As Sri Lanka reopens passenger vehicle imports on February 1, experts are urging the government to implement a revised tax system to manage the anticipated surge in demand and reduce revenue loss from under-invoicing.
Murtaza Jafferjee, Chair of the Advocata Institute, has proposed a temporary surcharge tax on vehicle imports to address the initial demand spike. Speaking at the HNB Leasing forum titled “Sri Lanka Motor Industry: Outlook for 2025”, Jafferjee criticized the country’s rigid economic policies, which he believes encourage imports at the expense of domestic production.
He called for a more balanced monetary and fiscal policy framework that prioritizes sustainable growth.
“The current system incentivizes imports but hinders the development of local goods,” Jafferjee stated, emphasizing the need for progressive taxation and strategic reforms to support local industries and create a sustainable economic model.
Jafferjee also highlighted inequities in the vehicle taxation structure, which taxes vehicles based on categories.
He argued that this system disproportionately affects certain population segments, making vehicle ownership inaccessible for many. To address these disparities, he proposed a flat tax system that would promote equitable access to vehicles while stimulating broader demand.
He further stressed the importance of announcing tax policies in advance and maintaining consistency to ensure market stability. This view was supported by Charaka Perera, a past president of the Ceylon Motor Traders’ Association (CMTA).
Senior Economic Advisor to the President, Duminda Hulangamuwa, explained that the primary aim of reopening vehicle imports is to generate Rs. 300 billion in government revenue. While property taxes could be a more equitable revenue source, Jafferjee acknowledged that vehicle taxation offers an easier avenue due to the strong cultural attachment Sri Lankans have to cars.
However, Jafferjee criticized the current unit-based duty system, which taxes vehicles based on engine size and capacity. He argued that this system is flawed, leading to market distortions and encouraging under-invoicing. “The current system creates inefficiencies, particularly with the differential treatment of electric and internal combustion engine vehicles,” he said.
To address these issues, Jafferjee suggested using gross vehicle weight as the basis for taxation. Unlike engine size, gross vehicle weight is less prone to manipulation and avoids interference in engineering decisions. He also advocated for a Value-Added Tax (VAT) system, calling it the most efficient and equitable way to generate revenue from vehicle imports.
Despite the policy changes set to take effect, Hulangamuwa noted that the arrival of vehicles would take time. Used vehicles are expected to take 1–1.5 months to reach the market, while brand-new vehicles could take up to six months.
The government faces the dual challenge of managing initial demand surges while ensuring fair and sustainable revenue generation. Experts like Jafferjee emphasize the importance of aligning taxation policies with long-term economic goals to create a more balanced and equitable automotive market.
