had the biggest market share among branded radials, the firm said.

Kelani Tyres is complaining of competition from imports which are slipping under trade restrictions imposed on domestic consumers.

"We are still facing unfair competition from under-invoiced imports to the country," chairman Chanaka De Silva told shareholders.

"We believe that the representations we have made in this regard to authorities will be taken seriously and necessary action will be put in place to circumvent this serious problem which in my opinion is causing an annual loss exceeding Rs. 500 million to the Exchequer."

Protected industries and smugglers - including those that 'under invoice' imports - engage in tax arbitrage.

Protected domestic industries arbitrage the entire potential tax and use it to fatten their profits, while under-invoicing smugglers give a part of the tax to the exchequer and may also pass on part of the margin to consumers when competing against protected industries.

Classical economists have pointed out that protected industries steal the trade liberties of citizens by using the coercive power of the state against them to restrict their choices and artificially push up the price on imported goods.

When foreign exchange shortages came to Sri Lanka with the creation of a soft pegged central bank after independence from British rule, trade liberties of citizens were restricted and 'import substitution' schemes flourished.

Sri Lanka made CEAT branded tyres are now exported to many countries. Kelani Tyres exports have grown to 1.9 billion rupees in 2010 from just 136 million rupees before 2002.

CEAT tyres are exported to India under a free trade deal, which improves the trade freedoms of Indian citizens.

Kelani Tyres profits had risen to 829 million rupees in 2010 from an average of 141 million in 1999 to 2002.

The firm is now facing higher production costs due to a sharp spike in rubber prices.

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