Confusion over vehicle import taxes

With the relaxation of restrictions on vehicle imports, expectations were high that dreams of owning a personal motor vehicle would become a reality at last. Unfortunately, such hopes have been dealt a severe blow with the extremely high import duty structure imposed on motor vehicles. Under the prevailing duty structure, a brand new motor bicycle would cost nearly Rs. 1 million while a brand new three-wheeler would cost around Rs. 2 million.

A large influx of motor vehicles could cause an unwarranted pressure on foreign reserves as well as the exchange rate. Hence, the authorities have been reluctant to allow a sizeable inflow of vehicles to the country. In the run up to the Parliamentary Election, the NPP political leaders gave hopes to the electorate that every family in the country could own a vehicle under an administration led by them. Opponents have now begun to ridicule the ruling politicians by recalling those pre-election remarks.

The import ban on vehicle imports was enforced during the early stages of the COVID-19 pandemic. As the economy ran into a severe shortage of foreign currency reserves, the ban was in place for an extended period. Given the awful state of the island’s public transportation system, there is a huge yearning to own a motor vehicle across the society. However, cities like Colombo are highly dense in terms of population and concerns have been expressed as to whether a widespread individual ownership of vehicles is advisable for a geographically small landmass as ours. The poor discipline and erratic driving habits of the general public compound the matters further.

Meanwhile, the Deputy Minister of Economic Development Prof. Anil Jayantha cum Head of the NPP Economic Policy Council remarks and subsequent denials on vehicle import taxes have created uncertainty in the market. Last Thursday, the Deputy Minister was quoted to have said that the Government might consider revising the import duties downwards if the demand fails to earn the projected revenue of Rs. 700 billion. But one day later he clarified that the Government would not bring down the import duties any time soon apart from correcting the revenue expected from motor vehicle imports to Rs. 400 billion instead of the earlier stated figure of Rs. 700 billion.

The conduct of the former Academic of the University of Sri Jayewardenepura is a clear illustration of his amateurism and lack of experience in public policy. One can understand why President Anura Kumara Dissanayake did not give him the critical portfolio of Finance in spite of the pre-election insinuations. His initial statement would have persuaded some to postpone their orders in anticipation of potential reduction in import tariffs later. The assertion which was later withdrawn came amidst early data suggesting substantial but not overwhelming interest in opening letters of credit for vehicle imports as per the front page of this newspaper last Friday. The Central Bank too had not observed a considerable surge in forex demand for vehicle imports.

The big question is whether the Government would be able to meet its revenue targets if the anticipated level of motor vehicle imports does not take place. The Government intends to raise the tax revenue to 15.1% of the GDP during 2025 and vehicle imports are seen as a key source with regard to the realisation of this challenging target. If the anticipated revenue from vehicle imports is not generated, the Treasury might cut back on the planned capital expenditure – a practice that has been adopted by successive administrations.

It is imperative that policymakers give proper attention to prepare a national transport policy for the country as traffic and vehicle congestion is becoming a serious social and economic issue. Such an approach would be beneficial to all stakeholders of the transportation system in the country.