Tuesday, June 1, 2010

The Reduction in the Import Duties, especially on vehicles

A reduction in various import duties has been announced. As usual there has been no honest explanation of why. While this reduction has been predicted for over 6 months now amongst the circle of people in the know, as one can see certain shares had gone up a while ago in anticipation of this announcement, it nevertheless needs to be looked at impartially from the current street talk of the cocktail circuit.

There is no argument that in 2009, the revenue collected from Car duties dropped dramatically, as only those with public servant permits, and politico permits brought in new vehicles duty free. In a calculated move to turn this around it was decided that this move will increase revenue with the pent up demand for vehicles which the revised prices will satisfy. It is probable that at most there will be about Rs25B in the next 12month period in taxes which will help reduce the deficit.

The expected revenue is still only a guess. There is some dispute at the moment of writing about whether this is across the board or on a restriction on the cc capacity. Any restriction will only reduce the sums raised. As so little taxes are raised from the wealthy, who rarely pay income taxes in Sri Lanka, the car duties were the only way they ever paid taxes, so this was thought by the policy makers as a progressive tax on the rich, who will be the purchases of cars. So that is the economic rationale.

Further this is a way of releasing idling black money, to cars, and indirectly back to the treasury by way of taxes, as policy planners are racking their brains as to how to get hold of the billions that people have stashed under their pillows,FDs or bank accounts, back into the government to reduce the deficit and spur growth.

On the grounds of public policy, the benefits are arguable, as there are many things that are required prior to any increase in vehicular traffic on the roads. It is of the utmost importance to improve the condition of the existing roads, which take a huge toll on the cars, where tires and spares, most of which are imported need to be replaced at a huge import cost due to the fault of the administration. The public transport system needs to be hugely improved to persuade more people to use this, reducing the pressure on the road system, in terms of traffic and commute times, both of which are huge costs to the economy. If the taxes collected are put to this use then it is a win win situation, where there will be a net benefit to the economy.

There will be an inevitable reduction in second hand vehicle prices in the local markets, which will also help those who are middle class to purchase a vehicle, and a flood of small cars for these contributors to the national economy, is an encouragement for them to remain in Sri Lanka, rather than emigrating!!!