- How buying a car in Sri Lanka has become a luxury most can’t afford
It’s no secret that owning a car in Sri Lanka is becoming harder by the year. What was once considered a practical need, especially for families, young professionals, or anyone living outside the city, is now increasingly out of reach for most people. The problem is the layers of taxes stacked on top that often cost more than the vehicle itself.
For many, a car is now something to aspire to, not necessarily because they want the luxury, but because public transport has become unbearable. Buses break down often. Trains are packed beyond safety. Travel times have stretched. Yet, for those trying to opt out of that system, the alternatives are being priced out through one of the most aggressive vehicle tax structures in the world.
The tax burden that keeps getting heavier
As of 2025, taxes on imported vehicles can exceed 250% of the vehicle’s Cost, Insurance, and Freight (CIF) value. In some cases, especially for higher engine capacities or Electric Vehicles (EVs), the total tax can rise past 300%.
Take the example of a simple, three-year-old car with a 1,498 cc engine and a CIF of Rs. 13.5 million. Under the current structure, the taxes alone amount to nearly Rs. 24 million. When Value-Added Tax (VAT) is added, the final cost of that vehicle hits Rs. 37.3 million. That’s almost three times its base price.
Even a small car under 1,100 cc, over three years old and imported at Rs. 2 million, now attracts Rs. 5.2 million in taxes, making the final cost more than Rs. 7.2 million. In both cases, taxes account for more than 250% of the CIF value. This is before adding insurance, registration, fuel, or repairs.
The Govt.’s longstanding dependence on vehicle taxes
For years, Sri Lanka has used imported vehicles as a source of easy revenue. This is not new. Back in 2015, motor vehicle excise duty brought in Rs. 267 billion, nearly 19% of all tax revenue. As the economy slowed and restrictions were introduced, the figure dropped, reaching Rs. 130 billion in 2019. But the policy mindset didn’t shift.
The reason is simple. Taxing imports is much easier than collecting taxes from domestic income or property. Many studies have found that Sri Lanka’s tax system was heavily skewed towards border taxes collected by Customs, while the Inland Revenue Department (IRD) remained underperforming. Customs brought in more tax revenue than the IRD in multiple years, despite the latter being responsible for income and corporate tax.
This imbalance has had real consequences. It has discouraged domestic production, encouraged a culture of consumption, and created an overdependence on short-term trade taxes. Instead of reforming tax administration, governments across the years chose to tax cars, liquor, cigarettes, and imports, items that are visible, high in value, and easier to control at the point of entry.
5 years of import bans and a sudden reopening
When Sri Lanka’s foreign reserves collapsed in 2020, one of the first things to go was vehicle imports. Starting in May 2020, the Government imposed a blanket ban on private vehicle imports to reduce the outflow of dollars. For nearly five years, the country functioned without new cars, motorcycles, or three-wheelers coming in.
Used vehicle prices skyrocketed. A 10-year-old Prius sold for twice what it was worth before the ban. Spare parts became scarce. Those who already owned vehicles held onto them or sold them at premium rates. The black market thrived.
Then, in February this year, the ban was lifted, but only on paper. The new rules that came with the liberalisation made importing a vehicle more expensive than ever.
What changed in 2025?
Several things happened at once:
- A 50% surcharge on Customs duty was introduced through Gazette No.2421/43, pushing the effective Customs duty from 20% to 30% of CIF
- Excise duties were adjusted up by 5.9%, while rates were doubled for EVs
- Luxury tax was restructured to apply a flat 60% on the CIF value above Rs. 6 million
- VAT of 18% was reimposed on all vehicles, calculated not just on the CIF, but also on Customs duty and excise, tax on tax
- Exemptions for the Ports and Airports Development Levy (PAL) and Social Security Contribution Levy (SSCL) remained, but most other duty waivers were removed, except for Letters of Credit opened before 31 January 2025
All these changes came into force as the International Monetary Fund (IMF), in its Second Review in June 2024, encouraged the Government to phase out balance of payments-related import controls, but with a clear caution not to compromise on revenue. So the country opened its borders while locking vehicles behind a new wall of taxes.
Who gets to import and who doesn’t?
According to the rules, only registered importers, State institutions, and individual citizens (one vehicle per year) can import motor vehicles. The vehicle must be registered within 90 days, and any delays incur a penalty of 3% per month, capped at 45% of the CIF.
There are also age limits. Passenger cars must be less than three years old. Three-wheelers must be under two years. Goods vehicles can be up to four years old. This filters out cheaper options from older markets and drives up the cost further.
A vehicle imported without following these rules must be re-exported within 90 days.
The public has no alternatives
Sri Lanka’s public transport system is broken. Long commutes, overcrowding, lack of safety for women, and unreliable timetables make it a daily battle for many. Outside of Colombo, most families rely on motorbikes or three-wheelers for basic transport. But even those are becoming too expensive.
Motorcycle imports, which once crossed 360,000 units per year (2017), dropped to 5,025 units in 2023. Three-wheeler imports shrank from over 132,000 in 2015 to just 13 units in 2023. Tractors and goods vehicles, critical for agriculture and logistics, also saw steep drops.
Taxing EVs like they’re a threat
One of the biggest contradictions in policy is how EVs are taxed. In 2021 and 2022, the Government spoke publicly about transitioning to cleaner transport. But by 2025, the excise duty for EVs had doubled, and the rate now depends on motor capacity and age.
For instance, an EV with a motor capacity of 50-100 kW that is over three years old pays Rs. 72,400 per kW. That’s Rs. 7.24 million in excise alone for a 100 kW vehicle. Add Customs duty, VAT, and Luxury Tax, and the landed cost easily crosses Rs. 30 million.
This goes against regional trends. India, for example, has aggressively reduced EV taxes to promote cleaner vehicles. Bangladesh has incentives for hybrid and electric vehicles. But Sri Lanka, caught between its environmental goals and fiscal desperation, has done the opposite.
What is the bigger picture?
In short, the Government’s addiction to taxing imported vehicles has created a distorted economy. It punishes consumers, fails to build domestic industry, and offers no viable public transport as an alternative. All the while, it postpones the urgent reforms needed to fix the IRD.
According to the IMF, Sri Lanka needs to raise tax revenue to at least 14% of GDP to meet its debt obligations and continue receiving bailout support. But the focus remains largely on indirect taxation, fuel, telecom, tobacco, and vehicles. The bigger challenge, expanding the personal and corporate tax net, remains mostly untouched.
This is why vehicles remain such an easy target. They are visible and they are of high value. They don’t require legal reform. But in doing so, the country has created an economic trap, where those who need private transport most are excluded and those who can afford it are paying three times the global average.
Reassurance from the top
In the wake of concerns about rising vehicle taxes and speculation about renewed restrictions, President Anura Kumara Dissanayake has firmly stated that the Government has no intention of increasing taxes on vehicle imports or limiting access to the market again.
“There was uncertainty about whether imports would actually resume, but we have now seen real momentum in the market,” the President said, speaking in Parliament.
He gave a reassurance that this influx of vehicle imports would not pose a threat to macroeconomic stability. The President also stressed that Sri Lanka’s ageing vehicle fleet, much of it over 15-20 years old, urgently needed renewal.
“There are narratives out there trying to make people panic and make hasty decisions or destabilise the rupee,” he warned, referring to social media speculation. “Let me make it clear: the Government is not planning to restrict vehicle imports again, and we are not increasing taxes on vehicles.”
‘CIF value is important’
“Sri Lanka derives a significant portion of its import taxes from the importation of motor vehicles,” said KPMG Sri Lanka Tax and Regulatory Division Principal Suresh Perera.
“Key types of taxes applicable to motor vehicles today are 20% Customs duty, surcharge Customs duty (for one year – Gazette Notification No.2421/44 of 31 January 2024), excise duty (150%, 200%, 240%, and 300% on Cost, Insurance, and Freight [CIF] value per unit rates depending on the Harmonised System [HS] code), 18% Value-Added Tax, and Luxury Tax.”
He added that Excise (Special Provisions) Duty varied based on “multiple factors such as HS code, fuel consumption, engine capacity, and vehicle type”. That means even vehicles with similar CIF values may face vastly different tax bills.
The Luxury Tax, meanwhile, is imposed only on high-value vehicles, with the threshold recently raised. “Effective 1 February 2025, the minimum Luxury Tax threshold has been increased to Rs. 5 million (from the previous figure of Rs. 3.5 million),” Perera noted.
Some levies, however, have been taken off the list. As per Gazette No.2312/67 of 31 December 2022, the Ports and Airports Development Levy (PAL) no longer applies to motor vehicles. Similarly, the Social Security Contribution Levy (SSCL) was removed for vehicles subject to excise duty, following the SSCL (Amendment) Act No.15 of 2023.
Perera touched upon the need of the CIF value in the entire calculation: “The CIF value is crucial because most vehicle import taxes and duties are calculated based on this value. A higher CIF value results in higher import taxes.”
Tax breakdown
Tax type
Rate/rule
Notes
Source
Customs Import Duty (CID)
20% of CIF
Effective rate becomes 30% with 50% surcharge (as of 1 February 2025, valid for 1 year)
Gazette No.2421/43
Surcharge on CID
50% of CID
Applies on both general and preferential basis
Gazette No.2421/43
Excise duty
Varies by engine size, vehicle type, and age
Increased by 5.9% in January 2025; e.g. Rs. 72,400/kW for EVs (50-100 kW, >3 years old)
Gazette No.2418/43
Luxury Tax
60% on CIF value exceeding Rs. 6 million
Flat rate; supersedes previous tiered scheme
Effective 29 April 2025
VAT
18% on CIF + CID + excise + Luxury Tax
Reinstated under VAT Amendment Act No.32 of 2023
Effective January 2024
PAL
Exempt for motor vehicles
Previously applied; now removed for vehicles
Current as of 2025
SSCL
Exempt for motor vehicles
Exemption under SSCL (Amendment) Act No.15 of 2023
SSCL Act
Registration penalty
3% per month, maximum 45% of CIF
Applies if vehicle is not registered within 90 days of Bill of Entry
Department of Motor Traffic rules