Thursday, February 21, 2013

A wholly unnecessary benefit, the car permits – except if you get one!



Economics is the most efficient use of scarce resources available to a country and how it contributes to the development of an economy. – My definition

When Sri Lanka issues a few thousand duty free permits a year to a set of people that the Government from time to time deems deserve this privilege, it completely skews the efficient use of scarce resource theory. It builds inefficiencies into the system. I do not know of another country that offers benefits to a selected few, changing the goal posts as a gift for services rendered.

Lately the Govt. has formalized what was previously an informal arrangement where car permits are now available for sale to the highest bidder by permitting their sale. Very soon we will hear of a weekly auction of car permits, as the most efficient way to dispose of your permit, and best way to find a market at the least cost to you sans a broker who used to make his cut on the deal.

Therefore the grant of a permit is actually a grant of a non taxable benefit to some. Apart from MPs senior public servants and other public staff, such as professors, doctors in govt. service, judges and an assortment of people that the Govt. deem from time to time receive a permit. They now include people who have hardly been in public service, where previously one had to serve in a job for a certain number of years before qualifying. Lately members of a commission also were granted!

It must also be noted that the value of a vehicle on permit granted to one may vary depending on your particular status. So a Minister may be permitted up to say US$50K whilst a MP for US$40K and for a Provincial Councilor US$30K and so on. This amount also varies and has been increased to take account of the increases in prices. In this way it is usually luxury cars that benefit from this permit. I must confess I do not know if there is a token amount of duty that is payable as those with no permit have to pay over 300% in duty to get down a new car. All in all the value of a permit today can be as high as Rs10M which is more than the average worker earns in his whole working life in Sri Lanka!

The consequence of removing this from perks will correct an anomalous situation where some have to pay tens of millions to purchase a vehicle where a permit holder has to pay a fraction, with the difference being the loss to the treasury in not receiving the duty on that vehicle. It also creates a problem where due to the permit in existence a person who has purchased a permit may be able to sell a car at a profit for less than a person who pays full price for it and see the drop on delivery.
Another basic fact is that an expensive sport utility vehicle, that is heavy on gas and very expensive to maintain, is a purchase of choice with the permit as price is less than a third of what one would have to pay with duty. This adds bogus status to the purchaser whilst the total cost is less than what an ordinary person may have to pay for a Toyota Corolla. It creates a lust for these uneconomical cars not being driven for the purposes for which it was made, but to add kudos to a politician, where the electorate has been massaged to believe one without such accoutrements is not worthy of one’s vote, distorting electoral politics too!! Often these politicians get a loan from a friend to make this purchase and make sure the friend is well rewarded by awarding lucrative contracts, encouraging wholesale corruption.

I am not one to be jealous of such practices, but I believe this anomaly distorts too many economic goals. It is better to pay the politician a proper wage than try and force this sort of unnecessary luxury on a person!

Yesterday there was the news item that January’s BMW registrations were up by 281% albeit in total numbers is not great, but in the SL context notable in the manner certain segments of the population are benefitting while the registrations of the Indian Maruti has dropped so low that the surplus stock will take a few years to sell unless the dealer re-exports it!

It must be remembered that in SL which is one of the lowest tax countries on earth for the wealthy, taxing luxury vehicles heavily was one way in which the wealthy would be taxed and many would wish to purchase luxury vehicles. So eliminating this by way of duty free vehicles went against this basic principal of equity.

In the same vein it is one of the highest tax countries for the poor, where even the sugar, salt, flour, potato, onions, canned fish, maldive fish that the average person consumes is heavily taxed; to say nothing of tobacco and alcohol. The govt. depends on the poorer classes of people (includes the wealthy but their spend as a percentage of their income is minuscule on such products) to support its spending, its wastage, its maintenance of a record number of ministers and ministries and a hugely profligate presidency which alone consumes over Rs10B annually, primarily to spread its reach in the form of a PR exercise that is not productive.

This will sound as a very unpopular move, as benefits cut affects people’s perceptions more than benefits given, but this must be a step in the right direction along with the recent reintroduction of personal income tax for public officials who have hitherto been exempt. The economic benefit to the Country will be immediate

3 comments:

Anonymous said...

you're probably correct that they should simply increase wages and do away with the permits but I wonder whether that would save the state money in the end or whether it is more economical for the state to issue permits rather than raise wages.

If the wages were increased sans the permits, would the politicians be driving such expensive cars or simply use their wages to buy cheaper cars, which would not provide as much tax revenue to justify their salary increase in the absence of a duty free permit.

I believe the idea behind the permits is to allow public servants to perform their duties more efficiently by allowing them a suitable mode of transport other than train or bus to get things done. Things have been skewed however due to the commodification of the permits which now makes it possible for rich Sri Lankans to get new cars while the public servants take a modest pay increase in the form of income received from sale of a permit.

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