A pragmatic step

Last week, I commented on some positive aspects of the recent tax revision on vehicles. This week too, I am focusing on another aspect of the tax revision, namely the new regulations on reconditioned vehicles.

When Sri Lanka liberalised its economy in the late 1970s, it opened the floodgates to vehicle imports from Japan and some other countries, regardless of the age of the vehicles. A large number of vehicles which was well past their prime landed on these shores and entered our roads. It took a few years for the authorities to realise that such unfettered imports were actually hurting the economy and the environment.

What really is a reconditioned vehicle ? It is a glorified name for a vehicle used abroad for 3-3.5 years, which are mostly imported in a ‘as is’ condition without any repairs or reconditioning.

There are cases when the exporter fits new tyres, batteries or other spare parts, but it is by no means a ‘new’ car. Many cars are sourced from the Japanese car auction system, which does have a certification system for the mileage, exterior and interior, but the fact remains that these are used cars. Of course, there are cars that enter this system with just a few genuine kilometers on the clock, which are virtually brand new.

The upper age limit for passenger cars imported to Sri Lanka was 54 months, but through the latest tax and duty regulations, the Government has reduced this to one year. This means that only those cars which have been used abroad for one year or less (12 months) can be imported to Sri Lanka now.

Imports

This is one of the best decisions ever taken by any Government as far as auto imports are concerned. Any car which has been used for less than one year from the date of manufacture is likely to be in almost brand new condition, unless the mileage is very high.

It is also known that some of the cars exported to Sri Lanka have failed emissions and other roadworthiness tests in the country of original registration. Since we do not have a system of physically examining cars at the point of importation, these cars can enter our roads and pass local emissions tests later.

Most Sri Lankans also have the habit of installing used spare parts to their reconditioned vehicles, making matters worse.

However, there is no reason why the upper age limit of one year should be limited to cars only. It should apply to all vehicle categories including vans. Some buses and trucks which have been used for as long as 10 years abroad are imported freely. It is true that many large diesel engines are real workhorses and can run a million kilometers without a hitch. But there simply is no point in importing used buses and trucks because hardly any taxes or duties are imposed on brand new buses and trucks.

The price difference is often minimal. Even VAT is not charged on bus purchases – a 40 seater brand new bus can be purchased for just Rs.3 million.

Before commenting further on this aspect, let’s take a look at the reconditioned vehicle ‘industry’ in this country. We can see a large number of so-called ‘car sales’ all over the country, each one having at least 50 cars on show at any given time.

These cars have been imported on the assumption that people would turn up eventually to buy them, not on any confirmed orders by customers (which is the usual practice of brand new car importers). One can imagine the massive quantum of foreign exchange which had flowed out of the country with no definite aim. These car sales often occupy prime commercial lands which can be used for more productive purposes. And despite the rather preposterous claim by a reconditioned car importer that their industry employs around a million people, just two or three people are often adequate to run a ‘car sale’. This does not point to a very productive industry.

However, there should be a mechanism to encourage consumers to opt for brand new vehicles. The best mechanism is to impose a lower duty/tax band for brand new vehicles and a higher one for reconditioned ones, regardless of vehicle category.

The authorities have already done this for vans with a seating capacity of 13-20. Both petrol and diesel vans with these capacities will attract a cumulative duty of only 125 percent, whereas modified or reconditioned vehicles will attract a duty of 300 percent. No one in his right senses will want to buy a reconditioned van with 80,000 Km on the clock when a brand new one is available at an affordable price with zero mileage. However, this measure needs to be applied to all vehicles to wean people away from reconditioned cars, which are still cheaper at least by a small margin even at 200 percent overall taxes/duties.

The authorities should re-evaluate their strategy in this regard if they seek a complete stop to the reconditioned vehicle business. In many countries, the duty on brand new cars was reduced to encourage people to shun reconditioned ones.

Revision

As for hybrid vehicles, the Government has prudently kept duty rates comparatively low even after the recent revision, but one wonders whether it is prudent to allow the imports of used/reconditioned hybrid vehicles.

The battery in a hybrid car is generally believed to last 10 years, but there is no guarantee that it is in a perfect condition in a used hybrid car.

There is no way to know how much it has drained or whether the car had been involved in an accident that could have affected the battery.

However, with more brand new car importers literally getting on the hybrid bandwagon, the demand for used hybrids will wane. We also have to consider a ‘cash for bangers’ or a duty rebate scheme to take very old, mechanically unsound vehicles away from the roads. Such vehicles pose a danger to other road users and to the environment. In the UK, the Government had a scheme to buy old vehicles for scrap so that they could be removed from the roads. Many other countries have similar schemes.

The ultimate aim of these moves should be safer roads for all.