New Delhi: Indian auto companies, facing the prospect of a slowdown in their home market, are also seeing an export market that accounts for around 13% of their exports dry up after Sri Lanka effected a steep increase in indirect levies that will make it all but impossible for them to remain competitive.

The move, which dates back to early November but is just coming to light, doesn’t single Indian firms out, but affects them the most because they account for 95% of the auto market in the island nation.

Through 2012, Sri Lanka has made it difficult for Indian auto exporters, first by increasing import duty significantly in April, and following up with the increase in excise duty.

Sri Lanka has increased excise duty on utility vehicles to 173% from 100% previously. Total duty on cars less than 1,000cc increased from 120% to 200%, including a 47% increase in excise.

The excise on three-wheelers was raised from 45% to 100%, and on two-wheelers from 61% to 100%. Colombo has also imposed an absolute levy of Sri Lankan rupees 109,000 on commercial vehicles, besides a 12% excise duty. The new structure came into effect on 9 November.

“We are still trying to evaluate the impact of the development. The impact of it has been negative and exports of vehicles to Sri Lanka has completely stopped," said Vishnu Mathur, director general, Society of Indian Automobile Manufacturers, or Siam, an industry lobby group. Domestic sales of cars declined 8% in November, in a month when they were expected to rise.

New Delhi has taken note of the developments in Sri Lanka.

“We believe the very substantial rise in import tariff in Sri Lanka is going to adversely affect our car exports to Sri Lanka, so we are concerned about it," Rajiv Kher, additional secretary, ministry of commerce, said in New Delhi on Monday.

According to Siam, Sri Lanka is the largest export market for Indian automobiles. In 2011-12, out of India’s $6 billion worth of auto exports, Sri Lanka accounted for $800 million.

The relationship between the two countries has been testy in recent times over the issue of the treatment of Sri Lankan Tamils and also after some fishermen from Tamil Nadu were captured by the Sri Lankan coast guard for allegedly straying across the maritime boundary.

Mint reported on 12 October that state-run power utility NTPC Ltd’s plan to build a 500 megawatts (MW) plant in Sri Lanka has been indefinitely delayed, in part because of the protests by Tamil Nadu against the Sri Lankan government.

The $500 million power project to be set up as an equal joint venture between NTPC and Sri Lanka’s Ceylon Electricity Board (CEB) is an integral part of India’s attempt to engage Sri Lanka politically and economically at a time when China is becoming increasingly influential in that country. The changes in import and excise duty have already affected India’s exports to Sri Lanka, said a senior Siam official who spoke on condition of anonymity.

“In the current fiscal, two-wheeler export to the country has declined by 70% and cars and utility vehicles by 90%. The new duty structure seems to be targeted at us more than anybody else," this person added.

The industry lobby and India’s department of heavy industries are discussing a possible solution with Colombo. Meanwhile, Siam has also put on hold a January auto show in Sri Lanka, the official added.

He said second-hand cars “coming in from Japan and Singapore" are not affected by the incremental levies. Sri Lanka doesn’t have local car makers.

Prasad Kariyawasam, Sri Lanka’s high commissioner to India, said the increases in excise duty are not targeted at any one country. “Duties on cars have been increased across the board so it’s not only cars from India but across the world. The increases are on certain types of cars," Kariyawasam added.

The Sunday Times (not to be confused with the UK paper), a weekly newspaper in Sri Lanka, termed the duties as “prohibitive" and said it “may edge out Indian vehicles from Sri Lanka’s market while the exemptions to those coming from Japan will give them an added advantage in the market".

Another Sri Lankan newspaper, Business Times, said the government had “controversially reduced duties on racing cars while increasing excise duty on small cars with engine capacity of less than 1,000cc."

The newspaper said “this has shattered the dream of Sri Lanka’s middle income earners in owning a small vehicle with the Maruti 800, said to be the cheapest small car (in Sri Lanka), going up by at least Rs200,000 (Sri Lankan rupees).

Quoting an anonymous Sri Lankan customs official, The Sunday Times said the “technicality placed imports of cars from Japan at an advantage. While 90% of cars imported into Sri Lanka are from India and under 1,000cc engine capacity, no such vehicles are brought from Japan".

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