An analysis of budget 2018 from an automotive perspective



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By Sheran Fernando


Historically, customs duty on motor vehicle imports have been calculated on the CIF value of the vehicle. In customs terminology, the value for customs duty is assessed on the price "paid or payable" by the importer.


The assessment of value for duty computation has a significant impact on the selling price of a vehicle, because duty in Sri Lanka is so high. Duty for a 2,000 CC1 petrol vehicle used to be an effective rate of 184% of the price paid or payable. Thus, if the value for duty purposes were to drop by one rupee, the cost of the car would drop by Rs. 1.84.


The assessment of the value for customs duty purposes has always been a challenge, and in my assessment, the complexity of making this assessment has historically led to a loss of revenue to the government.


The key change in the budget of 2018 is that motor vehicle duty is no longer calculated on values, but on the cubic capacity (CC) of the engine, be it petrol, diesel or hybrid, and the Kilo Watt (KW) output of the electric motor for an electric vehicle (EV).


I feel this system is much more equitable to all segments of the industry, including the customer. From the government point of view, the system is transparent and easy to administer.


What did the government set out to achieve?


Reading the budget speech, and studying the relevant appendices, it seems the government set out to achieve the flowing;


• Create transparency and a level playing field for the various segments of the industry


• Maximise revenue and minimize leakages


• Limit outflow of foreign exchange on the import of motor vehicles


• Set direction to the industry.


If these were the objectives of the government, I feel the budget has been very successful. In fact, I feel it has been one of the most successful budgets for the automotive industry in recent times.


Create transparency


The above tables define the import duty on any vehicle to be imported into Sri Lanka. All you need to know to work out the import duty of a vehicle to be imported is the CC of the engine, and whether it is Petrol, Diesel, Petrol Hybrid, Diesel Hybrid, or Electric. Once you define which of the four sources of power the vehicle to be imported is powered by, and you define the power of the vehicle, the table allows you to simply and easily calculate the duty payable. This is the easiest system of duty calculation that has ever been implemented in Sri Lanka.


This system is transparent to everyone. The system is absolutely easy to implement. It is not open for interpretation and thus not open for abuse.


Maximise revenue


The transparency of this system will stop the leakages that were prevalent to this point. These leakages existed because some importers could benefit from the complexity of motor vehicle valuation and get away with lower duty payments. Thus, the government will be able to collect greater revenue through the recommended system. In fact, the estimated revenue collection from import duty is Rs. 25 billion. I feel this target could be exceeded.


Limit outflow of foreign exchange


If you look at the steep cascading of the duty rates applied to vehicles with more powerful engines, it shows a steep cascading of duty applicable for more powerful engines, and even within a CC band, the smaller engine pays significantly less import duty than a more powerful engine.


Take for example a 1,000 CC petrol car compared to a 800 CC petrol car, the more powerful 1,000 CC car would attract a customs duty of Rs. 1,750,000 (Rs. 1,750 x 1,000) compared to the 800 CC car attracting a duty of Rs. 1,400,000. Rs. 350,000 is a very material sum of money in this market segment. Most people buying the smaller cars buy them on lease. An average four year lease repayment would cost Rs. 1,500 per Rs. 100,000 borrowed. This, the 800 CC car would cost Rs. 5,250 per month less on a lease. This again, is a material sum of money in this market segment and hence the policy will be effective to drive consumers to purchase less powerful engines.


Whist a 1,000 CC petrol vehicle attracts a duty of Rs. 1,750,000 a 1,300 CC petrol vehicle will attract a duty of Rs. 3,536,000. This further proves the budget will persuade consumers to purchase smaller engine vehicles.


Encourage fuel efficiency


The above table shows that a hybrid vehicle below 1,000 CC petrol attracts a duty of Rs. 1,250 per CC and hence the duty of a petrol hybrid would be Rs. 100,000 less than that of a compatible petrol non-hybrid.


The benefit of pushing consumers towards smaller engines and hybrids will lead to a significant reduction in expenditure of fuel. Hybrid vehicles are at least 25% more fuel efficient than non hybrid vehicles. So, if all vehicles in Sri Lanka were to move to hybrid, we could save 25% (or more) on the total import value of fuel for motor vehicles.


The total value of fuel imported for transport is approximately US$ 1,700 million1. This is around 9% of total imports and one of the largest imports for the country. Comparatively, the total import value of "transport equipment" which is not just motor vehicles but all transport related equipment including agricultural equipment, earth moving equipment and may even be rolling stock2 is US$ 931 million. This means that the foreign exchange outflow from the import of vehicles is much less significant than the foreign exchange outflow from the purchase of gasoline.


Assuming the entire fleet of Sri Lanka’s motor vehicles were to move to hybrid, which could bring a 25% saving in fuel imports, this saving would translate to US$ 439 million. This value would be 4% of our total exports. The point being made is that any possible saving in fuel is significant in the context of import reduction and balance of payments.


In context of reducing fuel imports, the benefits given for the import of electric vehicles is very significant.


The arguments presented above show that the budget 2018 has actively targeted the balance of payments improvement in a two pronged manner. On one side, it is actively discouraging the import of expensive motor vehicles through an import duty that cascades steeply for more expensive vehicles (through the increase of import duty in relation to CC) and on the other side, though the encouragement to import more efficient transport equipment and thus reducing the import of fuel.


The benefit of EV’s are not merely derived from the benefit of reduced fuel imports. The main benefit of an EV is that the vehicle, in terms of its design, is fundamentally more efficient than an Internal Combustion Engined (ICE) vehicle. In terms of energy efficiency, an ICE vehicle is estimated to transfer only around 50% of the input energy to the vehicles driven wheel. An EV is estimated to be able to transfer over 90% of the input energy to the driven wheel. This is a significant difference in efficiency.


The argument that Sri Lanka’s national grid is powered by fossil fuel and hence EV’s don’t bring efficiency is thus negated. Further, the potential to capture more solar and other alternative energies in Sri Lanka support the strategy that we should actively promote EV adoption.


Professor Ashok Jhunjhunwala, of the Department of Electrical Engineering, IIT Madras, and automotive advisor to the Indian Prime Minister, addressing the Automotive Component Manufacturers Association (ACMA), at their annual sessions 2017 in New Delhi stated that research showed that if all the vehicles in the world were to immediately convert to EV’s, the world would only need to increase its electricity generation by 10% and this increase could easily be generated by sources of alternate energy without resorting to using more fossil fuel.


Many countries have announced that all vehicle registrations will be electric by around 2025 onwards. Sri Lanka has made the announcement in this budget, with an announced date of 2040. This target I feel is conservative, but at least we have a target.


To be continued


 
 
 
 
 
 
 
 
 
 
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