SOME car dealers have reduced the level of first registration tax by withdrawing the 12-month free warranty most manufacturers offer new owners. In doing so, they are exploiting a loophole in a measure that aims to crack down on tax evasion, said the chief executive of the Hong Kong Automobile Association, Kendy Chan Kin-chung. Under the measure, which took effect in 1994, dealers have to get approval from the Transport Department on the retail price they set for a car, instead of using a 'manufacturing invoice' to prove the value. Some items, including audio systems, alarms, air-conditioners and warranties have been exempted from the tax. But some dealers have stopped giving 12-month warranties in order to lower the retail price, and the customers have to pay for any service. 'Although it is optional to customers, nobody wants to buy a new car without a warranty. They are therefore forced to pay for the service, which used to be free,' said Mr Chan. He said that the measure proposed by the Financial Secretary to set a ceiling value on tax-exempted items would help to plug the loophole. But he said the end result would be a higher retail price for the customers. 'The dealers would not absorb the extra cost, unless the economy is really bad,' he said. A Transport Department spokesman said he could not disclose details on how car dealers were evading tax.