Financial Times

New vehicle taxes
Govt. saves forex; loses revenue
The new duty on cars which has been disputed in court will not only see a sharp reduction in imports but also a sharp fall in revenue for the government, new car dealers say.

The volume of reconditioned cars will also fall but it would be a smaller percentage however as against new cars while the import of trishaws will increase significantly as this will be relatively more affordable, a group of dealers said in an analysis on the new duties.

Duty collection from reconditioned cars will also drop which could result in the government achieving its objective of limiting foreign exchange outflows but at a cost of a significant loss of duty revenue, the dealers said.

The Appeal Court on Wednesday ordered the Customs to release 600 vehicles held up in the Colombo Port on a bank guarantee. The order came after the court considered 25 petitions filed by importers of reconditioned vehicles. The new tax has also been challenged in court and suspended pending completion of the case.

In a detailed analysis of the car import scenario vis-à-vis the new tax, the dealers said: Some Rs. 19 billion worth of motor vehicles were imported into the country last year and these imports resulted in a duty collection of Rs. 15 billion. Motor vehicles accounted for around 4% of total imports. Total duty and VAT on vehicles accounted for 49% of total duty collection and 2.5% of total VAT collection while the duty on motor vehicles represented 6% of total government revenue.

It thus can be concluded that import duty on cars is an important source of revenue for the government. New cars amount for 9% of total imports of motor vehicles and trishaws in volume terms. New cars account for 31% of total duty collections and also accounts for 25% of the total value of vehicle imports. Used cars account for 23% of the total volume of motor vehicles and trishaws imported contribute 60% of total duty collected. This shows the duty per unit is of a new car is around 24% more than of a reconditioned car.

Trishaws account for 68% of the total import of motor vehicles and trishaws in volume terms and also account for 19% of total import value but only counts for around 9% of total duty collected.

Some suggestion to alleviate the government's problems:

*The government could limit foreign exchange outflows by removing present incentives for the import of reconditioned vehicles such as the depreciation table. It could also limit the age of cars imported to 18 months old as a deterrent to importing used cars. As reconditioned cars constitute 23% of the total market, this would have an appreciable impact on curbing foreign exchange outflows. With the import of newer cars the present import of Rs. 5.5 billion worth of motor spares could also be reduced.

* The import duty on trishaws could be increased as it is considered environmentally unfriendly and also an inefficient means of public transport.

* Cheap transport for the common man could be achieved by reducing the import duty on small vans which are safer and cleaner.

* This approach will benefit revenue collection as it will lead to the import of more new cars which are more environmentally friendly. It will also bring about a reduction in total foreign exchange outflow.

In 2003, the number of petrol vehicles imported were 4,944 (new), 11,906 (reconditioned) and 35,775 (trishaws) worth Rs 4.8 billion (new), Rs 10.7 billion (reconditioned) and Rs 3.7 billion (trishaws). The duty received by the government was Rs 4 billion (new), Rs 9 billion (reconditioned) and Rs 1.4 billion (trishaws).

In the same year, diesel vehicle imports were made up of 859 (new, costing Rs 1.3 billion, with duty paid Rs 2.3 billion), 92 (reconditioned, Rs 81.3 million, Rs 127.3 million) and 32 (trishaws, Rs 5 million, Rs 7.0 million).

Officials from associations representing used car dealers and trishaws slammed the analysis as "biased" towards new car dealers. "As usual new car dealers seek benefits only for themselves like raising issues on the depreciation table, suggestions to raise import taxes on trishaws and saying trishaws are an inefficient method of public transportation. What more can we say?" an official from the used car dealers' association said.

However Sunday Times reader B. Mackay blamed used car dealers of making a fast buck by raising prices from between Rs 100,000 to Rs 300,000 on showroom vehicles in which taxes had already been paid -- prior to the new tax.

Mackay, questioning the validity of the dealers disputing the tax in court in a letter to the Editor said some dealers raised the prices of vehicles already in their possession by also stating that vehicle prices would rise further in the budget.

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