Sri Lanka shuts door for small cars; wide open for luxury cars
View(s):Sri Lanka has been hard-pressed by balance of payment issue triggering imports substitution and ad hoc controls on vehicle imports.
Taxes on imported cars by the government would be intended to protect the country’s economy, but recent ad hoc policy decisions do more harm than good, motor traders warned.
Local motor traders will lose sales and middle class car buyers will have to pay higher prices for affordable autos as the recent excise duty hike on small cars would bring down this segment of import, several heads of motor dealers associations told the Business Times.
As per the new taxes, a Wagon R will go up by around Rs. 425,000 and other vehicles below 1000 cc will also be increased by around Rs. 200,000 to Rs.450, 000, Indika Sampath Merinchige, President of the Vehicle Importers’ Association of Lanka (VIAL) said.
The government’s move will affect the motor vehicle importers and the green economy initiative in the long run as the excise duty or production tax on hybrid electric cars below 1000 cc has been increased to Rs.1.25 million, he pointed out.
The excise duty on small cars less than 1000 cc will be Rs. 1.5 million under the new tax revision.
These tax amendments would not affect the letters of credit (LC) opened before August 1, 2018, and new taxes are not applicable for vehicles cleared before January 31 2019, he said.
This tax relief was aimed at providing benefits to a leading franchise motor dealer with connections to a Dubai company engaged in the importation of small cars as it has opened LCs frequently in banks during the past few months before August 1, opposition MP Bandula Gunawardena alleged.
Therefore this company could import small cars at old excise duties till January 31,2019; he said adding that a large number of buyers of small cars were still in their waiting list.
The government on the one hand has clamped small car imports by increasing excise duty but on the other hand opened the door for super luxury vehicles to enter the local market with the removal of ad-valorem rate through the 2018 budget, a frontline member of the Ceylon Motor Traders Association (CMTA) disclosed.
Explaining the negative side of the engine capacity based taxation formula of 2018 budget, he noted that it is not fair to charge the same duty for a 2,000 cc Korean-made vehicle produced and purchased for US$20,000 and a European manufactured one with same engine capacity purchased at $35,000.
A European made model X with a CIF value of Rs.5 million (taxed at 130 per cent) will be charged with the same duty as that of a Japanese made model X with a CIF value of Rs.2 million (taxed at 300 per cent) thus depriving the government of a duty income of around Rs.7-10 million per vehicle, he explained.
The government has lost at least Rs.15 billion in tax revenue under these circumstances, he said adding that the additional outflow of foreign exchange on an expensive vehicle does not bring in a sufficient proportion of inflows to state revenue.
He noted that basically, the new policy whilst trying to close the front door had opened the rear door for foreign exchange outflows.
If the need of the government was to curtail car imports, it had the option of imposing a temporary suspension on duty free/duty slashed car permits, and increasing the loan to value ratio for credit facilities being given to car buyers by finance and leasing companies.
Most of the luxury cars and SUVs are brought in using duty concession permits which are openly sold by permit holders.
According to Finance Ministry statistics, around 60 per cent of all car imports were financed through lending institutions during the first six months of this year.
This indicates a credit compress could be a better option to curtail car imports rather than resorting to tax hike, the CMTA frontline member said.
Deputy Treasury Secretary S. R. Attygalle told a media conference recently that the higher taxes will reduce car imports and may also reduce revenue.
In the 2018 budget, a tax based on engine capacity was introduced with the aim of replacing ad hoc taxes and corrupt practices including under invoicing by certain vehicle importers in the past, he added.
Mr. Attygalle said this has resulted in more than 4,500 cars and 1,000 vans with less than 1,000 cc engine capacity being imported each month from January to May 2018.
The expenditure for car imports has doubled to $666 million in the first five months of this year from $316 million during the same period last year.
However Central Bank Governor Dr. Indrajit Coomaraswamy told a media conference in Colombo recently, “if no action is taken to curtail small car imports, the country’s trade deficit would further widen exerting pressure on the exchange rate while creating a balance of payment issue.”
According to Central Bank data, foreign exchange outflow from the purchase of 1000 cc engine capacity vehicles increased to $195 million in 2018 from $26 million in 2017.
Import expenditure on 1500 cc engine capacity vehicles has risen to $73.2 million in 2018 from $20 million in 2017.
But 3000 cc petrol vehicles import expenditure dropped to $21.1 million from $33.5 million, but 2500 cc diesel vehicles rose to $5.4 million from $1.9 million.
This data showed the trade deficit has widened by $716 million in the first five months of this year and of that amount, $350 million was attributed to the increase in vehicle imports, Dr Coomaraswamy said.
He revealed that those small cars accounted for around 86 per cent of all motor vehicle registrations during the first two months of 2018.
The CMTA said in a statement that they understand the government’s policy decision taken to increase excise duties targeting the small motor cars segment
The association said previous vehicle import duty reductions had led to increased imports of small cars which resulted in massive foreign exchange outflows and worsened traffic congestion in cities.