New vehicle taxes fail to reduce foreign exchange outflows
View(s):The system of calculating taxation on vehicle imports in November every year through the budget swings the prices up and down without considering the sentiment of motor traders and buyers, automobile sector analysts and tax experts told the Business Times.
The new taxation formula based on vehicle engine capacity has pluses and minuses and no one can ignore the negative aspect of the new system, an automobile sector analyst said adding that the new system of tax calculation is simple and is intended to maximise revenue and minimise leakages.
But the policy makers in the Treasury have ignored the outflow of foreign exchange due to import of luxury vehicles and the affordability of an average person to purchase a vehicle in Sri Lanka, he said.
The recent budget proposals removed the formula of calculating duty as a percentage of the value of the vehicles imported and adopted a system of calculating duty, purely based on the engine capacity of each vehicle.
This will result in billions of losses to the government and also affect the market competitiveness among brands, he pointed out.
The reason given by the authorities for this move is their inability to control importers declaring lower values for payment of customs duty and their inability to control their own employees at Customs which was already addressed with the current system so further revision was not necessary.
This new system is not in use in any other country in the world and the general principle of taxation is progressive taxation where the taxes increase as consumption and value increases, a tax expert disclosed.
The engine capacity based taxation system attempts to deprive middle income earners who aspire to buy an entry level vehicle whilst the super-rich have benefited by making selected super luxury vehicles much cheaper, he alleged.
Outlining the pluses of the new method, he said it is good in managing the issue of corruption by ensuring that the duty payable for a vehicle imported is a straight forward calculation based on the engine capacity.
However, the colossal loss of revenue to the government by way of high priced vehicles entering the country paying extremely low duties has been overlooked, he added.
He noted that the new method will also affect the balance of payments and foreign reserves.
Citing an example he noted that an over US$118,000 vehicle could be imported paying the same duty instead of a $24,000 vehicle simply due to the fact that the engine capacity of the two vehicles are the same.
“If we are to assume that on an average the loss per vehicle is Rs. 8 million the total loss to the government would be over Rs. 3 billion,” he said adding this goes against all attempts being made to improve the balance of payment and reducing the outflow of valuable and much needed foreign exchange.