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POSTED AT 04:10 PM 30-12-2018

Small car taxes likely to fall

Image Courtesy: Carmudi

Sri Lanka is mulling to reverse the tax increase on small cars while even mid-sized sedans will become cheaper under a new taxation system following intense pressure and lobbying of motor traders at the end of a political crisis, official sources said.

Amidst concerns expressed by Indian automobile manufacturers, the Finance Ministry is likely to bring down small car duties back to what they were before August 1 or even reduce further especially for cars below 1,500cc engine capacity.

With the aim of curtailing an additional outflow of foreign exchange from vehicle imports, the government is to introduce vehicle engine power output based taxation (engine horse power) criterion in the 2019 interim budget an official source revealed.

The current engine capacity based taxation formula introduced in 2018 budget is to be replaced by engine power output based taxation to prevent tax revenue leakage, a senior Treasury official who wished to remain anonymous told the Business Times.

He said that the current system provided avenues for siphoning out money from the country as the CIF value is now not considered for duty calculations.

This system was helping money launderers and persons who wish to send money out of the country to do so by hooking up an invoice and siphoning out money, putting pressure on the already stressed foreign reserves.

The removal of the ad-valorem calculation method of duty on vehicles and introducing a taxation system of subsidising the duty on super luxury cars has resulted in the coffers losing around Rs. 25-40 million from each of these vehicles.

Confining the duty calculation on vehicles engine capacity and removing the ad-valorem calculation of duty introduced by the budget has resulted in making the super luxury category cheaper.

The previous system of calculating the vehicle import duty on the cost, insurance, freight (CIF) value of the vehicle has brought sizable revenue despite minor leakages owing to the under invoicing of certain importers, he pointed out.

Under the previous system the price invoiced or quoted by a seller includes insurance and all other charges up to the named port of destination, he explained.

With a view of introducing a fair and justifiable system of duty calculations, the Finance Ministry is weighing the pros and cons of the new taxation system linked to the vehicle engine output (Brake Horse Power BHP).

The proposed taxation system will compel the higher end super luxury vehicle buyers to pay a higher duty, closing a tax revenue leakage of the government as well as creating a level playing field and ensuring the survival of all players in the market, the official disclosed

Under the present taxation formula based on engine capacity, the same duty should be levied for different brands of vehicles with same engine capacity, he said adding that the value of those vehicles differ each other in quality standards.

It is not fair to charge the same duty for a 2,000cc Korean-made vehicle purchased for US$20,000 and a European manufactured one with same engine capacity purchased at $35,000, he claimed.

Citing an example, he noted that a European made model car with a CIF value of Rs.5 million (taxed at 130 per cent under the previous system) will be charged with the same duty of a Japanese made model with a CIF value of Rs.2 million (taxed at 300 per cent) thus depriving the government of a duty income of around Rs.7-10 million per vehicle, he added.

The Finance Ministry has focused attention on the additional outflow of foreign exchange on an expensive vehicle which does not bring in sufficient proportion of inflow to state revenue, he said.

However, he said that no final decision has been taken to introduce the engine horse power based taxation system and it is still under the process of evaluation and consultation.

Meanwhile the depreciation of the rupee against the Japanese Yen and the US Dollar has pushed the prices of imported vehicles by around 5 per cent making it difficult for motor traders to sell their vehicles.

The prices of all vehicles will go up by 5 or 6 per cent due to the depreciation of the rupee pushing sales volume down, Vehicle Importers Association of Lanka (VIAL) President Indika Merenchige said.

He added that the price of the fast selling Suzuki WagonR will go up to Rs.3.5 million from Rs.3.3 million.

Franchise motor traders complained that their business is on the verge of collapse and most of them have decided to retrench their staff as a cost cutting measure.

Around 1000 temporary and casual workers will lose their jobs under the present circumstances they claimed stressing the importance to maintain a constant policy on vehicle taxation in the country.

Bandula Sirimanna