A black Toyota Aqua Hybrid was Parami Pathirana’s dream car. She had worked tirelessly for three years to be able to finally buy it this week. The government however threw cold water on her dreams with an increase on the excise duty of vehicles over 100cc, and the Toyota Aqua which used to cost Rs 3.5 million, now costs Rs 3.7 million.
“I was planning to buy my own vehicle with no help from my parents but now that seems impossible,” Pathirana said.
The new excise duty on cars will be based on a unit rate excise duty system (fixed rupee amount per cubic centimetre of the engine capacity) rather than the old transaction valuation system. Now, whether you buy a Toyota or a Kia, if their engine capacity is the same, you will be paying the same amount of tax. The exceptions to the rule are lorries, vans and buses.
Taxes on electric car batteries however have been reduced, thus the tax on a Nissan Leaf has been reduced to Rs 1.7 million from Rs 2.9 million. Threewheelers on the other hand have been dealt a heavy blow: A brand new threewheeler which cost close to Rs 600,000, will now have a tax of Rs 400,000 added to it. This puts the price of threewheelers on par with a TATA Nano cab at between Rs 1-1.2 million.
The Vehicle Importers Associations have called the changes arbitrary, and strongly oppose it:
“It is very difficult to figure out the logic behind this sudden increase in vehicle import tax,” Ceylon Motor Traders Association (CMTA) Chairman Gihan Pilapitiya said.
He said the CMTA had expected a major drop in the market, as this was, according to them, the highest tax increase in recent history.
“The government should consider ‘true transacted value’ when imposing tax on vehicles, as that is the internationally accepted system,” Pilapitiya said.
The ‘true transacted value’ is the actual Free On Board (FOB) value of the imported vehicle, which includes local charges of every description incurred, until the vehicle reaches the port in Sri Lanka.
“The market is already in distress given the depreciation of the rupee. This will change the competitors in the market. The high-end 1000cc cars will be in high competition in the current scenario,” Pilapitiya said.
Pilapitiya also said engine capacity alone was not a suitable criteria for calculating duty on vehicles:
“The price should be based on the value of the vehicle. An Indian Maruti cannot be compared to the 1000cc mini, made in the United Kingdom. According to the current increase in import tax, equal duty will be charged from both the vehicles,” he said.
“The import of motor vehicles with a cylinder capacity of between 1000cc and 1500cc will be reduced by 75 percent and vehicles of more than 1500cc will hardly be imported with this increase in tax,” Vehicles Importers Association President I. S. Merenchige said.
Merenchige was also of the opinion that this would change the type of vehicle preferred by the middle class:
“Sri Lankans prefer Japanese, used vehicles. Nearly 60 percent of the imports consist of it. Increasing taxes will reduce the gap between the Japanese vehicles and the Indian vehicles. However, 1000cc Japanese vehicles will have more demand, when compared to the Indian vehicles,” he predicted.
With a possible decrease in vehicle imports in the offing, Merenchige also said the government would lose billions in revenue every year.
An official from the Finance Ministry speaking to the Daily News however, explained that the tax change had more to do with protecting the government’s tax base than increasing government revenue:
“We have simply changed the valuation system now. Earlier the tax was based on a percentage of what people declared their vehicle to have cost. But then the depreciation table was removed and both the old and new vehicles were taxed according to the manufacturer’s value,” he said.
He explained further that the system based on transaction value had several people manipulating the tax regime: “People were undervaluing their vehicles and evading tax,” he said.
In September 2015 however, the Finance Minister, Ravi Karunanayake issued a gazette excluding the actual transaction value of a vehicle from the valuation criteria. According to the gazette, Sri Lanka Customs would also calculate the duty of vehicles based on the prices furnished by the manufacturers. It was however not disclosed as to how they arrived at these values.
In the 2016 Budget, the unit rate of tax duty for vehicles was introduced and it promised to revise the duties on the percentage basis for certain vehicles. The Vehicle Importers Association of Sri Lanka at the time claimed that this would increase the prices of vehicles between Rs. 200,000-Rs 2.5 million.
“This is not the first time that vehicle taxes have been increased, the market will adapt accordingly. It hasn’t stopped people from buying cars so far,” said the official in response to Vehicle Importers claims that their industry was on the verge of collapse.
He added that high valued cars would not be greatly impacted by these tax increases.
The move comes at a time when the country is trying to cut down on imports to avert a further worsening of the balance of payments crisis in the economy and to save its depleting foreign currency reserves:
“This is a temporary solution to decrease imports,” the Finance Ministry official said.
When the IMF in April granted a loan of US$ 1.5 billion through a 36 month Extended Fund Facility Programme, it also bound the Sri Lankan government to tough conditions including restrictions on the budget deficit size and the tax to GDP ratio. As a result the government has had to introduce tough measures such as the recent VAT increase and a range of structural changes to its fiscal policy. The latter includes ensuring that all pay tax.
“As a temporary measure, the government has resorted to increases in vehicles taxes and VAT but it does not provide a lasting solution to declining government revenue. There needs to be a long-term, more justifiable solution, instead of just taxing vehicles,” Prof. Sirimal Abeyratne, Senior Lecturer in Economics at the University of Colombo said.
He advocated for a more equitable tax regime which taxes all in a fair manner rather than ad-hoc increases in vehicle duties as a better way to solve the economic crisis and increase government revenue.
For Mahesh Withanage, a warehouse helper whose daily commute is a torturous two hours in the traffic, the recent tax increase on vehicles is a welcome change:
“It would reduce the number of cars on the road, we will have less traffic,” he explained.
Mohamed Riyaz however argued that while it was good to reduce traffic, the government also had to provide an alternative means of transport to the people: “It is time they began with the mass transit projects instead of engaging in these short-term measures,” Riyaz said.
“The personal vehicle culture in not going to work in Sri Lanka. It is not sustainable - both environmentally and economically. Every other developing country is moving towards creating more affordable, accessible and high-quality mass transportation methods. What is our government’s strategy to develop a better public transport system?” asked Hirundha Kanaharaarachchi.
Niresh Perera in the meantime did not expect the vehicle tax increase to last long: “Within the next six months they will have to revise the prices, when they start noticing that nobody is buying cars and that they are losing government revenue,” he said.
He stressed that more people would switch to public transport, especially trains, if they were more frequent, safe and clean.
According to Prof. Amal Kumarage, a Senior lecturer in Transport and Logistics at the University of Moratuwa however, the increase in vehicle taxation has always been counterproductive when it comes to reducing the number of vehicles on the road:
“We will just have more small cars on the road. Sri Lanka has one of the highest tax regimes and one of the highest vehicle ownerships in the world,” he explained.
He instead advocated for a user tax rather than a one-off ownership tax, to reduce vehicles on the road:
“When cars have become an essential item, its cost is absorbed and passed on to others down the supply chain. In the end you pay this cost through other goods and services,” he elaborated.
The professor proposed that the best solution would be to develop a good public transport system and then tax people for the use of their cars. He said this would deter people from thinking a car was an essential item.