The 50% surcharge on Customs import duties for motor vehicles, currently set to expire on 31 December, may not be extended if the rupee continues its current path of appreciation, a senior Government source has revealed.
This, as the compounding tax burden has pushed the automotive sector into a critical state, according to warnings from industry stakeholders.
The surcharge, imposed under Extraordinary Gazette No.2501/88 issued by Finance Minister Anura Kumara Dissanayake on 13 August, was originally introduced as a defensive measure to protect the currency rather than to meet a severe fiscal requirement.
“This decision was taken based on pressure to discourage [imports]. It was not done due to a severe requirement,” the Government source told The Sunday Morning, noting that the measure was temporary.
With the exchange rate showing positive trends at the moment, the source expressed optimism that the surcharge could be allowed to lapse. “Since the currency is appreciating now, it might not be necessary to carry it forward.”
However, the Government intends to determine the matter situationally, based on the impact on foreign currency reserves, with a formal review scheduled for December. The source cautioned that unforeseen geopolitical developments could still derail any move to lift the surcharge.
If it expires as scheduled, the surcharge will revert to base Customs Import Duty (CID) rates. Letters of Credit (LCs) opened on or before 15 May 2026 remain exempt from the surcharge only if the shipped-on-board date falls on or before 15 November and the LC remains unamended.
According to the Central Bank of Sri Lanka’s External Sector Performance – July 2026 report, released on 31 August, expenditure on motor vehicle imports reached $ 241 million in July alone, bringing total vehicle import spending to approximately $ 1.5 billion for the January–July period.
Separately, the Director General of Customs informed Parliament’s Committee on Ways and Means last week that actual Customs revenue collected by 30 June 2026 stood at Rs. 1,379,084 million against an expected Rs. 1,060,559 million – a 130% achievement rate, with monthly targets exceeded consistently through the year.
Officials said that 316,000 vehicles had been imported as of 30 June, generating Rs. 512,547 million in tax revenue, with petrol motor cars under 1,000 cc the single largest contributor at Rs. 137.4 billion, or 9.96% of total Customs revenue.
Meanwhile, Vehicle Importers Association of Sri Lanka (VIASL) Vice President Arosha Rodrigo told The Sunday Morning that a significant price correction was already underway as importers and consumers accepted that the surcharge would remain in place for the rest of the year.
He cited sharp increases across popular models, with a Suzuki Wagon R rising by up to Rs. 500,000, a Toyota Raize by up to Rs. 1 million, and a Honda Vezel by as much as Rs. 1.5 million.
Rodrigo said he doubted the surcharge would actually be allowed to lapse in 2027, noting that “temporary taxes introduced in Sri Lanka have a strong tendency to become permanent features of the tax regime”.
He pointed out that December – a traditionally high-import month – would leave authorities protective of reserves.
Rodrigo further described consumer purchasing power as plummeting, with importers now cutting prices simply to preserve cash flow rather than profit, while a reduction in the Loan-to-Value (LTV) ratio for vehicle financing from 50% to 40% had locked many ordinary buyers out of the market entirely.
He also flagged unfair competition from seasonal importers who brought in vehicles under relatives’ names to avoid corporate and income taxes, disadvantaging registered importers facing higher compliance costs.
The VIASL called on the Government to replace the surcharge with a cash margin requirement on LCs, raise the LTV ratio back to at least 50%, shift to a unit-rate tax structure based on engine capacity, introduce a withholding tax at the point of port clearance, set a minimum duty valuation for electric vehicles, and create a separate commercial classification for dual-purpose vans such as school vans, which are currently taxed at luxury rates.