Government targets Rs.48bn from Luxury Tax revision on vehicles

• Luxury Tax revised to determine rate based on CIF value and not engine capacity
• FinMin says revised tax will not apply to small cars and mid-range Japanese sedans
• Revised tax will be applicable to vehicles registered on or after November 1, 2019
• It will not apply to LC’s opened up to Oct. 31 and vehicles cleared before April 21, 2020 

The government has revised the Luxury Tax formula on vehicles by resorting to calculate the tax based on the manufacturing cost or the cost, insurance and freight (CIF) value of a vehicle, instead of the previous used method based on engine capacity.

The new tax move is expected to generate revenue of Rs.48 billion to the government, a Treasury official said. The revised tax will be applicable on vehicles registered on or after November 1, 2019. 

However, the Finance Ministry yesterday said on letters of credit (LC) opened up to October 31, 2019 and vehicles imported and cleared before April 21, 2020 through such facilities, the pre-November Luxury Tax regime would be applied.

The Luxury Tax on vehicles registered before November 1, 2019 was based on their engine capacity.

Accordingly, pre-November 1, Luxury Tax was applicable on only three categories of vehicles—petrol vehicles with cylinder capacity more than 1800 cc, diesel vehicles with cylinder capacity of more than 2300cc, and electric vehicles with more than 200kw power.

But after November 1, the Luxury Tax will be applicable to all petrol and diesel vehicles with a CIF value exceeding Rs.3.5 million. A tax rate of 120 percent will be applicable on the amount exceeding the luxury free threshold i.e. Rs.3.5 million.

The Luxury Tax applicable on hybrid petrol vehicles exceeding the CIF value of Rs.4 million will be 80 percent and on hybrid diesel vehicles exceeding the CIF value of Rs.4 million it will be 90 percent. 

On electric vehicles with a CIF value exceeding Rs.6 million, a 60 percent Luxury Tax would be charged.

The Finance Ministry said single cabs, vans, motorcycles and motor tricycles will be exempted from Luxury Tax and added that double cabs, on which the Luxury Tax was charged before November 1, will also be exempt under the revised Luxury Tax.

The ministry also stressed Luxury tax will not be applied to popular small car models such as Toyota Vitz, Suzuki Wagon R, Suzuki Baleno and Japanese sedans such as Toyota Premio, Axio and Honda Grace.

However, car dealers Mirror Business talked to were of the opinion that although the revision to Luxury Tax would mostly impact European vehicle brands, prices of popular Japanese mid-range sedans such as Toyota Premio, Allion and Axio are likely to go up.

“When Luxury Tax was initially imposed, people started importing expansive smaller engine capacity vehicles such as Peugeot 5008, Audi A1 and Q3 which were below the Rs.3.5 million range and within the 1800cc engine capacity range, taking advantage of the situation. 

To arrest that situation, the government has decided to remove the engine capacity threshold in another ad-hoc policy decision,” a leading vehicle importer told Mirror Business. 
He pointed out that the removal of the ad-valorem calculation method of duty on vehicles in favour of engine capacity-based duty calculation two years ago led to a massive revenue loss for the government.

“That’s why during past two years, we saw that top-end European vehicles flooding Sri Lankan roads,” he said.

He also pointed out that the ad-hoc changes to the tax structure to counter foreign exchange outflow is threatening the sustainability of the country’s motor industry including the job security of many employees. 

“This is not the ideal solution. There’s a cascading effect due to wrong policy decisions. In order to arrest one situation, they are trying to implement ad-hoc tax changes, which are basically impacting the industry. 

Through this ad-hoc tax changes, the government is indirectly favouring certain vehicle models and brands to be sold in the Sri Lankan market. Certain vehicle models have already gone out of market,” he added. 

He proposed that the government should make a firm decision to return to the ad-valorem calculation method while restricting importing of vehicles which cannot verify their CIF values. 
“That’s the ideal system. The government should have faith in vehicle franchise holders. Under the current system, the government cannot set revenue targets.”