The Government expects to allocate up to $ 1 billion for vehicle imports this year. By mid-May, Letters of Credit (LCs) worth approximately $ 450 million had already been opened for vehicle imports.
Sri Lanka Customs currently processes approximately 200-300 vehicles daily and around 16,000 motor vehicles have been cleared so far since vehicle imports reopened. However, the Committee on Public Finance (COPF) recently raised concerns over used vehicle import valuation, outdated practices, and legal loopholes at Customs and their financial cost.
At a recent meeting, COPF Chairperson Dr. Harsha de Silva questioned the rationale behind the 15% depreciation applied to vehicle imports, even for those with minimal mileage (including those under 50 km) or those as new as five days old.
Concerns about significant revenue loss were raised alongside this, with an estimate of Rs. 250 billion lost over three days based on a random data check, suggesting that if daily losses reached Rs. 100 billion, it could equate to a staggering Rs. 36.5 billion in annual losses for the Government.
Concerns over existing valuation system
Speaking to The Sunday Morning Business, Customs Media Spokesperson and Additional Director General Seevali Arukgoda stated that Customs followed the existing valuation system for vehicles, which had been gazetted in 2016 by the then Finance Minister.
“We have been continuing it ever since, given that it is the law we must follow. Until a variation is gazetted, we must continue with what is in place and there is no other option. If the current valuation system needs to be changed, this change must come from the policy level and the Ministry of Finance,” he said.
Arukgoda noted that there were no potential or pending changes to this approach for the time being and that the valuation would continue. He added that Customs had however submitted several proposals over time to be considered based on its requirements.
“It is up to the Ministry of Finance to make a decision. So far, we have not been informed of any potential or pending changes,” he stated.
Industry frustrations
Clarification on the collection of Value-Added Tax (VAT) on used vehicles has been sought and the equitability and efficiency of the process have been questioned by the COPF previously as well, especially concerning the variation in taxes imposed on used vehicles that are not registered and that have been driven only short distances.
At the recent COPF meeting, several industry stakeholders voiced concerns over these practices and expressed their frustrations.
Vehicle Importers’ Association of Lanka (VIAL) President Sampath Merenchige raised a key issue, noting that importers bringing in three-year-old vehicles from Japan encountered valuations that exceeded the vehicles’ true market price.
Meanwhile, Vehicle Importers’ Association of Sri Lanka (VIASL) President Prasad Manage expressed frustration that they had received no depreciation allowance for vehicles even as old as three years. Instead, there is only a discount on the brand-new retail price on offer.
Adding to these concerns, another importer highlighted that identical vehicles with matching chassis numbers were subject to considerably lower duties if imported as brand new, compared to used vehicles, placing importers of used vehicles at a severe disadvantage.
This highlights an urgent need for authorities to re-evaluate vehicle valuation processes and close legal loopholes, which could cause considerable revenue losses in the sector.
Losses to the Govt.
Speaking to The Sunday Morning Business, Ceylon Motor Traders’ Association (CMTA) Chairman Andrew Perera noted that the valuation of used vehicle imports in Sri Lanka currently had inconsistencies and a lack of transparency, which opened the door to various malpractices.
He added that one of the core issues was the absence of a standardised valuation mechanism aligned with international benchmarks. This results in significant discrepancies between the declared values and the actual market values of imported used vehicles.
“A major concern is the manipulation of invoice values, particularly in the used market, where under-invoicing by certain importers is common. We believe that some importers declare significantly lower prices than what is realistic, leading to reduced duty payments. This undermines fair competition and disadvantages legitimate franchise holders and importers who follow proper documentation and compliance procedures,” he charged.
In terms of Customs practices, he highlighted that many of the valuation methodologies might need to be reviewed and revised to ensure there were no loopholes for revenue leakages for the Government.
“The system also does not adequately factor in depreciation based on mileage, condition, or market demand; all used vehicles are given a 15% depreciation on duty, which is an immediate loss of revenue for the Government as questions arise regarding the basis for the provision of a 15% depreciation for used vehicles, especially vehicles registered as zero-mileage.”
Perera also highlighted the financial implications of these valuation and procedural irregularities as substantial. He noted that due to under-invoicing and undervaluation, the Government incurred significant losses in potential import duty and tax revenues annually. These funds could otherwise be channelled towards infrastructure, healthcare, or economic recovery efforts.
He also explained that legitimate motor traders, especially franchise holders, were placed at a competitive disadvantage. While authorised dealers adhere to proper valuation, testing, and certification standards, certain used car importers who under-declare values can offer lower prices, distorting the market.
“Moreover, customers purchasing undervalued or misdeclared vehicles often face issues such as lack of aftersales support, questionable vehicle history (including odometer fraud), and difficulty in registering or insuring these vehicles. This affects the long-term trust in the automotive sector.
“These irregularities also disrupt the formal vehicle market and can discourage global automotive brands from investing or expanding in Sri Lanka. It sends a negative signal about the predictability and transparency of our import and regulatory frameworks,” Perera stressed.
Further, according to him, an unreliable valuation system reduces investor confidence, affects local employment generated through authorised dealerships, and delays the country’s progress towards a cleaner and modern vehicle fleet, as certain used vehicle imports often fail to meet regulations, leading to a broader economic impact.
“The CMTA strongly advocates the strengthening of Customs procedures, especially in determining the transacted value based on which duty is calculated, better use of technology in valuation, and stricter enforcement to ensure fair competition, safeguard consumers, and protect Government revenue,” he added.
Addressing legal loopholes essential
In this light, speaking to The Sunday Morning Business on the broader economic impact of these legal loopholes, University of Colombo (UOC) Department of Economics Professor Priyanga Dunusinghe highlighted the requirement to prioritise addressing such loopholes within Customs and generally improving the capacities of revenue collection entities.
“Practices carried out by Customs in valuation processes regarding both brand new and used vehicles seem to have been in use for a while, even prior to Sri Lanka’s vehicle import restrictions. While Customs may have upgraded its valuation approaches over the years based on manufacturing and global market prices, loopholes still exist within the system. Historically, traders have also used various tactics impacting valuation processes,” he said.
He further observed that in an open market economy, regulating the private sector required smarter, more proactive approaches from public entities, noting that loopholes could otherwise be easily manipulated.
In this light, Prof. Dunusinghe recommended improved capacity building and technological advancements at Customs as well. He stated that the economic crisis had forced the public sector to acknowledge some of these loopholes, adding that these areas needed improvement to avoid such practices and establish a harmonious system.
The Harmonised System (HS) code is a unique way of identifying and coding merchandise/commodities to facilitate international trade, Customs regulations, and applications.
Prof. Dunusinghe noted the need to delve into more detail beyond the HS category, with countries like the US moving to 10-digit HS codes to further specify products and since many modifications were coming into play, especially regarding vehicles. Hence, he noted that further detailing of product classification was required for better revenue collection.
He also noted the need to ensure continuous updates at Customs, keeping pace with various technological and other changes, as well as providing the necessary resources, manpower, and capacity accordingly. According to him, Sri Lanka has failed to keep up with changes and improvements in its administrative systems in revenue generating entities, in terms of both exports and imports.
The Customs Ordinance is the primary legislation governing Customs operations in Sri Lanka, regulating the import and export of goods and the collection of associated duties. Prof. Dunusinghe noted that since the existing ordinance was outdated, problems related to actions of officials in regulatory measures were partly caused by such approaches.
According to him, the loopholes lead to many financial costs and can be manipulated by certain entities; therefore, amendments to the existing law to tackle these are essential.
“It is high time for Sri Lanka to rethink archaic legal frameworks. With regard to Customs, unfortunately, we have not witnessed any improvements with respect to the legal framework, partly due to resistance from workers.
“The Government should prioritise critical reforms, such as Customs legal frameworks, and make necessary adjustments soon, either within this year or the next. It is important to construct public opinion supportive of introducing new or amending existing laws according to requirements, which will facilitate the Government in achieving revenue targets,” he added.
Addressing several macroeconomic concerns, Prof. Dunusinghe also highlighted that when revenue was affected due to such legal loopholes, the Government would be compelled to compensate using other measures in order to fill the financial gap, such as maintaining higher VAT rates, thereby overburdening the poor to pay the price. Hence, these leakages need to be addressed and stopped in a timely manner.
“Under the previous administration, there was a proposal to establish a revenue authority, with all entities, including Customs, Excise, and Inland Revenue, in one place, sharing information. This must be reconsidered by the incumbent Government. A dedicated revenue authority helps in avoiding issues resulting from legal loopholes,” he added.