The Sri Lankan government recently increased the customs duty on imported cars from 120% to 200% in order to promote local manufacturing. The heavy import duties started hurting Indian car manufacturers especially Maruti who has a market share in the island nation worth mentioning.
Out of 29,000 new cars sold in Sri Lanka in the last financial year, 15,000 were Maruti cars as Sri Lanka ranks among the top export destinations for the automaker. In November, Sri Lankan government raised the 'minimum accessible price' from SLR 4.5 lakhs (around INR 1.9 lakhs) to SLR 7.5 lakhs (around INR 3.16 lakhs).
This implies that even though Maruti Alto is priced at SLR 5 lakhs, the 200% customs duty will be levied for SLR 7.5 lakhs making the car outrageously expensive. Maruti plans to evade the hefty customs duty by assembling the cars in Sri Lanka with a local partner.
A senior Maruti official told Financial Express that, "We are assessing the need of setting up a completely-knocked down (CKD) plant in Sri Lanka since increased duty rates will affect our sales there this fiscal."
Maruti is reportedly considering an investment of Rs. 20-25 crore in a CKD assembly plant with annual capacity of 30,000 units. However, getting the localization levels to 40% as required by the Sri Lankan government's local assembly norms would prove to be a challenge.
If Maruti sets up a plant in Sri Lanka, it would be its first expansion outside India and also Maruti will become one of the first manufacturers to set up a shop in Sri Lanka. Chinese automaker Geely has already proposed an assembly plant in the country with local partner Micro cars.
With 10% of total auto exports from India destined to Sri Lanka, other Indian manufacturers like Tata and Mahindra could also consider assembling cars there in the future.