Sri Lanka’s Car Taxes Hits Low End Market
By Dinouk Colombage
Sri Lanka’s car market which enjoyed a brief boom has once again plummeted due to the tax revisions. Car importers have been forced to pass on the increased cost to the consumer which has seen a decline in the demand for new vehicles.
With the tax hike many who have ordered and are awaiting delivery of their new cars are faced with dilemma of being forced to pay over a million rupees more. Some car buyers have even been forced to forfeit their down payments as they cannot afford the new prices.
Sahil Gunasekara, who had ordered a Nissan March, says he now faces a situation of being forced to pay a further LKR1.6 million for the vehicle. “Unfortunately when I ordered the car the papers I signed included a provision to pay the revised amount in case of a tax increase, I have no choice but to pay the additional amount as I sold my old car,” he said.
Gunasekara added that his previous car, a Honda Civic, was only three years old and he had sold it prior to the tax hike. “If I had held on I would have got a better price for the car. Now not only am I paying extra for my new car, but my old car was sold for a lot less than I potentially would have received,” he stated.
Gunasekara’s dilemma is not unique; Jagath Palasandiran a three-wheeler driver has also encountered a similar situation. He explained that his three-wheeler had met with an accident a month ago and could not be repaired. “My three-wheeler is my income; I immediately purchased a new one but was told I would have to wait for the new shipment. In that time the taxes have been increased which now sees me having to pay double for the vehicle,” he said.
Palasandiran added that he was now in a very difficult situation as he did not have the money to pay for the new vehicle, but he also needed the vehicle to continue earning an income. “The bank had refused to give me a loan as I had still not paid off my previous one, the three-wheeler is expected to arrive next week but I have no money to pay for it”, he said.
A despondent Palasandiran conceded that he may very well have to forgo his down payment for the new three-wheeler as he could not afford to pay the revised amount. “I paid a 20% deposit, I will have to forfeit that and look for a second hand three-wheeler. Unfortunately a reliable vehicle will be difficult to find”, he said.
Deputy Secretary to the Treasury, S. R. Attygalle, told media that the decision to increase taxes was taken to ensure foreign exchange was saved and fuel expenditure was reduced. He added that Sri Lanka’s trade deficit had increased with the high number of car imports and the growing fuel demands.
The government’s move to discourage potential car buyers has worked with many people being unable to avoid the new prices.
Dilruwan Dissanayake, a new car buyer, said that the increase in car taxes had dissuaded him from purchasing a new car. “I had planned on purchasing a new Maruti Suzuki, however, the increased taxes have now made that difficult too,” he said.
Dissanayake added that currently his wife and he uses his motorbike to go to work, “with my wife being pregnant I decided to purchase a small car which would be more convenient and safer for us”.
“The government has defended their decision to increase car taxes by saying that road congestion and fuel imports are too high. Yet I still see new SUVs (Sports Utility Vehicles) on the road, these vehicles are far larger and consume far more petrol than other cars”, Dissanayake complained bitterly.
According to the revisions the import duty on cars has gone up from 120-291% to 200-350%; on three-wheelers, it has gone up from 51-61% to 100%, and on motorbikes, from 61% to 100%.
An official connected with the Toyota car company, speaking on the condition of anonymity, explained that individuals who ordered new cars have “signed an agreement with the company that states they will pay if there is an increase in taxes.” This means that all pre-ordered vehicles will be sold at the new price; however, he added that current stock will be sold at the old price.
The government has also made it compulsory that all car shipments arriving in the country to dock at the Hambantota port. The official explained that this will mean that there will be an average increase of LKR15,000 per vehicle owing to the transport cost.
According to the official, the company is expecting a 50% drop in sales from last year, and they forecast that this downward trend will continue for a further year.
In a further blow to the car market, importers of reconditioned vehicles were slapped with a revised set of guidelines. The life span of vehicles permitted for import was reduced from 2 years old to 1 year for cars and five years to three and a half years for vans and SUVs.
The Vehicle Importers Association has predicted that unless a change is made to these new regulations many companies will be forced out of business.
Economist Haren de Sarem explained that on paper the tax increase for the smaller vehicles, the three-wheelers and motorbikes, appears lower than that which is placed on the cars. Yet people who purchase these vehicles often have a far lower income than those who have chosen to purchase a new car. De Sarem added that the percentage of lower income families earnings spent on a new car would have increased further than that of the higher incomes sectors. “You must add on the increased fuel prices to see how much car ownership will cost these families,” he said.
He further stated that the government’s strategy to reduce the number of car imports in Sri Lanka will work, “a large percentage of car imports are the smaller cars as well as the three-wheelers and motorbikes. In the short run the number of vehicles and fuel consumption will remain stable”.
De Sarem did add that these vehicles can be considered an essential commodity and eventually people will be forced to purchase new cars. “When people choose to purchase the new vehicles the impact it will have on the economy will be dependent on whether or not their incomes have increased to keep up with rising cost of living,” he concluded.
Sri Lanka’s dip in the car market is forecast to have a knock on effect in India, the largest car market from which Sri Lanka imports new vehicles. Bajaj Auto, India’s largest exporter of three-wheelers and motorbikes earns over 20% of its revenue from Sri Lanka. Leading up to March 2012, the company had seen a 54% increase in its exports to Sri Lanka in the fiscal year.
According to the firm the price hike instigated by the tax revisions had to be passed on to the consumers, which would mean that in the short to medium term there is expected to be a decrease in the sales volume. The company has shown confidence that Sri Lankan buyers will come to terms with the price hike and resume purchasing these vehicles. “All reports indicate that Sri Lanka’s economy is on the right track to recovery, once the signs are clearer people will once again start purchasing vehicles”, Rakesh Sharma, president of international business, told media.