Depreciation value revision sends Sri Lanka re-conditioned car market crashing
Sri Lanka’s reconditioned car business is heading towards the doldrums due to the government’s inconsistent monetary policies and ad hoc decisions of taxation on vehicle imports, motor traders warned.
Sector insiders said many reconditioned car traders are planning to diversify their business to more lucrative trades such as pharmaceuticals or fast moving commodities while others are about to shut down their business to save their dwindling investments.
The government has imposed import duty hikes and revised the percentage of taxes on customs value (CIF basis) on duty free permit car imports within a short period of three to six months making the car market unstable, they said.
The 2014 budget proposal to revise depreciation value of cars is the final blow against re-conditioned vehicle importers numbering 1000 to push them out of business, they complained.
Vehicle Importers’ Association of Lanka(VIAL) President, Mahinda Sarathchandra told the Business Times that there will not be much of a price difference of a brand new vehicle and a vehicle used between six months to one year due to the revised depreciation value of cars.
The taxes are levied on imported vehicles on predetermined value and the value will come down in accordance with the depreciation.
Under the previous system taxes on six months to one year old vehicles were 80-90 per cent based on the predetermined value of the vehicle. Under the current revision this value has been increased to 100 per cent and therefore there is no difference in the value of a brand new car and a used car, he explained.
The tax value of vehicles more than one year old and less than two years would be 90 per cent while earlier the tax was 70 per cent to 75 per cent. The difference of taxation between a brand new and used vehicle in this category is only 10 per cent, he added.
The sale of used motor vehicles will drop and buyers will opt for brand new vehicles, he said.
The duty of a 2012 Toyota Aqua hybrid would increase by Rs. 200,000 to Rs.260,000 and the selling price would also increase roughly by the same amount. Honda Fit would increase by Rs. 185,000-Rs. 245,000. The price increase of Prius and Insight would be more, he revealed.
(VIAL) has strongly protested over the revised depreciation value for the import of second-hand vehicles.
The new depreciation value structure, introduced in the 2014 budget for the valuation of used motor vehicles, will be beneficial only for 12 brand new vehicle importers in the island, a VIAL spokesman revealed.
“This move will lead to a drastic increase of vehicle prices and the people will not buy re-conditioned vehicles under these circumstances,” he added.
Mahesh L. Ganwani, Director of Lekhraj Automobiles (PVT) told the Business Times that they are in the business for almost 28 years and it is difficult for them to continue car sales any more.
This was mainly due to the government’s inconsistant policy on vehicle imports, and no industry can survive by changing the duty structure every three to six months, he said. If the government wants to raise customs revenue they can do so by introducing and maintaining the tax structure for some time then the market will adjust to prices and there would be stability after all, he added.
The present system will result in not only the collapse of the industry but also the loss in revenue for the government due to a drop in car sales and the closure of tax-paying businesses, he revealed.
The only affordable car for the people was the hybrid car as its duty was 60 per cent after an earlier duty increase while the import duty of all cars went up from 120-291 per cent to 200-350 per cent.
However the price of a used Honda FIT hybrid (2 year old) in the post-budget period will go up by Rs. 240,000 and all car prices will skyrocket accordingly, he revealed.
These lopsided Treasury regulations have also shattered the dream of any small man engaged in self-employment to buy a vehicle, he added.
But a senior Finance Ministry official said that this proposal was aimed at closing a loophole in the tax structure which has caused massive revenue loss for the state coffers due the tactic of under invoicing adopted by vehicle importers.
A revision in depreciation of motor vehicle for customs duty will help gain Rs. 2 billion during the year 2014, he disclosed.
He noted that the Treasury Secretary Dr. P.B. Jayasundera was of the view that people who can afford a vehicle could do so opting for a brand new one rather than buying a re-conditioned vehicle as the price gap has now been narrowed.
On the other hand the government has extended a series of existing taxes to raise revenue without introducing new taxes and expand protectionism, setting ambitious state revenue targets for 2014 with more spending and borrowing outlined outside the budget, he added.