National Budget 2022 and impact on motor vehicle importation

Vehicle importers have faced major difficulties maintaining their business premises, paying off bank loans, rent and paying the salaries of their employees

Due to the inferior quality of these vehicles lacking adequate safety and emission standards, sold by these assembling companies, the Sri Lankan citizen is at a loss. Furthermore, most of these vehicles are not allowed to be run in their respective manufacturing countries as they do not meet international quality and safety standards and Sri Lanka is generally used as their testing grounds

By Vehicle Importers Association of Sri Lanka 

We are an association inaugurated in the early 1980s as the Vehicle Importers Association of Sri Lanka (VIASL). Our members are the pioneers of the motor vehicle trade in Sri Lanka. 

a)Import ban to continue 

The Government has imposed a complete ban on importation of motor vehicles since March 2020 sighting foreign currency outflows as the main reason. This has negatively impacted the Sri Lankan economy as well as vehicle importers and all related industries. As per the National Budget 2022, the ban is to continue further in the foreseeable future. When inquired about this decision from Finance Ministry officials, we have been informed that importation of vehicles is an area that they have not even considered due to the prevailing foreign currency issue. 

b)Special Goods and Services Tax (SGST) for motor vehicles 

Furthermore, an additional Special Goods and Services Tax (SGST) has been imposed for the motor trade. At a time when our industry is struggling to survive, we believe a tax of this nature is extremely unfair. Due to the high value of vehicles, it will affect selling prices considerably if an additional SGST is to be implemented on motor vehicles. 

c)Amnesty to be provided for illegally imported motor vehicles

An amnesty is being proposed for illegally imported motor vehicles to be registered legally. As per this proposal, vehicles that have come in few pieces and illegally imported vehicles will be given the opportunity to register legally. This is an extremely dangerous practice as some of these vehicles are not roadworthy (passenger safety and pedestrian safety). Furthermore, it encourages smuggling of vehicles evading import taxes. 

Moreover, it is extremely unfair on individuals who have paid legitimate taxes and imported vehicles. 

Normally a vehicle is condemned even when there is a minor chassis damage. However, with this system vehicles with the chassis cut into few pieces would be seen on the road. There are thousands of illegitimate vehicles such as these currently on the road. Legislation such as these will encourage importation of such units even in the future. As a responsible association and law-abiding citizens, we oppose this proposal wholeheartedly. 

Severe issues faced by vehicle importers and related parties 

Vehicle importers have faced major difficulties maintaining their business premises, paying off bank loans, rent and paying the salaries of their employees. Since we have been waiting for more than one and half years for importation to open up, it has brought us to a crucial juncture in which most traders have decided to close down their businesses. As a responsible association we are fully aware of the unprecedented pressure the pandemic has brought upon the Government. 

Various diverging tactics to control the prices and the frustration of the general public 

However, we expect a credible survival plan as well as the fullest support of the Government for us to overcome our difficulties. Instead, the Government has been carrying out various diverging tactics to control the frustration of the general public and the vehicle importers. Last year the Government announced that the importation will be ‘Reviewed in December 2020’ and then in March 2021 they announced that they are considering a ‘quota system’ for vehicle importation. 

In October 2021, various statements were made regarding a scheme in which local taxes could be paid in US dollars and vehicles to be imported without a dollar outflow. This system was again discarded by the Finance Ministry due to its obvious drawback of money laundering. It is simply evident that these are strategies by the officials to control the ‘price bubble’ and to defer the issue in hand. 

The truth behind the US Dollar import system that was rejected by the Ministry of Finance   

Various statements have been made regarding a scheme in which vehicles could be imported through a system where local taxes could be paid in US Dollars. However, it is not possible to implement a system such as this without exacerbating the current dollar crisis. 

As vehicle importers who have been carrying out this trade for generations, we do not recommend such a system as it will lead to various malpractices. This we believe will result in a reduction of the net dollar inflow, as regular remittances will be sent in the form of vehicles. Such a system will pave way for few individuals who would exploit this opportunity for short-term gains making the future bleak for genuine importers while worsening the dollar crisis.   

This is a system proposed by Sri Lankan exporters living in Japan. They have made several pleas to the Government to allow them to export vehicles they have purchased and pre-ordered targeting the Sri Lankan market. Hence their main intention is to export out their stock of vehicles using any means possible. As much as VIASL agrees that they should be given the opportunity to export those units once the country is in a stable situation, we do not agree that this method is the right one. 

If such a system it to be implemented, it will only encourage a system in which Sri Lankan rupees will be sent out illegally through unofficial channels to purchase these vehicles and the import tax to be paid in dollars. It is also a fact that the unofficial rate of the US dollar has far surpassed the official dollar rate of Rs. 200 imposed by the Central Bank. Due to this difference in the official and unofficial dollar rate, the Government is losing out on legitimate remittances as remitting these dollars through unofficial channels has become more lucrative. 

Hence, a system in which vehicles could be imported by paying taxes in US dollars will only increase the demand for unofficial US dollars. Consequently, it will further weaken official dollar remittances and create an imbalance in the economy. This will increase the inflation further and price of essential good and commodities will rise to a record high level. 

Through various media platforms, these Japanese exporters have made several claims that importation of vehicles by paying taxes in USD is the ‘patriotic’ method of saving our country from the dollar crisis in hand. As a responsible association with a genuine interest in longevity we do not recommend a system that would encourage illegitimate remittances. However, VIASL kindly requests these so-called patriots to invest their foreign earnings in Sri Lankan term deposits to strengthen our dollar reserve as opposed to misleading the Government.  

Prevention of tax evasion of vehicle manufacturing and assembling industries 

The local assembling system promoted by the Government does not appear to have met its objective as it has drastically reduced the Government revenue while sending out a considerable amount of dollars. When considering the assembling data, we estimate the income loss for the Government to be around Rs. 6 billion-Rs. 7 billion in 2020/2021. For the same period around $ 50 million-$ 60 million (estimate) has been sent out of the country to import components/spare parts required for assembling.  

VIASL strongly believes that this process does not add any value to the country’s economy and is merely designed to benefit from the tax concessions that are being offered in order to maximise their profitability. The local assembling companies mainly import an almost finished product and add minimal value to it. Hence the CIF (Cost, Freight and Insurance) value or the amount of foreign currency sent out of the country is perhaps more than the CIF value of a good quality Japanese vehicle; due to economies of scale and lean production mechanisms used in large scale manufacturing. 

However, the import tax paid for a locally assembled vehicle is far less compared to the import tax paid for a car imported by our dealers. The loss of Government revenue does not justify the minimal number of employment opportunities offered by these assembling workshops.

Due to the inferior quality of these vehicles lacking adequate safety and emission standards, sold by these assembling companies, the Sri Lankan citizen is at a loss. Furthermore, most of these vehicles are not allowed to be run in their respective manufacturing countries as they do not meet international quality and safety standards and Sri Lanka is generally used as their testing grounds.

At an era where safety of a vehicle and its environmentally friendliness is of utmost importance globally, Sri Lanka seems to be lowering its standards through this inferior assembling process. Also, it’s a fact that the repair cost is extremely high on a locally assembled vehicle. Furthermore, the after-market value of a locally assembled vehicle is far less compared to a high-quality Japanese vehicle. 

Considering these facts, we propose an increased import tax rate for assembling companies and importation of components need to be put on hold until the current dollar crisis is resolved. Strict measures need to be taken to monitor the quality and standard of these units.  

 Cost of a motor vehicle if it is to be imported today 

It is a fact that prices of all goods and services have increased drastically after the COVID-19 pandemic. When making an educated analysis, even vehicle prices would increase drastically if we are to import them with current market conditions due to the four main factors listed below:   

1) Exchange rates have risen drastically and all currencies have appreciated against the Sri Lankan rupee. 

2) Global car prices have risen by 30%. When evaluating current market prices of used cars in countries such as UK, Japan, Australia and Thailand, it is evident that prices have increased after the pandemic due to issues with supply chain. Production of brand-new vehicles is facing severe delays due to lack of components and spares and as a result used car prices have increased globally.    

3) Freight and shipping charges have increased by four times after the pandemic due to various issues and this has resulted in shipping charges increasing to unprecedented levels.  

4) Most vehicles on the road have been cleared without luxury tax that was implemented in the latter stages of 2019. The newly implemented luxury tax is a considerable amount and will definitely increase the price of vehicles.  

Overall, if a vehicle is to be imported with current market conditions, it will cost 60%-70% more than pre-pandemic prices. 

Controlling local vehicle prices 

It is a fact that the vehicle prices have drastically increased over the last few months. Although VIASL believe that this is mainly due to the economics of demand and supply it is evident that individuals from various other industries have entered the market of buying and selling used vehicles, this can be attributed to the difficulties experienced in their respective industries (tourism, gem exports, etc.) due to the natural effects and restrictions imposed as a result of the prevailing pandemic.

In order to control prices or prevent individuals from unreasonably increasing the prices, we suggest to use the Loan to Value ratio (LTV) as a tool. We believe that this will safeguard the interests of financial institutions and the banking sector from any adverse effects in the event of any drastic changes to the used motor vehicle industry.

Another factor contributing to the increase in used vehicle prices is the rapid increase in the prices of locally assembled vehicles. Over the last 12 months the prices of locally assembled vehicles have gone up at least on three occasions. VIASL believes that these price increases aren’t proportional with factors affecting costs of local assembling (exchange rates, international freight rates, etc.). 

Furthermore, considering the large profit margins the local assembling companies are enjoying due to enormous tax concessions provided to them by the Government, they are in a position to reduce prices and pass on some of the benefits to the end consumer. Vehicle assembling has thrived in the last two years due to the import ban of motor vehicles and this situation has created a monopoly. Hence, we strongly recommend to implement a mechanism in which prices of locally assembled manufacturers are being controlled. 

Conclusion

In order to streamline the importation and to protect local consumers when the Government is in a position to import motor vehicles, a mechanism in which genuine importers are identified should be introduced. Importation of motor vehicles is not regulated, hence carried out by various ‘seasonal’ importers whose identity is not discoverable after a few months. Due to insufficient restrictions, the number of individuals posing to be genuine importers on various platforms of advertising have committed various frauds and have obtained large advances from customers in order to import vehicles and have not returned them sighting various reasons. 

There should be a mechanism in place to ensure that all vehicle importers are being monitored under various legal and ethical criteria. The introduction of such a system would immediately boost Government income tax revenue, which could be used for the benefit of the general public. Furthermore, this system will definitely reduce the dollar outflow due to the controls in place. Above all, Sri Lankan consumers will be protected from various fraudulent activities.

There should be a mechanism in place to ensure that all vehicle importers are being monitored under various legal and ethical criteria. The introduction of such a system would immediately boost Government income tax revenue, which could be used for the benefit of the general public. Furthermore, this system will definitely reduce the dollar outflow due to the controls in place. Above all, Sri Lankan consumers will be protected from various fraudulent activities

As veterans who have been carrying out this trade for decades, we wish to make a request from relevant Government officials, to take our input on board when opening up importation. We believe our knowledge in this subject will be vital in devising a sustainable solution.