Sri Lanka Customs remains vigilant regarding malpractices that would hinder the country’s tax revenue while warning vehicle importers to be cautious and to always follow legal procedures.
Highlighting concerns raised by a group of vehicle importers recently, a senior official attached to Sri Lanka Customs who wished to remain anonymous told The Sunday Morning that a number of concerns were being raised by importers in relation to gazettes that had been issued, but that Customs would always abide by the current laws and policy decisions taken by the Ministry of Finance.
“We are trying to maximise Government revenue. We are concerned about anything that would cause any reduction in the revenue. At times, the concern of vehicle importers is to maximise their profits. As of yet, we have not agreed to any decision that would forgo revenue. Such a decision should be a policy decision from the Ministry of Finance,” the official said.
“Discussions are currently underway on concerns raised by vehicle importers when it comes to taxes, but our stand is clear that we will not agree to anything that will hinder Customs revenue,” the official further said.
The senior official clarified that the vehicle import tax contribution was only around Rs. 130 billion of the total tax income collected by Customs by the end of May, which was around Rs. 786 billion.
VIAL concerns
Commenting on the ongoing issues surrounding vehicle valuation and import regulations, Vehicle Importers’ Association of Lanka (VIAL) President Indika Sampath Merenchige stressed that a 2016 gazette on vehicle valuation remained the primary reference document in use today.
“All vehicle importers continue to operate based on this outdated gazette, which urgently requires revision to reflect current market realities,” he stated.
Addressing recent concerns over alleged tax evasions by a certain group of importers, Merenchige noted that such matters fell within the purview of Sri Lanka Customs, and called on the authorities to investigate thoroughly and take appropriate action where necessary.
He further highlighted the fact that only registered parties were permitted to import vehicles to Sri Lanka, adding that loopholes and inefficiencies within the existing regulatory framework made it vulnerable to misuse.
“Every gazette in Sri Lanka has issues, especially those relating to vehicle importation. These gaps must be addressed without delay. Unfortunately, we have observed a significant delay in amending these outdated regulations,” he said.
A key concern raised by the VIAL is the lack of industry consultation in the policymaking process.
“The Government continues to make decisions without engaging the stakeholders directly affected. We strongly urge the Government to involve us in discussions and decision-making, so we can collectively work to streamline and expedite the necessary reforms,” Merenchige said.
Major tax evasion
In the meantime, a major tax evasion was reported a few years ago with regard to the former Secretary to the Ministry of Labour and Foreign Employment.
The former Secretary was found by the parliamentary Committee on Public Accounts (COPA) to have been responsible for causing losses exceeding Rs. 2 billion to the Government due to the misuse of licences for importing fully electric vehicles for Sri Lankans working abroad, based on foreign remittances.
During the probe, COPA Chairman MP Aravinda Senarath stated that the former Secretary had allegedly carried out these irregular activities at the request of the former Minister, adding that these actions seemed to be aimed at providing privileges to a select group of individuals.
It was found that malpractices had occurred, ranging from the same importers holding over 600 Electric Vehicle (EV) licences to issuing licences to individuals who had not travelled abroad during the relevant period.
The Auditor General had pointed out that the Government had lost Rs. 2.42 billion in tax revenue due to the increase in the luxury tax exemption limit from Rs. 6 million to Rs. 12 million for 921 EVs imported up to 30 September 2024.
The committee had also discussed special audit reports regarding a scheme implemented between 1 May 2022 and 15 September 2023, which had granted permits for the importation of fully electric vehicles for Sri Lankans employed abroad, based on foreign remittances.
The Auditor General had further revealed that 1,077 vehicle permits had been issued during this period, of which 77 permits had later been cancelled. Two main institutions had acted as importers, providing facilities for 640 permit holders. The Auditor General had emphasised that this indicated the creation of a business under the pretext of permit issuance.
It was also revealed that four individuals who had not travelled abroad during the relevant period had been issued EV permits. Since the circular related to this scheme had not specified a minimum duration of overseas employment required for eligibility, individuals who had been abroad for as little as three days to three months, as well as those who had travelled intermittently, were granted permits. It was also revealed that the Ministry of Labour and Foreign Employment had implemented this scheme prior to its revision.
COPA has recommended that an internal investigation be conducted and a report be submitted within a month, and that disciplinary action be taken against the officials involved in these irregularities.
Customs response
Against such a backdrop, Sri Lanka Customs has confirmed massive irregularities in the controversial EV permit scheme, acknowledging a staggering revenue loss of Rs. 2.42 billion while revealing that ineligible applicants had fraudulently benefited from the programme.
Speaking to The Sunday Morning, Customs Spokesperson Seevali Arukgoda disclosed these findings following investigations into the scheme, which had originally been designed to encourage foreign currency remittances by offering tax concessions to Sri Lankans employed overseas.
The scheme’s most damaging loophole was the extension of the luxury tax exemption threshold from Rs. 6 million to Rs. 12 million per vehicle.
While 925 vehicles had been imported under the scheme, Customs had only examined about 100 cases, penalising violations through penalties and forfeitures where confirmed. Despite these findings, the majority of vehicles, 921 out of 925, have already been released, with only four remaining detained pending further investigation.
Another tax evasion
Furthermore, another such tax evasion has been notified to Customs by the Government recently and the senior Customs official noted that an inquiry would be launched in that regard.
In addition, as revealed in the recent National Audit Office (NAO) report on Customs, according to Customs Ordinance No.17 of 1968 Section 84(a)(3), when obtaining a manufacture in bond facility, the bonded goods should be assessed and paid as “imported goods” at the time of release from the warehouse for domestic use.
However, the 70% excise duty concession given to vehicle manufacturers, with a value added of not less than 30% locally on the recommendations of the Minister of Industry, had been obtained by two vehicle component assembling companies using the same bonded warehouse facilities. Customs had taken actions to give the said tax relief by ignoring the provisions of the ordinance.
Accordingly, the two respective companies had assembled 326 vehicles in the warehouse and released them to the local market in 2023. Although the excise tax to be charged was Rs. 350,432,000 when the assembled vehicles were released from the warehouse, only Rs. 246,628,800 had been charged. Therefore, Government revenue had been reduced by Rs. 103,803,200.
Instructions to take further action on this matter have been sought from the Attorney General. Compliance with the provisions of the Customs Ordinance is required.
One such vehicle assembling company had paid 30% excise duty on two types of vehicles in 2023, obtained the vehicles’ release from the Customs warehouse, and sold them at very high market prices, earning a huge profit.
Accordingly, the market price of one type of vehicle was Rs. 11,525,423 without Value-Added Tax (VAT), while it cost Rs. 6,307,763 when it was released from the warehouse. The cost of the other type of vehicle when it was released from the warehouse was Rs. 9,782,658 and the sales price without VAT was Rs. 13,555,084. There was a difference of Rs. 5,217,660 and Rs. 3,772,426 between the costs and market selling prices of the two aforementioned types of vehicles, respectively.