Sri Lanka’s vehicle tax system unfairly stacks VAT on VAT: Experts

• Assert excise duty should have been revised downward to account for VAT already included
• Say govt. should have adjusted composite tax system first and then implemented inflation-based revisions to maintain fairness for importers

By Nuzla Rizkiya

Sri Lanka’s vehicle tax structure has come under renewed scrutiny, with tax experts warning that the imposition of the value added tax (VAT) on top of an already VAT-inclusive excise duty has resulted in a “tax on tax” scenario, making the system unfair and unnecessarily burdensome.
Tax professionals this week highlighted that the composite excise tax structure, introduced in 2014, already includes a 12 percent VAT component within it. However, with the government’s recent tax revisions, an additional 18 percent VAT is now being imposed on vehicle imports, compounding the overall tax burden.
“The excise duty should have been revised downward to account for the VAT already included,” said KPMG Sri Lanka Principal Tax and Regulatory Rifka Ziyard. 
She pointed out that instead of directly imposing further layers of taxation, the government should have adjusted the composite tax system first and then implemented inflation-based revisions to maintain fairness for the importers. 

She shared her views while addressing the pre-budget webinar organised by KPMG Sri Lanka this week.
Ziyard’s concerns were echoed by KPMG Tax Principal Suresh Perera, who pointed out that Sri Lanka’s pre-2014 tax structure on vehicle imports was highly complex, consisting of multiple levies such as import duty, VAT, excise duty and port and airport development levy (PAL). 
The government later streamlined this system by consolidating various taxes, removing the VAT on motor vehicles as part of the reform. However, the VAT streamlining efforts in January 2024 reversed this exemption, effectively reinstating the VAT on vehicle imports.
“The VAT rate was already 12 percent within the excise duty but now an additional 18 percent is imposed on top of that. Altogether, the VAT on VAT amounts to 30 percent,” Perera noted, reinforcing concerns about excessive taxation.
Beyond the VAT issue, experts also flagged the potential reintroduction of the PAL as a substitute for the temporary 10 percent surcharge tax, a move that Perera suggested could be convenient for the customs authorities in collecting the surcharge at the importation stage. However, he warned against implementing both levies simultaneously.
“The PAL could be used as a substitute for the 10 percent surcharge. That switch might happen but I hope they don’t impose both and make it a double burden again,” he cautioned.
As of February 1, 2024, the overall tax on imported vehicles includes a 20 percent customs duty, a 10 percent surcharge on customs duty, and an excise duty ranging from 200 percent to 300 percent. Electric vehicles have been particularly affected, with their excise duty rates doubling under the latest tax structure. Additionally, an 18 percent VAT is being levied alongside a luxury tax on high-value vehicles.
Notably, while some levies such as the PAL, social security contribution levy, national building tax and cess duty remain exempt, the layered taxation system continues to drive costs higher, prompting calls for reforms to ensure a more transparent and equitable tax structure.