Sri Lanka will be lifting its restriction on the importation of motor vehicles for commercial purposes in February after almost five years of having banned it.
With the news of the lifting of restrictions, most vehicle importers have been advertising prices of brand new vehicles, requesting advances to be placed in order to reserve the vehicles.
However, in a recent extraordinary gazette issued under Section 3 of the Excise (Special Provisions) Act No.13 of 1989 by the Minister of Finance, Planning, and Economic Development, excise duties of almost all Harmonised System (HS) codes had been updated based on the indexation method.
Accordingly, the Finance Ministry said that excise duty on items including motor vehicles and cigarettes had increased by 5.9% as per the inflation-adjusted indexation implemented in 2024.
These increases in excise duties have especially affected those who were waiting to acquire new imported vehicles, as importers argue that the general public will not be able to afford new vehicles under these new taxes.
Excise duty will raise taxes by 60%
Speaking to the media last Sunday (12), Vehicle Importers’ Association of Lanka (VIAL) President Indika Sampath Merenchige said that the recent increase in excise duties would raise taxes imposed on imported vehicles by 60%.
He said that at present, excise duty was adjusted annually according to inflation as per the conditions of the International Monetary Fund (IMF), whereas earlier, excise duty adjustments had been announced during the budget.
Merenchige added that with the recent increase in excise duties, the taxes on a Wagon R car, which had been commonly imported to Sri Lanka before the ban in 2020, had increased from 16% to 18%, which amounted to approximately a Rs. 250,000-300,000 increase in taxes.
Furthermore, he said that during the 2015-’19 period, excise duty and Value-Added Tax (VAT) on vehicle imports had been combined into a single tax, while with the expected relaxation of imports in February, excise duty and VAT would be implemented as separate taxes in accordance with IMF conditions.
“Therefore, we request the Government to take the Social Security Contribution Levy (SSCL) payment at the Colombo Port itself,” he said, adding that if excise duty, VAT, and SSCL were charged separately on imported vehicles, a Wagon R would incur Rs. 2.8-3 million in taxes alone.
Merenchige further noted that while it would have cost around Rs. 1.6 million in taxes to import a Wagon R when there had been a single tax in the past, this had now increased by 60%.
He added that the Toyota Vitz, another car brand with popular demand in Sri Lanka, had seen its taxes increase from Rs. 2 million in 2020 to Rs. 5 million this year.
Used vehicles to be unaffordable for many?
Merenchige said that the Government was allowing the importation of vehicles used up to just three years from markets such as Japan, which was still considerably expensive for a market like Sri Lanka.
He added that despite requests from importers to increase the limit to seven years so that affordable vehicles could be brought into the country and President Anura Kumara Dissanayake’s concurrence that cars used for at least up to five years should be allowed to be imported, Finance Ministry officials were still not allowed to do so.
Merenchige further noted that finding vehicles used for up to three years in Japan was now difficult as most Japanese were using their vehicles for at least five years due to the economic situation in that country.
“If the Government doesn’t increase this limit to more than five years, people will not be able to afford a good vehicle once import restrictions have been lifted,” he said.
Merenchige added that if the Government allocated only $ 1 billion for vehicle imports annually, and if vehicles used for more than five years were allowed to be imported, importers could then bring in at least 40,000 vehicles, considering the average price of a vehicle to be at $ 25,000, whereas the volume imported would decrease by half should the three-year limit remain unchanged.
He further noted that vehicles used for a duration of up to only three years had now altered their prices between Rs. 1-5 million in relation to prices before the import ban in 2020, a figure that could not be borne by Sri Lanka’s middle class.
However, he said that due to the increased prices, excise duties, and VAT increases that vehicle imports were subject to, the Government would not add another tax to vehicles as it would drive prices even higher.
He added that 1,000 cc vehicles, which had usually been imported for the middle-class market, were now being priced at Rs. 5-10 million.
Vehicle imports subjected to four taxes
Speaking to the media on Monday (13), Vehicle Importers’ Association of Sri Lanka (VIASL) Chairman Prasad Manage said that according to a Cabinet memorandum issued in September 2024, imported vehicles were subjected to four taxes: excise duty imposed based on engine capacity, special import tax based on import value of the vehicle, luxury tax for vehicles valued above Rs. 3.5 million, and VAT, which will be based on the overall value of the vehicle, including the other three taxes.
He added that the Government was yet to mention an exact date when the import ban on motor vehicles would be lifted, although it had said that it would be lifted in February.
Manage further noted that during discussions with President Dissanayake, the latter had assured importers that the sale value of motor vehicles would not be subject to a huge increase compared to their actual market price.
However, Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe said that the prices would increase significantly above the current market price when taxes were imposed.
The VIASL Chairman said that when compared to the taxes of 2020, when calculating the current taxes, there could be a 400-500% increase considering the current Cost, Insurance, and Freight (CIF) values.
However, he said that the exact price fluctuation in Sri Lanka’s second-hand vehicle market could only be determined once the vehicles were imported to the country, adding: “Based on the current conditions, we cannot expect a huge reduction in their prices.”
Moreover, he said that it was difficult to determine the precise sale price of an imported vehicle without proper knowledge about the tax base and the duties involved.
Nevertheless, he warned the general public not to pay advances for vehicles at the moment and urged them to wait patiently until the exact prices were announced by importers once the vehicles were brought in.
Furthermore, he said that the Government had informed vehicle importers that it could allocate only $ 1 billion per annum for vehicle imports, which would allow about 40,000-50,000 vehicles to be imported annually.
Manage added that the Government had informed them that the Treasury was expecting to cover the majority of the additional 2% of GDP in tax revenue required for 2025 through taxes from vehicle imports in order to ensure a total tax revenue of 15% of GDP.
Huge volumes to be imported once ban is lifted
Speaking to The Sunday Morning, Softlogic Stockbrokers Co-Head of Research Raynal Wickremaratne said that most vehicle importers were reselling second-hand vehicles at present as they lacked the required inventory.
He said that most of that inventory had been cleared 1-2 years after the banning of vehicle imports in 2020.
Wickremaratne further noted that since the import ban would be lifted in February, most importers would look to restock vehicles with huge import demand.
“Whether that demand will translate into consumers buying immediately or whether consumers might have a slower shift towards vehicles is yet to be seen,” he said.
He noted that some of the brand-new imported vehicles were at a relatively high-end market level rather than a low-end or middle-end market.
Wickremaratne added that low-end and middle-end vehicle consumers would be purchasing vehicles from the second-hand market and would not purchase the new imported vehicles.
“Initial consumer demand for vehicles will come from the upper middle to higher income class and businesses which are looking to change their vehicles used for operational activities,” he said.
Consumer demand increase will take time
Wickremaratne said that once vehicle imports opened up, it would be relatively affordable for everyone to own a vehicle, as the second-hand vehicles that the middle class could not afford previously would see their prices decrease with new vehicles storming the market, which would also allow the upper class to be able to afford new vehicles matching their expectations.
However, he noted that the market would not reach an equilibrium as soon as the import ban was lifted, with there being a period where people would have to adopt a wait-and-see approach especially in relation to the second-hand market, in order to see where prices would settle.
“Once there is equilibrium in the market, then the consumer demand for vehicles will start to kick in,” he said.
Further, he noted that leasing would become a viable option for consumers with the low interest rate environment.
Budget proposal will decide demand for vehicles
Wickremaratne also said that the budget would have a significant impact on the consumer demand for imported vehicles.
“However, some budget proposals related to vehicle imports will not see immediate implementation,” he said
He added that if implementation happened 3-6 months after the passing of the budget in Parliament and if it was likely to affect vehicle prices, there would be immediate transactions taking place in the consumer market.
Excise duties not finalised
Speaking to The Sunday Morning, KPMG Sri Lanka Tax and Regulatory Division Principal Suresh Perera said that the excise rates that had been increased were based on the decision to annually revise duties based on inflation, which did not apply to motor vehicles but to products such as cigarettes instead.
“I don’t think these rates have been finalised,” he said, adding that there could be changes in these rates next year based on inflation performance.
Govt. yet to finalise all taxes for vehicle imports
Speaking to The Sunday Morning, Department of Fiscal Policy Director General Dr. Kapila Senanayake said that the Treasury was expecting more than 1% of GDP revenue from motor vehicle taxes, which would help the Government to achieve its primary surplus target of 2.3% of GDP by the end of 2025.
However, he said that the Government had not finalised the taxes that would be imposed on the importation of motor vehicles.
Moreover, the Director General said that the excise duty indexation was done through a Cabinet-approved formula, which had other variables apart from inflation.
“If there is an excise article in rupee terms rather than as a percentage, it will be increased in rupee terms, but there won’t be any increase in percentage points because that is already captured,” he added.
Senanayake added that the import restrictions would be lifted by the first week of February and that the taxes for vehicle imports would be finalised and announced prior to that.