Proposals to Budget – 2022
The Vehicle Importers Association of Sri Lanka (VIASL) in a press release presents several proposals to be considered in the national budget 2022 and also brings to the notice several grievances faced by the motor industry. The release states:
Import ban on motor vehicles
The government has imposed a complete ban on Motor Vehicles since March 2020 citing foreign currency outflows as the main reason. This has negatively impacted the Sri Lankan economy as well as vehicle importers and all related industries. These entrepreneurs have been in the motor vehicle industry for generations. Furthermore, those providing supporting services for motor vehicles have been adversely affected.
Severe issues faced by vehicle importers and related parties
Vehicle importers have faced major difficulties maintaining their business premises, paying off bank loans, rent and paying the salaries of their employees. Since we have been waiting for more than one and half years for importation to open up, it has brought us to a crucial juncture in which most traders have decided to close down their businesses.
As a responsible association we are fully aware of the unprecedented pressure the pandemic has brought upon the government. However, we expect a credible survival plan as well as the fullest support of the government for us to overcome our difficulties. Instead, the government has been carrying out various diverging tactics to control the frustration of the general public and the vehicle importers.
Last year the government announced that the importation will be “Reviewed in December 2020” and then in March 2021 they announced that they are considering a “Quota system” for vehicle importation. At present, they are making statements regarding a scheme in which local taxes could be paid in US dollars and vehicles to be imported without a dollar outflow. Hence it is simply evident that this is again another strategy by the officials to control the “Price bubble” and to defer the issue in hand. Even though various official requests have been made to the Minister of Finance to provide us with an audience to discuss our issues and to take our suggestions on board to overcome this situation, so far we have not been given the opportunity.
As evident from incidents around us, failure to consult industry experts on respective matters is a fundamental weakness of this administration. Focusing on the national budget 2022 we have listed down several budget proposals from VIASL. The main objective of these proposals is to develop the motor vehicle industry while increasing the government revenue. Above all we wish to provide an opportunity to the community, to purchase a quality vehicle at a reasonable price.
1. A viable long term solution for vehicle importation
Various statements have been made regarding a scheme in which vehicles could be imported through a system where local taxes could be paid in US dollars. When inquired about this system from the Treasury they have not provided us with any concrete system or even a method in which this will be possible without exacerbating the current dollar crisis.
As vehicle importers who have been carrying out this trade for generations, we do not recommend such a system as it will lead to various malpractices. This we believe will result in a reduction of the net dollar inflow, as regular remittances will be sent in the form of vehicles. Such a system will pave the way for few individuals who would exploit this opportunity for short term gains making the future bleak for genuine importers while worsening the dollar crisis. This is a system proposed by Sri Lankan exporters living in Japan.
They have made several pleas to the government to allow them to export vehicles they have purchased and pre-ordered targeting the Sri Lankan market. Hence their main intention is to export out their stock of vehicles using any means possible. As much as VIASL agrees that they should be given the opportunity to export those units once the country is in a stable situation, we do not agree that this method is the right one. If such a system is to be implemented it will only encourage a system in which Sri Lankan rupees will be sent out illegally through unofficial channels to purchase these vehicles and the import tax to be paid in dollars.
It is also a fact that the unofficial rate of the US dollar has far surpassed the official dollar rate of Rs 200 imposed by the Central Bank. Due to this difference in the official and unofficial dollar rate the government is losing out on legitimate remittances as remitting these dollars through unofficial channels has become more lucrative.
Hence, a system in which vehicles could be imported by paying taxes in US dollars will only increase the demand for unofficial US dollars. Consequently, it will further weaken financial dollar remittances and create an imbalance in the economy. This will increase the inflation further and the price of essential goods and commodities will rise to a record high level.
Through various media platforms these Japanese exporters have made several claims that importation of vehicles by paying taxes in USD is the “patriotic” method of saving our country from the dollar crisis in hand. As a responsible association with a genuine interest in longevity we do not recommend a system that would encourage illegitimate remittances. However, VIASL kindly requests these so-called patriots to invest their foreign earnings in Sri Lankan term deposits to strengthen our dollar reserve as opposed to misleading the government.
2. 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 maximize 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.
3. Introduction of the GAAI certificate
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 have committed various frauds and have 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.
4. 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 bringing down the existing Loan to Value ratio (LTV) for used motor cars from the current rate of 70% to 40%. 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 the 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.
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.