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‘Individuals from various other industries have entered automobile market’

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Vehicle Importers Association of Sri Lanka (VIASL) in a communiqué has raised concern over the impact to motor vehicle importation from Budget 2022.

The release says:

Prevention of tax evasion of vehicle manufacturing and assembling industries

The local assembling system promoted by the government does not appear to have met its objective as it has drastically reduced the government revenue while sending out a considerable amount of dollars. When considering the assembling data, we estimate the income loss for the government to be around Rs 6 billion – 7 billion in 2020/2021.

For the same period around USD 50 million – USD 60 million (estimate) has been sent out of the country to import components/spare parts required for assembling. VIASL strongly believes that this process does not add any value to the country’s economy and is merely designed to benefit from the tax concessions that are being offered in order to maximise their profitability. The local assembling companies mainly import an almost finished product and add minimal value to it.

Hence the CIF (Cost, Freight & Insurance) value or the amount of foreign currency sent out of the country is perhaps more than the CIF value of a good quality Japanese vehicle; due to economies of scale and lean production mechanisms used in large scale manufacturing. However the import tax paid for a locally assembled vehicle is far less compared to the import tax paid for a car imported by our dealers.

The loss of government revenue does not justify the minimal number of employment opportunities offered by these assembling workshops.

Due to the inferior quality of these vehicles, lacking adequate safety and emission standards, sold by these assembling companies the Sri Lankan citizen is at a loss. Furthermore, most of these vehicles are not allowed to be run in their respective manufacturing countries as they do not meet international quality and safety standards and Sri Lanka is generally used as their testing grounds.

At an era where safety of a vehicle and its environmentally friendliness is of utmost importance globally, Sri Lanka seems to be lowering its standards through this inferior assembling process.

Also it’s a fact that the repair cost is extremely high on a locally assembled vehicle.

Furthermore, the aftermarket value of a locally assembled vehicle is far less compared to a high quality Japanese vehicle.

Considering these facts we propose an increased import tax rate for assembling companies and importation of components need to be put on hold until the current dollar crisis is resolved.

Strict measures need to be taken to monitor the quality and standard of these units.

Cost of a motor vehicle if it is to be imported today

It is a fact that prices of all goods and services have increased drastically after the Covid-19 pandemic. When making an educated analysis, even vehicle prices would increase drastically if we are to import them with current market conditions due to the 4 main factors listed below.

1) Exchange rates have risen dramatically and all currencies have appreciated against the Sri Lankan rupee.

2) Global car prices have risen by 30%. When evaluating current market prices of used cars in countries such as U.K., Japan, Australia, and Thailand it is evident that prices have increased after the pandemic due to issues with supply chain. Production of brand-new vehicles is facing severe delays due to lack of components and spares and as a result used car prices have increased globally.

3) Freight and shipping charges have increased by 4 times after the pandemic due to various issues and this has resulted in shipping charges increasing to unprecedented levels.

4) Most vehicles on the road have been cleared without luxury tax that was implemented in the latter stages of 2019. The newly implemented luxury tax is a considerable amount and will definitely increase the price of vehicles. Overall, if a vehicle is to be imported with current market conditions, it will cost 60%-70% more than pre-pandemic prices.

Controlling local vehicle prices

It is a fact that the vehicle prices have drastically increased over the last few months. Although VIASL believe that this is mainly due to the economics of demand and supply it is evident that individuals from various other industries have entered the market of buying and selling used vehicles, this can be attributed to the difficulties experienced in their respective industries (tourism, gem exports etc) due to the natural effects and restrictions imposed as a result of the prevailing pandemic. In order to control prices or prevent individuals from unreasonably increasing the prices we suggest to use the Loan to Value ratio (LTV) as a tool. We believe that this will safeguard the interests of financial institutions and the banking sector from any adverse effects in the event of any drastic changes to the used motor vehicle industry.

Another factor contributing to the increase in used vehicle prices is the rapid increase in the prices of locally assembled vehicles. Over the last 12 months the prices of locally assembled vehicles have gone up at least on three occasions. VIASL believes that these price increases aren’t proportional with factors affecting costs of local assembling (exchange rates, international freight rates etc).

Furthermore, considering the large profit margins, local assembling companies are enjoying due to enormous tax concessions provided to them by the government, they are in a position to reduce prices and pass on some of the benefits to the end consumer. Vehicle assembling has thrived in the last two years due to the import ban of motor vehicles and this situation has created a monopoly. Hence we strongly recommend implementing a mechanism in which prices of locally assembled manufacturers are being controlled.

Conclusion

In order to streamline the importation and to protect local consumers when the government is in a position to import motor vehicles; a mechanism in which genuine importers are identified should be introduced. Importation of motor vehicles is not regulated, hence carried out by various “seasonal” importers whose identity is not discoverable after a few months. Due to insufficient restrictions, the number of individuals posing to be genuine importers on various platforms of advertising has committed various frauds and has obtained large advances from customers in order to import vehicles and have not returned them citing various reasons.

There should be a mechanism in place to ensure that all vehicle importers are being monitored under various legal and ethical criteria. The introduction of such a system would immediately boost government income tax revenue, which could be used for the benefit of the general public. Furthermore, this system will definitely reduce the dollar outflow due to the controls in place. Above all, Sri Lankan consumers will be protected from various fraudulent activities. As veterans who have been carrying out this trade for decades, we wish to make a request from relevant government officials, to take our input on board when opening up importation. We believe our knowledge in this subject will be vital in devising a sustainable solution.

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