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Skyrocketing prices and taxes crash Sri Lankans’ automobile dreams
View(s):The high taxes imposed on imported vehicles have dashed the hopes of purchasing a vehicle.
While there has been a liberalisation of imports of vehicles, problems in the importation of Japanese vehicles have been brought into focus by the Lanka Vehicle Importers Association.
Vehicles on sale. Pic by M.A. Pushpa Kumara
Up to February 2025, the market for secondhand vehicles in Sri Lanka is seeing firm price directions due to changes in policy. These include removal of bans as well as a sharp increase in duties on imports of vehicles.
The Vehicle Importers’ Association of Sri Lanka (VIASL) pointed out the reality that limiting imports to vehicles that are not over two years old—rather than the earlier five to seven years—was another blow to affordability.
This, along with the augmented import charges, has driven up the prices of new as also second-hand motor vehicles steeply. The price of a Suzuki Wagon R, for example, a local favourite, can be expected to cross Rs. 10 million, motor vendors have stated.
Fears have risen over possible spikes in motor vehicle import levies, presently sitting at a little over 300%. A warning from Sri Lanka Vehicle Importers’ Association is that these levies would go up and even hit rates of 400%, 500%, or up to 600% on particular cars.
This is because there are several layers of taxation such as a special import duty tied to the value of the vehicle, a luxury duty, and an 18% Value Added Tax (VAT). These cumulative charges significantly increase the final cost of imported cars, both on new and used markets.
The combination of high levies and high import controls has rendered cheaper cars out of reach, and thus additional price inflation in the used car market.
Industry experts indicate that prices of some of the top-selling used cars could rise by up to 20% to 30% in the short term. This is largely driven by higher demand for secondhand cars as consumers are being pounded by high prices of new cars.
While all this is happening, prospective buyers are advised to monitor trends in the market and carefully study the long-term economic implications of owning a car in this context.
As and from February 1, 2025, Sri Lanka customs import duty on motor vehicles stands at 30% of CIF (Cost, Insurance, and Freight) as there is a 50% surcharge on the previous 20% rate of duty. Apart from this, several other taxes are applied to imported cars:
- Luxury Tax: On cars with prices above a specified figure.
- Value Added Tax (VAT): An 18% VAT in addition to CID and other fees.
- Special Import Tax: Calculated as a percentage of the value of the vehicle.
- Excise Duty: 200% to 300%.
The total tax burden on imported vehicles is a sum of these levies, and thus the ownership becomes increasingly expensive. The Vehicle Importers’ Association of Sri Lanka has also cautioned that taxes can be raised further, with luxury vehicles potentially having import tax rates of up to 600%.
The country’s complex vehicle tax system has come under renewed attack, with tax experts arguing that the imposition of VAT on an already VAT-inclusive excise duty has created a ‘tax on tax’ scenario. They argue that this is excessively burdensome and unjust to buyers.
A number of tax advisors have pointed out that Sri Lanka’s composite excise tax system, which was introduced in 2014, already contained a 12% VAT element. Yet, with recent tax amendments, an extra 18% VAT is now imposed on car imports, substantially raising the overall tax burden.
Before 2014, the tax regime on vehicles in Sri Lanka was extremely complex, with several levies such as import duty, VAT, excise duty, and the Port and Airport Development Levy (PAL). The government then streamlined the system by removing VAT on motor vehicles. However, in January 2024, tax reforms reinstated VAT on imported vehicles, reversing earlier efforts to ease taxes.
Experts have warned that the re-imposition of VAT—with an added 18% to already paid 12% VAT-inclusive excise duty—essentially means a 30% total VAT burden. This has reinforced over-taxes warnings.
Also, the PAL is speculated to be brought back as a substitute to the 10% ad-valorem surcharge tax temporarily imposed, and this would allow customs to collect it at importation level. If that happens, this will also add to the cost of importing cars.
Electric vehicles have been particularly hard hit, with excise duty rates doubling under the new taxation system. While some levies, such as the PAL, Social Security Contribution Levy, National Building Tax, and Cess Duty, remain exempted, the cumulative system of taxation is still pushing the prices up.
These rising costs have fueled calls for tax reforms to institute a more transparent and equitable car tax system in order to prevent excessive sacrifices on the consumer level and restore affordability in the auto industry.
| Mixed bag of concerns as vehicle prices spiral By Kasun Warakapitiya Vehicle buyers and sellers have given mixed responses to the government move to drop vehicle import restrictions, Ceylon Motor Traders Association (CMTA) Chairman Andrew Perera said. He said that though the move of allowing vehicle importation was highly appreciated, people were disappointed about the high taxes imposed. He said even though there is big demand for new vehicles due to the prolonged import ban, the high taxes have increased prices, making affordability a key concern. “Many potential buyers are adopting a wait-and-see approach, assessing their financial capabilities before making a purchase” Mr. Perera added. He explained that some buyers who had already placed orders are proceeding, especially those who need vehicles urgently or have financial flexibility. He also said many are reconsidering their orders with some looking for alternative financing options, and others alternative vehicle options. Mr. Perera added that the CMTA understands the government’s need to manage foreign exchange reserves and generate revenue, yet the current tax structure is excessively high and makes vehicle ownership a challenge for many. He suggested that a more balanced tax policy, which considers affordability and economic growth while ensuring government revenue, would be the way forward. He added that tax policy should also be closely monitored by the policy-makers to find a balance on the medium term and long-term plans. He added that the CMTA recommends a structured, predictable tax policy that allows gradual affordability while ensuring a steady flow of government revenue. “We propose a long-term automotive policy to ensure stability and investor confidence in the industry” he added. The Chief executive officer of Advocata institute (an independent think tank), Dhananath Fernando too believes that the current vehicle prices are pushed up too high despite a pent-up demand created due to restriction of imports. He pointed out that though the government aims to raise revenue by bringing down import restrictions, the move has its own set of challenges as the government was required to restrict imports and make revenue at the same time considering the economic condition. “I expect that the high taxation would reduce the demand in imported vehicles and would raise demand for used and reconditioned vehicles” he said. According to him overall the taxes are too high, and despite the taxes bringing revenue to the government, there will be adverse effects such as the market shrinking. Already the vehicle-selling prices are being altered after the government lifted the vehicle import ban two weeks back. A resident from Nugegoda who had advertised his 2005 registered Toyota Corolla 121 (automatic) car for Rs 5.9 million in December 2024 said he is now selling the car for Rs 6.4 million. The price was increased from nearly a million anticipating the increase of vehicle market prices as new imports would be too expensive with high taxes. An owner of a MG ZS (2018) which was to be sold in December 2024 for Rs 9.6 million has now lowered the price to Rs 9. Million. A brand new imported car of the same brand is Rs 14 million. Menusha Gunasinghe, who works at the stock market, told the Sunday Times that vehicle importers have issued prices of the imported vehicles and they are at the high-end. “The taxes are too high on the imported vehicles, therefore automatically a demand would be created for the old vehicles.” Mr Gunasinghe said that while there might be a gap between the prices of imported vehicles and those locally available, overall both categories would be expensive. Meanwhile three-wheeler drivers too lamented over the taxing system. They said that a three-wheeler earlier priced at Rs 9,35,000 would now cost around Rs 2.1 to 2.2 million. The All Island Three-wheeler Drivers’ Union president Lalith Dharmasekara said that even though three-wheelers are now allowed to be imported, many will not be able to afford them. He said he hopes the government would introduce a mechanism to make three-wheelers more affordable. | |
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