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Treasury likely to miss revenue targets from vehicle imports

27 January 2016 02:38 am - 0     - {{hitsCtrl.values.hits}}

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By Chandeepa Wettasinghe
The Treasury is likely to miss its highly optimistic revenue collection target from motor vehicle imports due to a myriad of issues, an economist and the head of a Colombo-based brokerage and research house pointed out. 

“The Treasury is projecting to collect Rs.280 billion in 2016, which is a 22 percent increase over 2015 and a 140 percent increase over 2014. This is a near impossibility. All indications are that the realistic estimate in 2016 will be lower. I am estimating it to be around Rs.180 billion,” JB Securities (Pvt.) Ltd MD/CEO Murtaza Jafferjee said. The 2016 Budget estimated a tax revenue of Rs.1.58 trillion. However, most of the tax proposals have been either revised or not implemented. For example, the Finance Ministry last week said that the Nation Building Tax and Value-Added Tax revisions will be delayed.

The government increased taxes to discourage importation of motor vehicles in order to reduce congestion on the streets, which seems to contradict expectations of such high revenue targets. 

Jafferjee noted that the state had collected Rs.229 billion in taxes from motor vehicle imports in 2015, which was double that of 2014 and broke the Rs.134 billion record set in 2011.  “Credit extension fuelled the previous boom, with LTVs (loan-to-values) reaching 90 percent and low interest rates. Both of these factors have recently reversed; the LTV cap is back at 70 percent,” Jafferjee said.

He noted that the buyers, who highly depend on credit for vehicles such as three-wheelers and small cars, will significantly reduce purchases as they cannot afford to place the 30 percent upfront collateral or pay the rapidly increasing interest rates. 

“The heightened demand witnessed in 2015 was from potential buyers expediting their purchases anticipating an increase,” he added. Further, he noted that since the rupee has depreciated 9 percent relative to the dollar, and declined further compared to the euro and the yen, it had pushed up the prices of not just cars, but of all items, decreasing the purchasing power of the public. The increase of tariffs on hybrids is also unlikely to help the Treasury’s cause.

“Hybrid vehicles have seen a significant increase in prices; in most categories a 30-35 percent increase. Demand is not inelastic; some will trade down for a cheaper vehicle or hold back hoping the Treasury will revise the tariff rates down,” Jafferjee said.

He added that with permit transfers being restricted, the premium car market would also suffer, bringing less revenue.

“Either these buyers will trade down to a less premium model or delay their decision or buy another durable with less incidence of taxes,” he said.
 
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