MONETABRIEF – Import duties, which drive corruption by encouraging undervaluation, brought only 183.3 billion rupees compared to total 1,528 billion collected by Sri Lanka Customs up to July, official data show.
Import duties are imposed in Sri Lanka mainly to allow political powerful domestic manufacturers to exploit customers at higher than world prices by not paying the required taxes to the government (tax arbitrage), leading to revenue losses.
The current administration re-imposed import duties on cars, which allows local assemblers to take (arbitrage) the taxes.
Sri Lanka started to hike import duties from 1952 as the central bank printed money to create forex shortage, starting the island's post independent path to de-liberalization, internal strife to become a lagging nation in Asia.
The import surcharges imposed in the 1952 crisis was made permanent in the following year as forex shortages continued.
The PAL tax was imposed after the 2001 currency crisis. The PAL tax was imposed on imports including raw material for exports at a lower rate. There was an IMF program in that period.
The CESS taxes, was originally enacted in a mis-guided effort to boost exports by keeping the prices of exported raw commodities lower than world prices (world price-CESS) hurting export-oriented farming in particular.
Sweeping CESS taxes was imposed in the 2004 currency crisis. In 2004 monetary policy was run by Deputy Governor W A Wijewardene and currency trouble came from veto by macro-economists in the Treasury involving actual true fiscal dominance.
The Treasury, which was under the control of macro-economists slapped a 20 plus page CESS gazette as the rupee came under pressure from then 60 billion rupees printed in 2004.
At the time the Treasury which was under the control of macro-economists, put pressure on the central bank not to raise rates and the central bank did not print money on its own unlike after 2015 under mid-corridor (single policy rate), doctrine.
The high taxes slammed as macro-ecomnomists print money then lead to undervaluation, mis-declaration and corruption. Price controls may also follow, triggering further corruption and disrespect for the law.
Though Singapore is now known as a nation with little corruption, when the British returned after World War II, it was ridden in corruption due to controls brought during the 'Banana Money' period.
The British Military Administration was dubbed the Black Market Administration as it continued Japanese-era controls.
While new taxes and surcharges are imposed after rate cuts by the central bank trigger external crises, they are very slow to be taken off.
The 2004 CESSes which created a new class of protectionists, are to be taken off only from 2028, delaying Sri Lanka's export competitiveness outside of special zones.
DELIBERALIZATION : Import protection comes fast as the central bank drives up inflation and shatters the rupee, but they are slow to go. The 2004 CESS taxes are going only 24 years later from 2028. The 1952 style 'tax surcharge' was imposed on cars in 2026 as the rupee was busted.
After the current IMF program, Customs have got new powers over firms in export zones, and some some exporters say they are harasse with demands for documentation going back to a decade.
Unlike in countries like Vietnam where export firms can easily sell domestically, local sales require exhaustive documentation due to protectionist taxes.
The SSCL was a new tax associated with the 2020 rate cuts and currency crisis which ended in external default, and was continued in the IMF program.
The PAL came in the so-called 'food crisis', a commodity bubble fired by the Federal Reserve along with the housing bubble.
At the time the Trade Ministry proposed under Minister Bandula Gunawardene the PAL as a single tax with the good intention of avoiding the cascading taxes from PAL, VAT and import duty.
However, it is now imposed for protection to keep food prices high and protect farmers.
All import duties – supposedly imposed for developing infant industries – become a tax on exports - by not only making inputs expensive but also driving up food prices, which drive up wages or make people who cannot make ends meet migrate out to the Middle East.
The first country to resist protection and become an export powerhouse was Hong Kong after World War II which had a currency board style regime and free trade.
The strategy was copied by Taiwan about a decade later, along with monetary stability, with tax rebates to avoid the problem of 'effective taxation' import duties after initially giving tax rebates. Taiwan then invented free trade zones, initially linked to Kaohsiung port after a senior administrator saw an Italian free port.
Singapore the followed in the late 1960s. After separating from Malaysia, Singapore dismantled the 'common market' of import protection in a single day and eliminated all import duties after re-establishing a currency board for monetary stability.
In the 1970s, as Taiwan appreciated its currency in the wake of the collapse of the Bretton Woods and started to collect high levels of reserves with deflationary policy, import duties were reduced. (Colombo/Sept09/2026)