MONETABRIEF – Sri Lanka's re-introduction of vehicle import duties on top of excise taxes and a depreciation allowance for used cars has led to protests from the United States to the World Trade Organization, an official said.
Until recently Sri Lanka only had excise duties on cars which did not discriminate between imports and domestically assembled cars.
Sri Lanka imposed a 20 percent vehicle import duty after the country emerged from an external default triggered by rate cuts to boost growth (target potential output gap), moving away from the previous practice of imposing an excise duty.
An excise duty does not discriminate between locally assembled and imported vehicles.
But when there is import duty, the local assembler which sells at a similar price pockets the tax, and it does not go to the government. That tax pocketing scheme is called 'tax arbitrage'.
After inflationary rate cuts and swaps led to currency trouble in early 2026, Sri Lanka also slapped a further surcharge on the import duty, this year.
Sri Lanka also has a practice of charging duty on 85 percent of the value of a used car compared to the brand new, when it is imported to the country six months after registration.
"The United States has complained to the World Trade Organization that the way the 85 percent tax is calculated in Sri Lanka is against that treaty," Customs Deputy Commissioner Chandana Punchihewa told reporters.
"There have been extensive discussions under the leadership of the Finance Ministry on what steps to take.
"I have also participated in those discussions. Recently, there was also a zoom call with Sri Lanka's permanent representative at the WTO to review the latest situation on the complaint."
The 85 percent value is determined by taking the value posted on the website of the manufacturer. At least 85 percent of the value has to be declared as the value of the vehicle.
"At one time there was only an excise duty imposed through the Excise Special Provisions Act which is administered by the Director General of Customs," Punchihewa said.
"At the time tax was charged only on the engine capacity or the kilowatt of the electric vehicles. There were complaints that European vehicles in particular had higher performance. For example turbo charged vehicles.
"After the economic crisis, and the IMF program, the government started to tax many items that were not subject to import duties earlier.
"Then the customs duty was re-imposed on vehicles. The question was whether the complaint from the US to WTO came due to this situation?
"Yes, that is correct. There are border taxes and inland taxes. Excise duty and luxury tax at the time, they were inland taxes. The WTO trade facilitation agreement does not apply. It applies only to border taxes.
"After studying our tax structure, the WTO has determined that the customs import duty, the surcharges on that – we had a recent surcharge imposed on vehicles - and the Port and Airport Development Levy.
"When the border taxes were not there the 85 percent question did not arise. Even though the Customs collected the earlier tax at the border, it was actually an inland tax.
"Now the government is taking action to solve the problem. There is a danger of Sri Lanka losing revenue over the matter, and we need to find a way to manage that risk. That is the discussion now."
In the case of brand new vehicles, the tax is charged on the invoice of the manufacturer. The problem arises in the case of used vehicles, he said.
"In Japan for example two-year old vehicles are bought at auction," Punchihewa said.
"There were actually used cars. But there are case in Europe in particular where cars are bought registered and immediately de-registered. For example Mercedes Benz are bought outside Germany and de-registered. So they are actually brand new vehicles.
"This is where we had the problem. Based on a 2012 we have to consider it a used vehicle.
A car worth 60,000 Euro may be declared as 45,000 Euros, he said.
"Under WTO rules, we have to use the importers invoice," Punchihewa said. "Some trading agency in that country issues the invoice. If not we have to prove through an Customs investigation that the value is not correct.
"When there are a large number of imports, it is not practical to do that. It was in that situation that the 85 percent value was used by the government. Even if the declared value was lower, we charged tax on the 85 percent.
"Importers also paid it. I think everyone new that the actual value was higher. So, there was no problem in paying at the rate of 85 percent." (Colombo/July12/2026)