Originally appeared on The Morning
By Dhananath Fernando
Sri Lanka can’t win by obstructing its competitors
I still remember some silly things I did when I was in school. It was an inter-house pre-selection race for 400 metres for the school sports meet. As you all may know, to match the equal distance for each athlete, the most outer track athlete is placed slightly ahead at the start of the race and the most inner track athlete is placed at the very behind at the start. So during this race, I got lane eight, the most outer track. Without realising that the starting point placement was done to provide a level-playing field I thought I have some added advantage to start the race well ahead.
The race started and we were all accelerating to the finish line. After a few metres, from the corner of my eye I saw the athlete next to my lane running faster and he was getting closer to overtake me. So I changed my track to lane seven and obstructed him. Just after a few seconds, I realised that the lane six athlete was about to overtake me. I changed my track to lane six. Then the athlete on lane seven overtook me. Throughout the race I was trying to obstruct the other athletes without running my race in my own track.
I was disqualified from the race. I was not only disqualified from the race because of my silly way of obstructing all athletes, but also because they had to redo the race. I still remember what my house master in charge told me after disqualifying me from the race. “Son, you can’t win a race by obstructing your fellow competitors. You have to work hard and practice to run faster than them. That is the only way you can become competitive and win a race.”
When I saw headline news stories on the Sri Lankan floor tiles, wall tiles, and bathware cess tax revisions and Customs import duties, and collective voices against obstructing imports of these product categories as per the new tax revisions, for a moment I wondered whether we as a country are trying to make the same mistake I did as a schoolboy athlete by trying to win a competition by obstructing our competitors without trying to be competitive by ourselves.
The bathware story took the limelight with a gazette notification allowing the importation of bathware with a 180-day credit period when the forward purchasing of foreign currency was not facilitated by banks. In simple terms, this is a condition where the importer has to negotiate with the supplier to give goods for a credit period of half a year and the importer has to bear the cost of exchange depreciation. So it was not at all very favourable for importers. Even in that context, the Imports and Exports Commissioner General instructed banks not to facilitate any imports of tile and bathware products on the next day itself.
It was reported after a few days on some news stories (gazette notification is not yet up on the Government website) that the industry associations agreed to increase the Customs import duty to 30% from 15% and increase cess to a flat rate of Rs. 125. Currently for certain sanitary products cess is 0% and some other product categories are charged at 15% or Rs. 40 per kg.
Essentially, if the media report is true, our Customs duty has increased by twofold and our cess has increased by threefold. According to the same media report, even before 2015, cess was 25% or Rs. 75 per kg. So even after a good seven years, we still want to obstruct our competitors at a higher degree with the higher cess. Let’s try to understand the overall impact
First, many people do not know how the tax calculation is done. The import tax formula is not as simple as saying that it is the addition of one tax to another tax. There are taxes on taxes (Value-Added Tax [VAT], Port and Airport Development Levy [PAL], etc.). So if the Customs duty doubles from 15% to 30%, the impact on the final tax on the consumer can be larger than just adding 15% to the final tax rate. According to the current calculation revealed by Sri Lanka Customs, the effective rate can go up as high as 89.80% of the actual imported value.
What does this mean for the local consumer? This means the local consumer has to pay twice the price to buy a bathware set, floor tile, or wall tile. In other words, our fellow Sri Lankans have to pay the cost of two bathrooms to build one bathroom. Needless to highlight, the bathrooms constructed by Sri Lankans are not royal-class gold-plated commodes and silver flushing systems; a basic commode and even a squatting pan have been taxed at a high rate as 52%. This will not only impact the local consumers but also other local micro, small and medium enterprises (MSMEs) as well.
When most of the MSMEs do their small constructions, they have to spend twice as much for the bathware and tiles, which increases the capital they require to start business. Most of them take loans to start businesses. Ultimately, this high cost of tiles affects their competitiveness in the business as well. Think of a small clothing shop in your town. Most of the time the floor is tiled and the shop requires a bathroom, so can we justify asking that entrepreneur to pay twice as much for some of his construction items which is a main part of the building when he is starting the business?
It does not affect only the small entrepreneurs, but rather creates a ripple effect across the economy. In the tourism industry, construction materials such as wall tiles, floor tiles, and bathware are used for most constructions. So as a result, their capital investment goes up and they have to cover capital through the room rate. As such, in the same room category, Sri Lanka’s hotel room rates are higher than the competing destinations in the region.
It is the same for luxury hotels as well as medium and small leisure sector entrepreneurs. It is not just the leisure sector, but even the Government has a big problem with the cost of construction. If you list down requests from rural students to the President in the programme “Gama Samaga Pilisadarak”, they are all about a building to do their studies, toilet facilities, a laboratory, or a playground. The cost of construction is as high as the sky so even the Government has a problem in allocating money for construction capital expenditure.
Further, think about the young professionals and all Sri Lankans who want to build a basic house but consider it a dream house. They take a bank loan with the greatest difficulty and pay twice the price for wall tiles and floor tiles from the money they borrowed.
Protecting local manufacturers and industries?
The main argument that has been put forward on increasing the tariff on bathware and tiles is that it is a move to protect local manufacturers. As Sri Lankans, we unanimously agree that local industries should be protected, but we have to evaluate how we are going to protect them without punishing our consumers. The only solution to protect them is to become competitive and that is a win-win for local manufacturers as well as the local consumers.
Many policy-makers and, to an extent, Sri Lankans are of the opinion that when we allow imports, it will affect the local manufacturers’ sales volumes. Some consumers are of the opinion that the higher import duties don’t affect them because only the prices of imported items are increasing and the prices of local manufactured products will remain the same. I too wish that the market acts the way we think. What happens in the market is actually the same thing I tried to do in the 400-metre race.
When we obstruct the competitor’s imported products, we narrow the window of competitiveness in the market and limit the entry of similar products to the market. In other words, we limit the opportunity for the consumer to buy a reasonably priced product from the market by imposing a higher tariff and making them uncompetitive. By doing that, like I obstructed the entire race which created an absolute disaster, all other connected industries will be affected. It will affect the pricing of apartments, roads, government infrastructure, wages, and the aspirations of young professionals. The tariff rates are extraordinarily high, not only with regard to tiles but in terms of most construction items. This obstruction of competition is not a recent phenomenon but it’s been there for decades in the tile and bathware industry. However, even after a near tariff imposition of over 80% on cost in some instances, we have managed to fulfil only about 50%-60% of the local market demand. As a result, Sri Lanka is stagnated in the same place without being competitive in industries, but rather complaining that our export portfolio is not diversified.
How can we protect the local industries?
Local industries can only be protected by being competitive and the definition of protecting local industries should not be punishing the fellow voiceless Sri Lankans. The only sustainable way of winning a game is hard work and being competitive. Instead of being competitive, if we lose our focus and try to obstruct the competition, we will not be able to achieve anything more than what we have been experiencing so far. This was the same policy we adhered to for decades and we have to question ourselves as to why we haven’t succeeded. We have to remind ourselves what my house master in charge said many years ago and redefine the way we think as Sri Lankans.
The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.