- Permits and lopsided tax policy on fuel make a lethal cocktail of policy to drive down rupee to record lows
Motor car registration surged to three-year high in July before the Finance Ministry put brakes on the influx of motorcars with smaller engines in August, according to the vehicle registration data compiled by JB Securities, a Colombo-based equity brokerage and research house.
Motor cars registrations—a close proxy for motor car imports—jumped to 7,193 units in July, the highest since September 2015, when such category vehicles reached an all time high of 14,544 units.
“Car registrations have skyrocketed in the last 3 months mainly in the small car category that account for close to 90 percent of volumes.
The impact of the recent increase in minimum duty rates will only be reflected in registrations towards the end of the year for there are large stocks of unregistered cars in the market and many more on the water that will not be taxed at the higher rates”, JB Securities Managing Director Murtaza Jafferjee said.
The Finance Ministry jacked up the excise duties of vehicle imports effective August 1 raising the prices of vehicles below 1,000cc category sending their prices up by at least Rs.425, 000.
Since the beginning of the year, vehicle imports have been closely watched by the Central Bank for its greater role in swelling the country’s already high trade gap.
During the first six months of the year, Sri Lanka spent US $ 813 million on personal vehicle imports, up 120 percent over the same six months in 2017.
On fuel, the country spent another US $ 2.1 billion, up 30 percent year-on-year and together the two commodities accounted for one quarter of the total import bill.
Meanwhile, Jafferjee proposed to reinstate the loan-to-value ratio on hybrid vehicles to 50 percent from the current 70 percent for a meaningful impact on the recent duty hike as, “excess credit towards purchasing of cars is driving imports and holding up the cost of borrowing which has not tracked policy and government securities yields downwards”.
“On the flip side taxi hailing platforms like Uber and PickMe have created a professional class of drivers who need financing to get their first vehicle thus any measures to curtail funding is a regressive measure – in such instance the car is a production asset rather than a consumption asset. Getting policy always right is very difficult for there are winners and losers thus one has to balance the various interests,” he added.
Sri Lanka has a lopsided tax system where duty permits are given to selected public servants to import vehicles paying a very low excise tax component, which discourages the true tax payers. “Not only does such a scheme encourage further rent seeking and create an entitled class but it also reduces tax morality amongst compliant tax payers – tax compliance is lower when compliant tax payers witness other taxable cohorts not paying their fair share of taxes,” he added.
According to JB Securities, between 6000 to 8000 permits had been supplied as a result of the relaxation of restrictions and transfer of civil servants car permits. A bearer of a permit is entitled to a discount of Rs.3.6 million and the excise taxes payable is irrespective of the CIF value of the vehicle.
“Most of these permits are being sold at a price between Rs.2.1 million and Rs.2.3 million – a back of the envelope calculation would estimate that permit holders have been enriched by a sum close to Rs.15 billion”, he said.
“Firstly, the sellers of permits who are enriched by Rs.2.1-2.3 million probably purchase durable goods including small cars that are imported. Secondly, the permit buyer creates further import pressure for he will probably invest in a more expensive car incentivized by a partial discount”, he further said. Meanwhile, another area for reforms is the tax on fuel and specially diesel, which is still under taxed relatively other imported goods given its negative externalities.
The fuel taxation is highly regressive where according to estimates, top 30 percent of the households benefit from 70 percent of the tax subsidy. “Relatively lower priced fuel coupled with cheaper vehicles has created a lethal cocktail that is now pressurizing the currency and driving the rupee to set new daily records”, Jafferjee, who is also an economist said.
Sri Lankan rupee has been hitting fresh daily lows these days due to strengthening dollar, existing foreign investments in government securities and expanding trade deficit.
On Friday the rupee ended steady at 161.45/50 against the United States dollar. Perhaps its time for policy makers to rethink the lower LTV on hybrid vehicles; reintroduce restrictions on civil servant permits such as the eligibility criteria and transferability and adequately tax fuel so that it is in line with other imported products and accounts for externalities including congestion and pollution”, he said.
Meanwhile in July, Sri Lanka registered 42, 043 vehicles, up from 39,257 units in June, which included 28,062 two-wheels and 1,675 three-wheelers.