Taxing aspirations

THE momentum of car imports will slow down following the Government’s decision to increase taxes. At this juncture it is relevant to analyse the thought process behind the reversal of taxes to understand whether there are any positive points in the inconsistent policies practiced by the Government.

Less than a year after vehicle taxes were slashed by a remarkable 50%, which created an almost euphoric environment for the motor industry, the situation has almost made a U-turn. Studies showed that in 2010 vehicle imports roared up by an impressive 215% to Rs. 117 billion from a mere Rs. 37 billion in 2009.

Unsurprisingly, the demand for small vehicles is robust with over 12,000 cars with 1,000 cc or less engine capacity imported last year. In terms of quantity, imported motorcycles and auto trishaws surpassed all other types of vehicles. Each year Sri Lanka imports over 100,000 motorcycles but in 2010 this grew by a whopping 97% with imports topping 200,000 for the first time in history.

Trishaw imports of 40,000 grew by 194% to record over 80,000 vehicles and the diesel trishaw market, which is seeing increased popularity, recorded a phenomenal growth rate of 427%. The latter of course grew from a low base of just 1,000 trishaws in 2009 to over 7,000 in 2010. Therefore, it is fair to term the situation as getting slightly out of control. Sri Lankan roads are ill-equipped to handle the massive surge of vehicles resulting in road safety and this was cited as one reason for the increase in duty.

Another point is that the Government is in need of extra revenue due to the high food and oil prices in the global market. Whether increased duty on vehicle imports was the most constructive way to gain extra revenue is still an open question since most middle income families aspiring to a vehicle will feel disappointed by this measure. Also there is a strong clamp down on hybrids that will create consternation to a public that views it as both an environmental friendly and money-saving option.

Around 3,000 hybrids are reported to have been imported within the last two months – a strong jump from the 426 recorded for 2010. However, the brakes have been applied for this with engine capacities less than 2,000 cc hitting taxes of almost 50%. Hybrids between 2,000 cc to 3,000 cc will see total duties reach nearly 75% and vehicles above 3,000 cc to 100%. In addition the excise duty on small hybrids was raised by 8% but total duties will increase by a large amount when added.

Even though the Government has stated that no cars older that two years can be imported for environmental reasons, it is obvious that if the taxes remained low then people would be naturally inclined to opt for newer models or hybrids since maintenance and fuel efficiency would be better. If the Government is interested in protecting the environment and creating better living standards for the average person, then this is possibly the worst step that it could have taken.

If the Government needs revenue, then there are better ways to manage public expenditure rather than increasing vehicle taxes. Moreover, this move comes after 220 Members of Parliament have made use of their duty free permits. Public servants may have this option, but there are many others who aspire to the privilege of owning a car. Increasing the comforts of public transport as a way to reduce private vehicles on the road would be a better option rather than controlling vehicle imports, which are a short-term effort at best.