Grey imports from the UK perturbs Sri Lanka’s luxury car market

Independent luxury car importers are exploiting loopholes to minimise hefty import taxes, but consumers—initially benefitting from cheaper prices—are suffering

Independent luxury-range car importers are exploiting duty loopholes to halve their tax payment for new models manufactured for use in cold climates by classifying them as used vehicles to grab market share from manufacturer-appointed dealers, says Ranjith Jayawardena, a director at Prestige Automobile, the local dealer for BMW. Customs value a used car at the manufacture’s selling price for a basic vehicle discounted at 15%. Independent importers, or grey importers, buy new cars in the UK, and register and deregister them there to qualify it as a used car to benefit from the discount. Authorised dealers can’t do this because carmakers appoint them to sell new cars.

Grey importers enjoy another benefit. Because import duty is calculated on the basic car, additional specs and options billed by the manufacturer, which increase the final invoice price by 30% or more, are not factored into the valuation. On the other hand, authorised dealers are taxed on much higher invoice values.

“We’re losing business because we can’t match the prices offered by grey importers. They’re selling new cars at a discount and still making higher margins than us,” Jayawardena says.

In 2012, Prestige Automobile accounted for 96% of BMW imports to Sri Lanka. By 2016, its share fell to less than 29%. Independent importers now dominate the market. “Most of these are new vehicles. We know this when we enter chassis numbers into the BMW database; most of them are barely a year old,” Jayawardena says.

The BMW X5 M Sport is the most popular BMW model imported to Sri Lanka. The SUV does 200km/h, with its 2-litre engine and 230 kW plug-in battery delivering 313hp. “It’s a monster,” Jayawardena says.

The basic model comes with premium leather seats, Mocha Dakota leather seat covers, driver-memory seat, high gloss shadow-line exterior trim and roof rails, park distance control, automatic transmission with gear shift paddles, and aerodynamic body styling. The manufacturer prices it at Rs10 million.

Prestige Automobile’s total cost to import a BMW X5 M Sport is Rs31 million. Allowing a reasonable margin of Rs2 million, the dealer must sell the Beamer for at least Rs33 million. However, an independent car importer can import the same car with the same specs for less than Rs23 million

The luxury SUV often comes fully decked to customer specifications, increasing the basic price by as much as 30%. Fine wood interior trimmings, night vision with dynamic light spot to detect people and animals from a long way off, adaptive LED headlights, an advanced audio system, rear seat entertainment screens, a panoramic glass sunroof, ceramic-finish control panels, soft-close doors, and a range of options can increase the selling price to about Rs13 million. A 20% VAT takes the selling price to Rs15 million, which is the valuation used by Customs to slap a 104% duty. This brings Prestige Automobile’s total cost to import a BMW X5 M Sport to Rs31 million. Allowing a reasonable margin of Rs2 million, the dealer must sell the Beamer for at least Rs33 million.

However, an independent car importer can import the same car with the same specs for less than Rs23 million, and there’s still plenty of room to make fat margins and undercut the authorised dealer on price.

They can sell the same SUV here for Rs6 million less than Prestige Automobile and still make four times the profit on the deal. This is because independent importers classify these imports as used cars. So, Customs deduct 15% from the basic price and taxes 104% on Rs8.5 million. The VAT component and extra options are not taxed.

Independent importers buy brand new cars in the UK because it’s the only country in Europe (apart from Cyprus, Ireland and Malta) that drives on the left-hand side.

Who wouldn’t bypass the authorised dealer to buy that dream car for much cheaper? “People think they are buying a fully functional new car, but they are soon disappointed, because none of this is meant for Sri Lanka,” Jayawardena warns.

German car maker BMW (Bayerische Motoren Werke; founded in 1916) and other car makers manufacture vehicles specific to different market conditions. In Europe, carmakers enjoy tax breaks for installing engines compliant with Euro 6 Emission Standards. These engines won’t last in markets like Sri Lanka where fuel quality is low, which is why BMW installs special engines for cars destined here.

Furthermore, the plug-in battery and other electrical components are programmed to withstand high temperatures in the case of cars manufactured for this region. The front grills of the X5 are smaller in imports from the UK. The Sri Lanka-specific models are larger, sucking in more air to cool the engine and systems.

The problems start when cars meant for the UK hit Sri Lankan roads. Destroyed by the heat, the 100kg battery in a BMW X5 ends up as a deadweight. The hybrids run on the combustion engine alone. “You can do this for a while, but you won’t get the smooth BMW experience. You won’t feel the monster either,” Jayawardena says.

Soon, low-quality fuel will take its toll. Engine knocks and stalling are common in Beamers meant for the UK market.

After China, Sri Lanka is the second-largest grey imports market for BMW, and generates the most number of user complaints due to the proliferation of grey imports. It’s hurting the luxury brand’s image.

Authorised dealers here have the necessary systems, spare parts and skills to carry out repairs, but they refuse to touch grey imports that deter future imports. Every component is electronically connected, and only authorised dealers can access manufacturers’ systems to run diagnostics. “Wayside mechanics can’t deal with niggling problems because they can’t get into the car’s system,” he says.

Prestige Automobile charges Rs3 million to register a grey BMW import, provided it’s a used car. “We can check our system for the date of manufacture. We rarely find grey imports that are actually used cars,” Jayawardena says. Replacing a battery can cost around Rs3 million, and BMW will not honour warranties for grey imports.

After China, Sri Lanka is the second-largest grey import market for BMW and generates the most number of user complaints due to the proliferation of grey imports. This is hurting the luxury brand’s image

People rarely talk about car troubles when they buy it from independent car dealers. They continue to drive their under-performing Beamers for pure prestige’s sake, or dispose them the first chance they get. Due to this, the secondhand market for BMW has collapsed, and the marque is gaining a reputation for being an unreliable brand.

Existing customers who paid a premium are also hurt. They can’t sell their cars to finance an upgrade because of now-cautious secondhand market. To address this, Prestige Automobile has rolled out an old-for-new exchange programme and a rental service for its secondhand fleet. “We had to resurrect the secondhand market. The luxury car market is growing, so we need to safeguard the brand to attract new buyers and retain repeat customers,” Jayawardena says.

Sri Lanka Customs calculates car import taxes in two ways, applying the higher of the two. One method is applying the tax rate on the CIF value (or invoice value billed by the manufacturer). The second method is based on engine capacity.

European cars have smaller but more powerful engines compared to Japanese brands, and they are taxed on CIF values because of the premium pricing. Japanese cars tend to be taxed on engine capacity because they are bigger, for more power. Japanese SUVs are less pricey, but their higher engine capacities put luxury models like BMW X5 within easy reach.

Hybrid cars, both diesel and petrol, between 1,000cc and 2,000cc are taxed at 104% on CIF value (or between Rs2,000 and Rs4,000 per engine capacity unit), and plugins with engine capacities over that range are taxed 173% or 230% on the invoice value or Rs5,000-6,000 per engine capacity unit.

The BMW X5 sits on the lower tax bracket and “is the most popular BMW model imported to Sri Lanka. This’s why grey importers are targeting this model,” Jayawardena says. He calls it a lucrative and thriving ‘cottage industry’. “All one has to do is sell one BMW to make a profit of Rs4 million or more,” he claims.

The government needs to plug loopholes in the import tax law. Arbitrage is not illegal, but in this case, as much as 50% or more tax revenue is lost from luxury vehicle imports. While grey imports do benefit consumers, this is not one of them. It’s hurting everybody except the grey importers