The impact of tax decrease on the Sri Lankan vehicle market

The Sri Lankan government recently announced several changes to the import tax regime with effect from 01st June 2010. These include the reduction in the number of tariff bands, reduction in import duties, removal of the 15% surcharge on import duty and removal of taxes such as the VAT and Cess on some of the items [1] .

Through the above reduction, the government slashed vehicle import levies by around 50% with the removal of two out of nine taxes and levies imposed on imported motor vehicles (i.e. 15% surcharge on custom duty and the 10% Cess) [2] expecting to facilitate more imports and to develop the transport sector in the country. According to the import tax Act on vehicles, it encourages the importation of used vehicles (up to 3 ½ years old) [3] . The government expected to help lift car import numbers to the country as cars are taxed on average 300% [4] upon import which will help to boost vehicle imports significantly.

Further the Government expected to pass down the benefit to the public, which will in turn earn more revenue to the Government by way of taxes, as more volume of vehicles will be imported. The Government has expected a win-win situation with this. As per the tendency in Sri Lanka, majority hoped that they will be able to buy a Japanese manufactured vehicle for a reduced amount and this reduction will affect on the second hand vehicle market as well, which will be helpful especially for the middle income level persons too.

CHAPTER 2

METHODOLOGY

AIM

The aim of this paper is to identify the impacts of the import tax reduction introduced recently by the Sri Lankan government.

PROBLEM STATEMENT

5. Even though the Sri Lankan government has reduced the import duties on motor vehicles expecting a decrease in vehicle prices, it has been observed that this benefit has not gone through the vehicle prices of majority demands. With this tax reduction majority expected a big expansion at local vehicle market as well as a price decrease on second hand vehicle market. However the majority, middle income level people have failed to accomplish there desire to buy a Japanese manufactured vehicle but have to be satisfied with a vehicle like “Maruti” or “Alto” which are in a average price range. Hence, the predicament of this nature (though the tax decrease, the vehicle prices are not changed) is a matter needs to be investigated.

Hypothesis

Even though the Sri Lankan government removed two levies which was imposed on imported motor vehicles, the majority of the population in Sri Lanka did not get the benefits expected by the government through the tax reduction.

SCOPE OF THE STUDY

The scope of this research is to gather the views and ideas of public regarding the tax reduction imposed by the Sri Lankan government.

OBJECTIVES

5. General Objective. To investigate whether, the majority of Sri Lankans get the benefit given by the Sri Lankan Government by reducing vehicle import tax.

6. Specific Objectives. The specific objectives of the research are as follows;

To identify how the tax decrease effected on vehicles importing to Sri Lanka.

To identify the difficulties faced by the majority of Sri Lankans when purchasing a vehicle according to their choice. (Brand New/ Second Hand/ Unregistered).

To identify the impact of tax decrease on the Sri Lankan second hand vehicle market.

To identify the impact of tax decrease on the vehicles that assembling in Sri Lanka.

To identify the impact of tax decrease on the Sri Lankan economy.

METHOD OF DATA COLLECTION

8. This study was carried out based on a survey. Further, a survey was carried out to investigate whether any secondary data are available in this issue by referring literature. It was intended to gather information as follows ;

9. Primary Source. Primary source of collection of information was done through interviews with key individuals such as the Sales Manager of Micro………, Owner of the Ishara Traders as they are the experts who are well experienced in the industry and questionnaires Q-1 (Annex “A”) and Q-2 (Annex “B”) were distributed among the persons who purchased a vehicle during the last 4 months and car sale owners. Questionnaire Q-3 (Annex “C”) was distributed among the persons with several income levels who are willing to purchase a vehicle.

10. Secondary Source. Secondary source of collection of information was done through Sri Lanka Customs, Central Bank Annual Report 2009, paper articles, web articles and relevant databases.

SAMPLING

10. Samples were been selected using random sampling method as follows.

a. Sample-I. Altogether 20 respondents who purchased a vehicle during the last 4 months consist of upper class and middle class.

b. Sample -II. Altogether 10 respondents, car sale owners, consist of second hand car sale owners and brand new/reconditioned imported car sales owners.

c. Sample -III. Altogether 20 respondents with several income levels who are willing to purchase a vehicle.

TECHNIQUES OF DATA ANALYSIS

11. The data obtained through the interviews, questionnaire and through literature was subjected to qualitative analysis.

LIMITATIONS

12. The time available to conduct this research will be only 3 months. The length of the paper will be limited to 5000 words, and it will not be possible to collect data from personnel from various areas in Sri Lanka. Hence, research will be accomplished through the data obtained from the personnel of Colombo district.

THE STRUCTURE OF THE PAPER

16. This research paper is structured as follows ;

a. CHAPTER I This is the introductory part of the research paper.

b. CHAPTER II This Chapter covers the Methodology.

c. CHAPTER III This Chapter consist of the background of the duty reduction introduced by the Sri Lankan government on imported motor vehicles and the scheduled way of adapt the new duty decrease and the expected changes to the vehicle market as well to the Sri Lankan economy.

d. CHAPTER IV This Chapter will cover the outcome of the duty decrease on motor vehicles……………………..

e. CHAPTER V This Chapter will cover the data which collected through questionnaire and analyzes them accordingly

f. CHAPTER VI Conclusion.

CHAPTER 3

BACKGROUND

THE PROPOSAL OF DUTY DECREASE ON IMPORTED VEHICLES

15. The Sri Lankan government recently removed two import levies out of nine levies imposed on imported motor vehicles and the nine band import tax structure [5] on automobiles were included;

Six fixed taxes

a. Port and Airport Development Levy (PAL) of 5%,

b. Surcharge of 15%,

c. Nation Building Tax (NBT) of 3%,

d. Social Responsibility Levy (SRL) of 1.5%,

e. Road and Infrastructure Development Levy (RIDL) of 2.5%,

f. Value Added Tax (VAT) of 20%

Three ‘varying’ taxes

a. Customs Import Duty (CID),

b. Cess

c. Excise Duty

From the tax reduction the government removed the 15% surcharge on Customs Duty and 10% CESS on motor vehicle imports. This reduction narrowed the range of taxes from 90% to 280% of the Cost, Insurance and Freight (CIF value). Before the reduction, the taxes and levies added 150% to 500% to the cost of an imported motor vehicle. At that time the import duty and levies on a midsized family car was around 300% of the CIF value.

16. The number of the brand new vehicles registered in 2008 was 25,325 and in 2009 were 7,437 which was a 70.63% massive drop. Government tax revenue, in contrast to Rupees.17.4 billion earned in 2007, dropped to Rupees 11.06 billion in 2008 and Rupees 3.25 billion in 2009 [6] . With this continues drop in revenue, the Sri Lankan government imposed an import duty reduction expecting that the motor vehicle sales which had dried up to pick up aggressively over the second half of 2010 boosting government revenue by widening the trade deficit through an increase in vehicle imports.

THE SCHEDULED WAY OF ADAPT THE NEW DUTY DECREASE

Table 1 : TARIFF STRUCTURE FOR IMPORTS 2010.

Table 02: Deference between the previous and new tax structure on import of vehicles [7] .

Vehicle Category

Previous Tax %

New Tax %

Change %

Cars – Petrol

< 1000cc

187

90

52%

1000cc<1600cc

217

118

46%

1600cc<2000cc

288

150

48%

2000cc<3000cc

299

150

50%

3000cc>

299

190

36%

Cars – Diesel

< 1600cc

12

178

57%

1600cc<2000cc

510

185

64%

2000cc<2500cc

524

271

48%

2500cc>

524

280

47%

Cars – Electric

Any

144

68

53%

Auto Trishaws

Petrol

68

40

41%

Diesel

47

40

15%

LG Gas

43

40

7%

Electric

50

40

20%

Vans – Petrol

13 < 17 persons

187

121

35%

Vans – Diesel

13 < 17 persons

281

152

46%

Double Cabs

Any

366

152

58%

Luxury Vehicles – Petrol

10 < 13 persons

299

181

39%

Luxury Vehicles – Diesel

10 < 13 persons

524

290

45%

Motor Cycles

Any

68

68

0%

EXPECTED CHANGES OF VEHICLE MARKET

The expected changes through the reduction were to give the benefit to both importers and buyers as the prices of cars will come down drastically and it was expected that more brand new and reconditioned vehicle will be enter to the market and the prices of the second hand vehicle market also will come down simultaneously making an automobile reality even for less affluent families. A decrease in the prices of average ranged vehicles such as Maruti which will be a benefit to the majority, middle income persons. Further hoped that more number of average ranged vehicles will enter to the market than the luxury vehicles.

An average vehicle may come down by Rupees 300,000 and a Sport Utility Vehicles (SUV) by about Rupees 3 million. With the price decrease it was expected that the demand for small vehicles would increase. Further it was expected that the decreasing prices of vehicles will be a benefit for the travel industry as well and will support the expanding tourist activity and rising level of tourist arrivals.

An Indian made Maruti which had attracted excise duties up to 183% of its value will come down to 90%. Maruti 800 which was priced around Rs.1.3 million will come down to around Rs.790,000 after the reduction. Maruti Alto 800 which was sold at 1.7 million will come down to around Rs.1.3 million. The brand new Indian manufactured Suzuki Swift which was priced Rs.3.1 million earlier will come down to around Rs. 2.4 million. The KIA Sorento (Diesel) Jeep which was around Rs.14.8 million will come down to around Rs.10 million including VAT. Reconditioned Nissan vehicle which was sold for around Rs.23 million would come down to around Rs.20 million.

Specimen Calculation for a Brand new Yaris under new and old tariff (IN USD)

New

Old

Consignment Price

11000

11000

Insurance and Freight

3000

3000

14000

14000

Duty

(14000×115%)

16100

(14000×217%)

30380

Agent Handling Fee

2000

2000

Miscellaneous

500

500

32600

46880

Saving = 46880 – 32600 = 16280 USD.

The number of vehicles imported to Sri Lanka has been dropped off continuously during the past few years and with the reduction it was expected to widen the trade deficit through an increase in vehicle imports.

EXPECTED EFFECTS TO ECONOMY

The government took the decision especially to earn more revenue by way of import taxes as more volume of vehicles will be imported and that the government as well the insurance business would get the benefit from the pickup in new vehicle registration.

Peoples will buy more vehicles and then leasing and finance sector will have more businesses.

Car importers, banking and finance sector as well as petroleum and transport sectors might have positive impact.

Banks would get the benefit from increased trade finance activity while an expected increase in imports could create moderate volatility on exchange rates.

To control the foreign exchange outflow as importing a used vehicle is lower cost and the foreign exchange out flow is less.

To protect the local car industry.

CHAPTER 4

THE OUTCOME OF THE DUTY DECREASE ON MOTOR VEHICLES

Even though the Sri Lankan government expected the above mentioned effects, the way the duty decrease effected on vehicle imports, vehicle market and the Sri Lankan economy are as follows;

INTRODUCE THE INCOME LEVELS OF THE SRI LANKAN POPULATIONS

20. Introducing the income levels of personals and who can purchase a vehicle.

To easily understand the income levels of the Sri Lankan population, the current (family) monthly income levels have been distributed as follows;

Less than Rs.30,000 (lower income)

Between Rs.30,000 – Rs. 100,000 (middle income)

More than Rs. 100,000 (high income)

Pie chart

THE WAY IT EFFECTED TO VEHICLE IMPORTS

With the tax reduction import of motor vehicle increased as shown in the Table.

Month (2010)

No. of imported vehicle from Japan

No. of imported vehicle from India

No. of imported vehicle from other countries

Brand New

Recon.

Brand New

Recon.

Brand New

Recon.

2008 Avg/Mnth

2009 Avg/Mnth

January

February

March

April

May

June

July

August

September

October

Due to the appreciation of the Yen, the prices of the Japanese manufactured cars increased than the price what it was before the duty reduction. A Japanese vehicle worth around Yen 1 million two years ago which was selling at a Rs. 3.6 million in Sri Lanka then, under the exchange rate of Rs. 0.9 per Yen. But in the last two years as the Yen has appreciated by nearly 45%, the exchange rate has increased to Rs.1.3 per Yen. Hence now a vehicle worth Yen 1 million is over Rs.3.611 million in Sri Lanka. Hence, the prices of the vehicle decreased significantly in Sri Lanka, the prices of the Japanese manufactured vehicle increased by 25% ( by interview ).

However, the Yen dilemma has not effected the Indian and Chinese vehicle market in the country.

Chart of imported vehicles

Less than 1 M

1M – 1.5M

1.5M – 2M

2M – 2.5 M

2.5M – 3M

THE WAY IS EFFECTED ON VEHICLE MARKET

The demand for registered and un-registered vehicles has increased substantially.

Demand for small cars has increased. (eg. 150 units to over 400 units in two months – Ceylon Motor Trading Association [8] ).

The car sale owners who had stocks had to sell their stock at a loss after the tax reduction.

As the previous duty structure did not encourage the import of diesel-powered dual purpose vehicle, an ageing fleet of vans and double cabs as well as a large number of illegally assembled jeeps came into the market. But as the new duty encouraged the import of second-hand diesel cabs and vans from Japan as well as South East Asia which further depressed the prices.

THE WAY IT EFFECTED TO LOCAL MANUFACTURED VEHICLES

23. The only car manufactured/assembled in Sri Lanka is the ‘Micro’ car. As there is a huge tax imposed on this local car to bring the price almost on par with imported cars which discouraged many people from buying this locally manufactured car. There is no any tax on this local product to give them more concession to improve the production. Hence, the tax reduction has discouraged and badly affected on the local manufactured cars.

THE WAY IT EFFECTED TO THE SRI LANKAN ECONOMY

Leasing businesses face some short term stress in its assts as the value of collateral on leased vehicles drop. However, an increase in new business volumes would more than compensate for this in the medium term. Vehicle leasing volumes rose sharply and came money to economy.

When importing used vehicles, it incurring more repairs leading to the increased import of spare parts. Hence this caused to the outflow of money to outside the country to purchase vehicles as well as to the spare parts, maintenance etc after purchasing a vehicle.

Huge expenditure on developing roads and highways. Construction and maintenance of roads (any road development plans). Presently it takes 30 minutes to travel 5 km in rush hours in the Colombo area due to traffic. The present road facilities are not adequate to accommodate the increasing number.

In the first instance the insurance sector got affected in the short-term by lower motor premiums on insurance renewals as a result of the decline in motor vehicle prices. But later insurance business got the benefit from the pickup in new vehicle registration.

CHAPTER 5

HOW DUTY DECREASE EFFECTED TO UPPER CLASS PERSONNEL

The tax reduction has effected positively on upper class personnels with a higher income level.

How the vehicle prices of luxury vehicles have decreased

HOW DUTY DECREASE EFFECTED TO MIDDLE CLASS PERSONNEL

28.

HOW DUTY DECREASE EFFECTED TO LOWER CLASS PERSONNEL

As mentioned in the Chapter 4, ___% of the people has not totally being effected by this tax reduction as they do not have sufficient financial level to purchase a vehicle.

DATA ANALYSIS THROUGH THE QUESTIONNAIRES

23. All data collected as primary, secondary, individual basis, will be analyzed to prove or disprove the hypothesis.

CHAPTER 6

FINDINGS, CONCLUSION AND RECOMMENDATIONS

The tax reduction has effected in a different way to the citizens and it effected mainly on their income levels. Even though it is a benefit to the buyer who purchased a vehicle, the affects has been spread through out everyone in the country in the long run. The reduction has affected the local vehicle assemblers as well as the local manufactures that will come up to the market in the future. Further the financial outflow which goes out the country by importing more number of vehicle are the monies that have to use for the development of the country and it affect the economy in the future. Affect the environment as more vehicle be used and the outflow of money due to high fuel consumption.

However the tax reduction will increase the number of importing vehicles with new technologies will help to improve our level of transport in the country and as the maintenance, servicing will be done locally and it will be a benefit to the lower class and middle class personnel who are engaged in the field.

as the new technologies will be introduced, the fuel consumption will be less per vehicle.

environment friendly than the old vehicles.

Even though the government introduced a steep tax cut on vehicle imports which has injected life into the almost comatose car trade, some dealers stubbornly hold the high prices hoping that tax regime will not last too long. Hence the government should give the public a breakdown of the prices with some examples explaining the system properly to avoid alleged unfair practice raises of the values of the vehicles as well as the situations like dual valuation policies.

More environment pollution as the used vehicles are less fuel efficient. So than importing more pollution the government should re-think and re-evaluate the policy encouraging importation of older vehicles to the country. The government should encourage the importation of brand new, economical low end cars and discourage the import of luxury cars which will make good quality vehicles to be on the new roads and this will also keep the environment better from pollution by old poor quality vehicles. The over consumption of fuel would make pollution as well as the country depending on import more fuel in future. If fuel rate increase it will make a problems also.

Must encourage the importation of brand new vehicles as much as possible and encourage expatriates to bring in a brand new vehicle for their private use as it do not have much of an impact on the foreign exchange outflow.

As there is not good public transportation system in Sri Lanka, the government should encourage everyone to buy the locally manufactured cars by making them cheaper than the imported counterparts.

Develop a good public transportation system such as electric train system, subway systems as they are more affordable, causes less pollution per traveller, saves lot of time for all and are more convenient.