How to create a sane vehicle taxation policy in Sri Lanka
Each year, November is a roller coaster period for vehicle prices in Sri Lanka. That’s of course because the annual budget comes out and plays games with vehicle taxes: A few go down but most of them go up.
After this year’s mess came out, here’s a sentiment I saw posted in someone’s Facebook feed:
What’s the use it’s never ending issue, why would an average person expect to have decent living in Srilanka, when you have to pay 10 million for a standard car…only for rich and politicians can have good life.. rest have no hope….
Unfortunately, that person wasn’t exaggerating. Here’s the tax schedule according to the new budget proposals for 2018 for petrol and petrol hybrid vehicles:
Let’s say I want to buy a Toyota Prius with a 1.5L engine. Just the excise duty for that car will be Rs. 2500*1498 = Rs. 3,745,000 = $ 24,477. Yeah, that’s right- for a Toyota Prius with a 1.5L engine I need to pay nearly $25k in excise duty! Oh and that’s not all the taxes you have to pay — there’s a bunch of other stuff that gets added so my understanding is that one cannot expect to get a Toyota Prius to their hand without at least Rs. 8M in hand. That’s more than $50k.
So that person’s sentiment is understandable — a normal person cannot be expected to have a decent life with a car in Sri Lanka because we pay a fraction of what other countries pay yet and cars are just so expensive. This is not a good long term thing as everyone who can find more reasonable living conditions elsewhere will leave Sri Lanka.
Is owning a car a privilege? Should it be a luxury?
No of course not, nor should it be.
If you live in a city/country with superb public transport, a car can indeed be considered a luxury as you can have a perfectly comfortable life without one. However, that is not our Sri Lanka. Certainly not yet.
Second, in our country, a car is also a major status symbol. If you have a car then you’ve “arrived” in some way. (Of course the car prices justify that feeling as one can buy a decent house for the cost of a normal car.) As a status symbol, people who don’t have a car often looked down upon by others. That’s an unfortunate aspect of our culture — we have a very class oriented mindset about some things and so its very natural that everyone wants to buy a car. That’s BTW why I’m an Uber driver.
One can argue that we should be encouraging vehicle sharing services like PickMe or Uber and even short term car rental solutions like ZipCar to make it possible for people to get a car easily without owning one. I’m all for that, but until we stop looking down on people who don’t have a car, the dream for everyone in Sri Lanka is to be a car owner.
Wait, lots of cars means lots of traffic!
Well yes, if you don’t manage it. Why is it that the rich can be allowed to drive in a big car with one person and cause traffic but a less fortunate person is not allowed to do the same in a smaller, more fuel efficient car? That’s not right.
Instead we should reduce traffic by things like having congestion control policies, higher road use taxes, increased fuel prices, and strictly enforced high parking fees. Still want to drive? Sure!
That is correct — I prefer to let people buy cars but make it more expensive to drive them in a senseless way (like one person / car during traffic times in a city).
Lots of cars also means more petrol imports!
If we continue to bring in petrol or diesel vehicles then yes that’s true. However, what we should do is encourage people to use non fossil fuel vehicles; i.e., electric vehicles.
In other words, we can allow people to have a car but have policies that don’t make people go crazy and waste petrol/diesel and thereby cause a further drain on the national balance of payments.
Policy?
According to Wikipedia,
A policy is a deliberate system of principles to guide decisions and achieve rational outcomes.
Unfortunately, it appears that successive governments of ours don’t see or believe the and achieve rational outcomes of the aspect of the word policy when it comes to vehicle taxation policies.
The crazy changes each year means some people get amazing benefits while others are screwed. Example: About 10 years ago we bought a Honda CRV for Rs. 4M (yeah a brand new one — read it and weep people). That was in September. November that year the policies were changed and the price went up to Rs. 6.5M. NUTS! No, COCONUTS!
One cannot have rational policies without having clarity on what rational outcomes one wishes to achieve. Our governments have treated vehicle taxes as a way to give themselves personal benefits (often many of them are party to companies that import vehicles) or as a revenue source. They seem to have forgotten why people buy a car: to have freedom of movement.
Desired outcomes of the vehicle taxation policy in Sri Lanka
The long term outcome has to be to make it possible for anyone who wants to buy a reasonable car to be able to do that at a reasonable price. If you want to buy a big car or a fancy car then its fine to charge two arms and a leg in taxation: after all, the motivation is to enable freedom of movement, not freedom of luxurious movement.
Another outcome of course has to be to move away from imported fossil fuel powered vehicles to vehicles that run on widely available power in Sri Lanka: Solar power.
Finally, we must encourage locally manufactured and locally assembled vehicles.
Proposed policy
Here’s the gist of my proposal for a rational vehicle taxation policy:
- Any solar powered electric vehicle is taxed very little, say 10%. Hey if the thing can run on our hot sun, then go for it.
- Small 100% electric vehicles are also taxed very little, say 20%. Small can be defined as equivalent of less than a 1500cc car. (I don’t have technical expertise to define that precisely but I know others do.)
- For bigger 100% electric vehicles, for every (equivalent) CC of engine capacity beyond 1500, the tax goes up by and additional 0.2%. So you can bring a nice Tesla P90D, but you have to pay a bit.
- Any petrol/diesel vehicle with an engine less than 1500cc is taxed at say 50%. After that for every CC of engine capacity beyond 1500, the tax goes up by and additional 0.2%. So if you buy a 1800cc car your tax is 50+60% = 110%. Really want that 5L Ford Mustang? Sure, but pay 750% tax.
- Passenger vans with a capacity of more than 8 (as 7 passenger is standard for a big SUV) can be given a bit more engine capacity room of say up to 2000cc before the “luxury” addition kicks in.
- Buses with a capacity of at least 25 can be given up to say 3000cc before the luxury addition kicks in.
- If the vehicle is not brand new (i.e., not shipped directly from the manufacturer), then there’s an additional 50% tax added. Yes, I think its time we stop importing used cars and its time to get rid of the used car dealers.
- If the vehicle is manufactured or assembled in Sri Lanka then the tax drops by 10% as long as at least 25% of the value addition is done in Sri Lanka. So that means locally manufactured or assembled electric vehicles are tax free.
Right along with this approach we have to introduce a pay-for-driving approach. One way is to add more taxes to fuel prices but that doesn’t handle electric vehicles and also doesn’t allow us to discriminate against personal vehicles being driven during high traffic times in cities. We cannot also rely on odometer readings because Sri Lankan vehicle mechanics will make your digital odometer have any value you want for a pittance!
Solution is to introduce a box into every car that tracks all this and makes you pay at annual registration time or by credit card or your mobile phone. That’s similar to Singapore’s In Vehicle Unit.
Once we get such a device into every vehicle, we can have UK/London style congestion charging to Uber style dynamic surge pricing to whatever. Its all a matter of software :-).
No more permits, PERIOD
Every year the government plays games with permits. These are used to give parliamentarians and other politicians special benefits. In my world there would be zero permits. If you want a vehicle, pay the taxes according to the rules.
If there’s a need to give senior government workers a “retirement bonus” then that’s fine — lets give that. But not by screwing up the taxation policy for vehicles. So that means, NO MORE PERMITS for anyone for any reason.
Yes that means government organizations and UN missions and foreign embassies ALL have to pay the taxes. Sorry guys — you want to use a vehicle in Sri Lanka then you play by the rules.
Is this approach economically feasible?
I haven’t done the full calculations, but I am 100% confident that by tweaking the actual percentages (what I put above is a broad brush proposal) as well as congestion and road use rates we can achieve the desired revenues. Second, by encouraging more electric vehicles (and I mean really encouraging, not the kinda-sorta-encouraging that’s been going on for a few years now) we reduce our oil/fuel import bill as well and make the world a greener place.
In order to avoid the equivalent of a “run on the bank” and everyone ordering cars immediately, we need to give a guarantee that this approach is here to stay. The base percentages should not be changed for a very long time, and even when they are they should be changed significantly to avoid crazy situations like what happened when I bought the CRV.
We may need to have some type of a lottery system to phase this in over a period of some years as no one will really believe any policy in Sri Lanka will be stable for more than a few weeks, or until beyond the next election swings by.
Huh? What are you smoking?
Rational policies with Sri Lankan governments? Yeah right. Well true, no recent government has shown that they can do the right thing even for a short term let alone long term.
One can always hope for better leadership in the future. Those leaders need policies designed to achieve some objectives and this blog proposes a set of objectives and the seeds of a policy to achieve them.
I would love to hear your thoughts on this approach. If you think its stupid please propose alternatives — I’m assuming you’re with me that the current strategy is just dumb. If you feel otherwise please explain how its not.
