Sri Lanka’s motor tax policies seriously questioned
View(s):The vehicle registration momentum continued into November due to the pre-November 20 budget surge and relaxation of loan-to-value (LTV) rule, a JB Stockbrokers research report said. “Total motor cars registrations recorded 10,054 units in November slightly down from 10,349 units in October, but significantly higher than 2,419 units recorded 12 months ago,” it said, adding that brand new car registrations recorded 6,682 units in November which is the second highest number on record slightly higher than 6,225 units recorded in October, but lower than the all-time record set in September of 9,427 units.
Running up to the budget, the Customs changed the basis of valuation on which duties would be charged, for example for a Nissan Leaf it is now around Rs. 4.35 million whilst previously the declared value was around Rs. 3.2 million which was due to a combination of under invoicing and lower values since they are pre-owned vehicles, it said. “How would you optimally tax vehicles? For the last 50 years no government has figured out how to optimally tax imported vehicles. The policy has yo-yoed depending on whether the country was facing a balance of payment crisis or the Treasury has a revenue shortfall or reacting to excess traffic on the road. Due to policy unpredictability the market places has seen idiosyncratic and discretionary behaviour,” it said, adding that when duties are reduced there is a surge of demand since consumers believe it will be short-lived; thus they don’t want to miss out.
“This invariably creates a spike in government revenues but places a strain on the balance of payments,” the report said, noting that periodically the permits with restrictions are issued to various interest groups – these in turn are flipped in the market defeating the rationale of issuing permits. Since permits come with restrictions, the supply side clamours to procure models that come within the defined threshold – the winners are invariably the ones who can genuinely match a suitable model to fall within the stated criteria or more likely the players who game the system by mastering the art of under invoicing, it pointed out.
Rationale
The report said that the “rate of duty is set depending on the size of the engine – one does not understand the rationale why it should be the criteria”. If the thought process is that larger engines equate to large size vehicles that doesn’t always hold for a BMW 520 and Mercedes Benz E200 as both engines are below 2L and attract the same duty level as a Toyota Corolla that has an engine size of 1.5, the report said. “Further, why should the rate of duty be different between a car with an engine size of 2L and 2.2L? Perhaps a progressive methodology should be used. There is a wide range of duties – one is not sure on what basis they have been decided.”
Personal vehicles serve a functional need to allow people to be economically active – go to work, trade, generate income by running a taxi service, etc, the report said, adding that the best evidence of its utility value is that people are willing to lease vehicles even though they are paying an interest rate of 24-28 per cent for two wheelers, 18-22 per cent for three wheelers, 14-16 per cent for used cars, etc. If vehicles become unaffordable economic activity will be affected. For the burgeoning middle class owning a personal vehicle has high aspirational value – it’s nice to have a Maruti Alto at home that is infrequently used, it also signals to the neighbours that the household is prosperous, the report said.
At the premium end of the market there is a snobbish value to owning a prestige brand. Thus there is a level of inelasticity for cars – the challenge is to set the taxes at a level that maintains demand – if set too high demand will slump due to unaffordability or customers buying an alternative with an equal utility – e.g. option for a duty free speed boat or yacht instead of a Mercedes Benz, it said.The research report said that congestion on the road should (not) be addressed via higher taxes on vehicles. Congestion is primarily an urban phenomenon and more pronounced at specific times of the day – thus congestion pricing has to be implemented in the cities to dissuade users from using their cars especially during peak times. “Penalising a car owner in Hambantota a town that has eight lane roads due to congestion in Colombo does not seem to be fair. We could be a pioneer by implementing dynamic congestion pricing using the mobile phone ecosystem – triangulate a vehicle’s location and price accordingly,” it emphasised.
It added that the level of duty should be based on value of the vehicle (not) on engine size or fuel type and it must be applied in progressive slab. “Offering permits to public servants as a remedy for below market wages is not tenable. Thus the recent budget announcement to pay a cash bonus in lieu of the permit was the right policy.”The report said that the cost of ownership of a vehicle has gone up considerably (rupee has depreciated by 7 per cent over the last three months, interest rates on leases are edging up) and the rate of duty has gone up by 10 per cent for the most popular hybrid vehicles and the customs valuations have been significantly revised upwards. “Its most likely that demand will drop dramatically due to lower affordability emanating from the depreciation of the currency, higher interest rates, lower LTVs and higher duties – tax revenues would also drop significantly requiring the Treasury to rethink its strategy,” the report added.