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April 11, 2017

Volume 7 Issue 7

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Sri Lanka’s Synlubes Tax Hike: Good or Bad?

Duties and taxes on synthetic lubricants in Sri Lanka shot up by 31 percent late last year, a move commerce advocate groups and traders say is roiling the market. But some say the increase has leveled the playing field for the better and may actually benefit end users.

“The recent steep rise in duty and tax imposed by the government on synthetic lubricants … is causing alarm in the market, as lubricant suppliers are now starting to pass on the hike to end users,” the Ceylon Motor Traders’ Association said in a March 22 statement.

CMTA, which is affiliated with the Ceylon Chamber of Commerce, charged that vehicle dealers will also be forced to increase their selling prices to compensate for the new rates, which apply to both import and excise duties.

“Unfortunately, this duty and tax hike will only result in discouraging vehicle owners from using synthetic lubricants, due to the high price,” the statement continued. “This is not a welcome development for the country, as synthetic lubricants help vehicles perform better when compared with conventional oils,” as well as result in less emissions and longer drain intervals.

Yet the increase may be a boon to the island nation, a spokesman from one of the country’s three lubricant blenders told Lube Report Asia on the condition of anonymity.

Prior to November, synthetic lubricants were classified as "other" in the country's Harmonized System coding and were subject to zero or minimal import taxes. Taxes for mineral-based lubricants total 53.5 percent, according to Sri Lanka Customs. This includes a 15 percent general duty; 15 percent value added tax; 7.5 percent ports and airports development levy; 2 percent nation building tax and cess of 14 percent.

“It is widely rumored that some lube sellers used this gap to import low-quality oils and mineral oils disguised as synthetic oils,” the source pointed out. “Several genuine sellers lobbied the government to close this gap as it was unfair, especially for the manufacturers who have to import base oils,” which he noted are subject to separate taxes and duties amounting to 31.9 percent.

The tax increase makes it less likely for consumers to be duped by deceitful marketing practices, he continued. “I think proper regulations and enforcement have to be established before any advantage to synthetics is given ultimately, so that consumers can enjoy quality products at a reasonable price.”

In November, "synthetic lubricants were made licensable and charged the same duties and taxes as mineral lubricants," an official at industry regulator Public Utilities Commission of Sri Lanka told Lube Report Asia. "Therefore, it is not a duty hike, but a duty rationalization."

Another unofficial spokesman working for a big firm in the market concurred. “Synthetics are a very small portion of the overall Sri Lankan lube market, but the issue was that the system was being abused by unscrupulous importers to bring in mineral lubricants while declaring them as synthetics in order to circumvent paying import duties, and thus undercut the established lubricant players.”

Some traders argue that the tax increase on synthetic products only benefits the nation’s three companies licensed to manufacture lubricants in the country: Chevron Lubricant Lanka PLC, Laugfs Ltd., and Indian Oil Corp. “All lube importers in the industry will have to bare the higher tax rate when importing synthetic lubricants,” said Shandini Silva, an analyst at Softlogic Stockbrokers Pvt. “This could ultimately make synthetic lubricants very expensive in the local market and it could be passed over to the end customers.” The move benefits blenders, she said, as they won’t have to increase prices for locally produced products.

Photo: Hemis / Alamy Stock Photo

Taxes on synlubes in Sri Lanka increased in late 2016. Some say the move agitated the market while others say the increase has leveled the playing field for the better.

Another importer said that the government should incentivize the adoption of synthetic lubricants in the country. In a global context, synthetic lubricants are being promoted due to environmental concerns, benefits of longer drain intervals and for the green economy, so synthetic lubricants should be promoted by Sri Lanka's policymakers as well, added Ruwan Jayatilake, managing director of Lexus Trading Co.

The government listened to the concerns of license-holding companies but has not considered the market's requirements, Jayatilake told Lube Report Asia. Sri Lankan customers are not technically knowledgeable about mineral or synthetic oils, and they use whatever oil is available, he noted, arguing that many engines may be comprised if they don't use synthetic lubricants, as drivers tend to not change oil as frequently as needed when using mineral oils.

According to a report released last year by PUCSL, synthetic oils made up only 1.1 percent of the approximately 51,000 metric tons lubricants market in 2015.

Currently, Sri Lanka’s lubricant market is shared by 13 operators, who are authorized to import, export, sell, supply and distribute lubricants.