After a five-year ban, the first privately imported vehicles arrived in Sri Lanka on Tuesday (25), following the long-awaited relaxation of import restrictions.
According to the 2025 Budget, a significant portion of the targeted revenue is to be accounted for by vehicle imports, with the Government hoping to achieve Rs. 700 billion in vehicle-related tax revenue.
Favourable demand for vehicle imports
Speaking to The Sunday Morning, Vehicle Importers’ Association of Sri Lanka (VIASL) Secretary Arosha Rodrigo stated that the demand and response to vehicle importation had been favourable thus far.
“There are no issues regarding demand and people are awaiting shipments. Considering the pent-up demand of five years, achieving the target set out by the Government will certainly be possible as well as effortless,” he said.
Commenting on consumer trends, Rodrigo noted that with the demand for new vehicles, there would be price adjustments pertaining to several models in the used vehicle market, although this condition may not apply to all models. He also added that while electric vehicles were popular during the initial stages of importation, most people were now moving towards hybrid and petrol vehicles.
VIASL President Prasad Manage reiterated that adequate demand could be witnessed in the vehicle import market.
“When comparing the prices in the local market in December 2024, when demand for registered vehicles was still evident, the newer vehicles are currently arriving at that same price range. The demand for used vehicles is likely to decline and there will be significant demand for imported vehicles.”
He also clarified that no preorders had been canceled, adding that demand could be witnessed in all vehicle models. According to Manage, there will be no issues in reaching the tax revenue targets set by the Government on vehicle imports. He also added that importers hoped that any leakages would be addressed and resolved by the Government in order to facilitate the process of reaching these targets.
Revenue limitations due to age limits
Moreover, Vehicle Importers’ Association of Lanka (VIAL) Chairman Indika Sampath Merenchige stated that many people, especially those who had been looking forward to the lifting of the ban, had already imported and purchased vehicles.
According to Merenchige, some people are also waiting to examine the shifting market trends and pricing based on duties resulting from the importation of vehicles. Further, importers expect imports to increase following the arrival of the first batch of vehicles that took place on Tuesday (25).
“We don’t notice any decline in demand, with models such as Toyota Yaris, Nissan Dayz, Honda Vezel, and Alto being the most in demand,” he said.
However, Merenchige said that it was difficult to estimate how demand would be sustained over the years due to high prices and affordability.
“We have requested the import of vehicles that are no older than five years, as that will help with affordability and people’s purchasing power. Limiting imports to vehicles that are not older than two years constrains the market; expanding it to five years will yield a higher duty alongside a low dollar outflow, as the duty revenue remains the same for the Government with just the cost factor being reduced,” he explained.
Therefore, he explained that limiting imports to newer vehicles impacted Government revenue, without which it could earn over three times as much, reaching approximately Rs. 900 billion.
Overall demand lower than expected
Meanwhile, speaking to The Sunday Morning, Ceylon Motor Traders’ Association (CMTA) Chairman Andrew Perera revealed that although there had been some interest from businesses and individuals in essential vehicle categories, overall demand remained lower than expected.
Further, he noted that the combination of heavy import duties, VAT, and other levies had pushed prices beyond the reach of many buyers, particularly in the middle-income segment. Additionally, financing constraints and high interest rates have further dampened demand.
“Pre-orders have been relatively modest, mainly concentrated on compact and fuel-efficient vehicles, with limited traction in the luxury and mid-range segments. If affordability issues persist, the projected revenue target of Rs. 700 billion may be challenging to achieve within the expected timeframe. However, it’s too early to predict.”
Commenting on meeting revenue targets, Perera explained that in order to ensure that the Government met its revenue target while maintaining a steady market demand, it may need to review the tax structure and make certain amendments considering the overall demand. However, the CMTA does not expect changes to take place in the short term.
Outlining several consumer trends that had emerged in response to the current vehicle pricing and taxation landscape, Perera noted that there was a shift towards smaller, fuel-efficient vehicles due to fuel costs and high taxation which made large vehicles less attractive, causing consumers to opt for compact and hybrid vehicles.
Extended vehicle usage is another trend, as many consumers are holding on to their existing vehicles for longer due to high replacement costs, leading to increased demand for spare parts and maintenance services.
Moreover, Perera added that there was corporate and fleet demand over individual buyers, with businesses and commercial fleet operators being the primary drivers of the current demand, focusing on essential vehicle purchases rather than discretionary ones.
“The Government’s revenue target is ambitious, but achieving it requires a balanced approach that considers both fiscal needs and market realities. A more strategic tax structure, supportive financing policies, and a phased import strategy could help stabilise the market while ensuring sustainable revenue generation. The CMTA is willing to collaborate with policymakers to create a long-term plan that benefits both the economy and consumers,” Perera added.
Uncertainty around achieving targets
The Government is anticipating an additional Rs. 929 billion as revenue in 2025. In 2024, its total revenue amounted to Rs. 4,031 billion, while in 2025, the revenue target is set at Rs. 4,960 billion – a 23% increase.
Similarly, tax revenue is also expected to increase by 24%, from Rs. 3,705 billion to Rs. 4,590 billion. Overall, the estimated total tax revenue to GDP is to reach 13.9%, with a 60% increase in tax revenue from taxes on goods and services. This indicates that part of the revenue growth is expected to arise from liberalised motor vehicle imports.
Speaking to The Sunday Morning, University of Peradeniya Professor in Economics Wasantha Athukorala noted that in this context, taxes on goods and services were expected to reach Rs. 571 billion. Due to the five-year ban, there is an expectation from the Government that people will import substantially.
However, expressing doubts, Prof. Athukorala said: “If we consider the income distribution across the country, the segment of people owning a large share of the income remains marginal and only this group of people possessing purchasing power will resort to importing. This will ensure that imports will fall short of Government expectations. Therefore, Government revenue will be less than expected for 2025 and achieving the vehicle tax revenue target will prove to be challenging.”
He explained that as most prices had surged, the affordability of purchases remained limited, making it difficult for people to afford even used vehicles in the market. Revenue from vehicle import taxes has remained marginal in comparison to other main taxes, according to him.
Commenting on alternative sources of revenue, Prof. Athukorala explained that there were several ways to improve the tax system and revenue in the country, given that the existing tax system was plagued with issues.
While several tax revisions have been made, Prof. Athukorala observed that these had not been conducted following adequate analysis. They have also been implemented solely targeting International Monetary Fund (IMF) requirements in order to fulfil revenue targets without efficient consideration of issues pertaining to economic expansion and people’s purchasing power.
“This discourages business activities. The tax base should be expanded alongside reducing tax rates in order to absorb more people into the system. Reducing the threshold leads to individuals submitting tax papers fraudulently by reporting lower turnover. Further, the majority of the transactions in the country are not recorded and digitalisation should be employed by creating adequate digital transaction systems.”
He also highlighted the need to consider aspects such as tax evasion, development of a mechanism to identify income/expenditure patterns, human resource shortage concerns, and expansion of capacity and facilities of the Inland Revenue Department (IRD) in order to improve tax revenue.
Tax surge and tax revenue
Currently, the new vehicle tax structure includes five taxes at the point of importation. Applicable taxes are a Customs duty of 20%; a surcharge tax at the rate of 50% on the applicable Customs duty rate (either general or preferential); luxury tax rates of 60%, 80%, 90%, 100%, and 120%; and a 100% excise duty increase for electric vehicles.
University of Kelaniya Professor in Economics W.M. Semasinghe noted that the tax revenue expected from vehicle imports was high, at approximately 1.2% of GDP. However, due to the high costs of vehicles, collecting a high tax revenue and achieving this target remains in doubt.
“It might be difficult to achieve this target, which will affect the financing of the Budget. Moreover, there is no clear explanation regarding how the Rs. 2,200 billion budget deficit will be financed. Failing to collect the targeted tax revenues will lead to significant issues for the Government in terms of financing,” he said.
According to Prof. Semasinghe, imposing high taxes and discouraging vehicle imports is a positive aspect as there is an adequate number of vehicles in the country to match personal needs. He instead pointed to debt settlement as a primary concern at present.
Speaking to The Sunday Morning, University of Peradeniya Professor in Economics Ananda Jayawickreme also addressed the tax-induced price surge of vehicle imports beyond the expectations of people, questioning the demand at present.
He noted that if demand was not significantly high, the Government may not be able to collect the targeted revenue, resulting in a lowering of revenue expectations in future.
“In 2020, import duties amounted to approximately Rs. 114 billion. They amounted to Rs. 105 billion in 2023, a period when vehicle imports were not taking place. This suggests that vehicle importation has not accounted for a significant portion of Government revenue over the years, and expecting a large amount of revenue from taxes might not be plausible.”
Prof. Jayawickreme noted that import duty tax rates had increased by 6%. However, the anticipated increase in revenue also factors in the increase in vehicle prices in rupee terms, with the percentage of revenue collected being higher.
“The Government will have to wait longer to assess the actual revenue that can be achieved. The used vehicle market also remains somewhat stagnant, while many expect the market demand to rise.”