Sri Lanka Resumes Used Car Imports After 5 Years – But Over 200% Tax!?

The Sri Lankan government has lifted the import ban on private cars and motorcycles, which had been in place since early 2020, effective February 1, 2025. This ban, which lasted for approximately five years due to a shortage of foreign exchange reserves, is seen as a significant step toward the recovery of the Sri Lankan economy.

For a long time, automobile imports have been a key economic activity in Sri Lanka, with international brands such as Toyota, Honda, Suzuki, and Hyundai enjoying widespread popularity. However, due to a severe currency crisis that emerged in 2020, the government was forced to restrict imports of various goods, including automobiles, to prevent further outflow of foreign currency. This import ban had a major impact on the domestic automobile market, making it difficult to obtain new cars while simultaneously causing a surge in used car prices.

This article will provide a detailed analysis of the background, specifics, and implications of the import resumption.

Background of Import Resumption

In 2020, Sri Lanka faced an economic crisis triggered by the COVID-19 pandemic, leading to a sharp decline in foreign exchange reserves. To curb the outflow of foreign currency, the government implemented import restrictions on various goods, including automobiles.

However, as the economic situation gradually improved and foreign exchange reserves recovered, the government decided to lift import restrictions in stages. One key factor behind this policy shift was the strong lobbying by the Sri Lankan diaspora. Many among them had supported the government in the previous elections, making their influence significant.

The primary reasons for resuming imports include:

Fiscal Reconstruction Through Increased Tax Revenue

Import duties and taxes on automobiles are a vital source of revenue for the Sri Lankan government. With the resumption of imports, the government expects an annual increase of 200-300 billion Sri Lankan Rupees in tax revenue. This is crucial for meeting the 15% GDP tax revenue target, which is one of the conditions set by the International Monetary Fund (IMF) for financial assistance. The IMF has acknowledged Sri Lanka’s economic recovery and permitted automobile imports as a means of increasing revenue from import duties. Additionally, under its agreement with the IMF, Sri Lanka has committed to lifting all import restrictions by the end of the year, making this measure part of that broader commitment.

Normalization of Economic Activity

The removal of import restrictions signals the normalization of economic activities. It is also expected to revitalize the automobile sales industry and related sectors.

Responding to Domestic Demand

The prolonged import ban made it difficult to obtain new vehicles in the domestic market, leading to a sharp rise in used car prices. The resumption of imports is expected to meet public demand for automobiles and contribute to stabilizing prices.

Details of the Import Resumption

The resumption of vehicle imports was carried out in the following three phases:

• October 1, 2024: Importation of public passenger transport vehicles such as buses, special-purpose vehicles, and non-electric cargo transport vehicles was permitted.
• December 1, 2024: Importation of commercial vehicles and cargo transport vehicles was allowed.
• February 1, 2025: Importation of private vehicles (passenger cars, vans, SUVs, pickup trucks, etc.) was permitted.

Eligible Vehicle Types

• Passenger Cars: Vehicles classified under code 304 can be imported for personal use.
• Buses: For public passenger transport.
• Cargo Transport Vehicles: Includes trucks and vans.
• Special-Purpose Vehicles: Includes dump trucks, fire trucks, and ambulances.
• Motorcycles:
• Bicycles: Other non-motorized vehicles.

Motorcycle Imports

In the 1960s, British-made motorcycles such as Norton, BSA, Royal Enfield, and Triumph were popular in Sri Lanka. Later, when the importation of Japanese used motorcycles was permitted, Honda’s 90cc Super Cub and postal delivery motorcycles dominated the market. With the resumption of imports, a diverse range of motorcycles is expected to enter the Sri Lankan market once again.

Motorcycles with an engine capacity of 350cc or less can technically be brought into the country as personal baggage. However, whether they qualify for duty-free customs clearance depends on the individual's duty-free allowance and the vehicle's assessed value.

Key Conditions for Importation

• Importers:
  • Only registered vehicle importers listed with the Department of Motor Traffic (DMT) or government agencies may import vehicles in required quantities.
  • Private individuals can import only one vehicle within 12 months.
• Registration:
  • Imported vehicles must be registered under the buyer’s name with the Department of Motor Traffic (DMT) within 90 days of importation.
  • Late registration incurs a monthly penalty of 3% of the CIF price (Cost, Insurance, and Freight).
  • Importers must sell and register the vehicle within three months of importation or face a 3% surcharge.
• Re-Export:
  • Vehicles imported in violation of regulations must be re-exported within 90 days at the importer's expense.
• Age Restrictions:
  • From October 1, 2024, the following vehicle age limits apply:
    • Passenger Cars, SUVs, Motorcycles, Pickup Trucks: Must be within 3 years of manufacture.
    • Public Passenger Transport Vehicles & Commercial Vehicles: Must be within 5 years of manufacture.
    • Special-Purpose Vehicles & Defense Vehicles: Must be within 10 years of manufacture.
• Environmental Standards:
  • Eco-friendly vehicles are prioritized, with emission standards upgraded from Euro 4 to Euro 6.
  • The importation of gasoline or diesel-powered three-wheel taxis is prohibited, while the local assembly of electric three-wheel taxis is encouraged.
• Shipping Ports:
  • Vehicles are typically shipped to Colombo Port and Hambantota Port.
• Seaworthiness Inspection:
  • All used vehicles imported from Japan must obtain a seaworthiness certificate from the Japan Auto Appraisal Institute (JAAI).

Tariffs and Taxes

The tariffs and taxes applicable to vehicle imports are as follows:

• Customs Duty: 20%
• Value Added Tax (VAT): 18%
• Luxury Tax: A 60–120% tax is applied to passenger vehicles with a CIF price of 5–6 million Sri Lankan Rupees or more and transport vehicles with a seating capacity of 10 or more (including the driver).
• Excise Duty: A tax based on the vehicle’s age and engine power is applied to private and cargo electric vehicles. The tax rate announced on January 10, 2025, has been increased by 100% (Click here for details).
• Surcharge: A 50% surcharge on customs duty is applied to private vehicles, transport vehicles with a seating capacity of 10 or more (including the driver), and cargo vehicles.

※ VAT on imported items is calculated using the following formula:

(CIF price in Sri Lankan Rupees + 10% of CIF price in Sri Lankan Rupees + Customs Duty + Excise Duty + Port and Airport Development Levy + Cess + Surcharge) × VAT rate

In Sri Lanka, high import taxes on automobiles are imposed due to infrastructure burdens and the lack of domestic automobile parts manufacturing. These high import duties serve as a measure to prevent excessive capital outflow and limit the increase in the number of vehicles on the roads.

Impact of Import Resumption

The resumption of vehicle imports is expected to have both positive and negative effects on the Sri Lankan economy.

Positive Effects

• Increase in Tax Revenue: Higher import duties and tax collection will support the government's fiscal reconstruction efforts.
• Economic Revitalization: The auto sales industry and related sectors are expected to experience growth, leading to job creation. Notably, Diesel & Motor Engineering PLC (DIMO), United Motors Lanka PLC (UML), and Sathosa Motors PLC—all publicly listed companies—are expected to benefit significantly from the increased demand for small and commercial vehicles.
• Consumer Benefits: With a greater supply of new cars, prices are expected to stabilize, offering consumers more choices.
• Attracting Foreign Investment: The removal of import restrictions signals that Sri Lanka is open to investment, potentially attracting more foreign companies.

Negative Effects

• Decline in Foreign Exchange Reserves: Increased imports could lead to capital outflow, reducing foreign exchange reserves. Historically, vehicle imports have cost Sri Lanka up to $800 million per year, raising concerns about an expanding trade deficit and potential depletion of foreign reserves. Additionally, a decrease in the current account surplus is also a possibility.
• Expansion of Trade Deficit: An import surplus could further widen the trade deficit.
• Impact on the Used Car Market: A surge in new car imports may cause a drop in used car prices, affecting existing car owners.
• Environmental Concerns: Increased vehicle imports could lead to higher emissions and worsening air pollution.

Impact on Sri Lanka’s Automotive Industry

The resumption of imports brings both challenges and opportunities for Sri Lanka's long-stagnant automotive industry. While local car dealers and importers will face intensified competition due to an influx of new vehicles, they also stand to gain new business opportunities.

To prevent market disruptions and ensure smooth import processes, the government must implement measures such as strengthening import regulations and establishing clear, transparent guidelines.

Government Measures

To minimize the economic impact of the import resumption, the Sri Lankan government has implemented the following measures:

• Phased Import Process: The import resumption is being carried out in three phases to prevent a sudden outflow of foreign currency.
• Import Restrictions: The government has limited the number of vehicles that can be imported per person to prevent excessive imports. Additionally, it aims to cap this year's total vehicle import value at approximately $1.2 billion.
• Registration System: An annual licensing system for importers has been introduced to regulate the automobile market, ensuring tax revenue collection and market stability.
• Monitoring System: Foreign currency outflows are monitored biweekly, with interventions planned if necessary.

Conclusion

The resumption of vehicle imports is a significant step toward economic normalization in Sri Lanka. However, concerns remain about the potential decline in foreign exchange reserves and widening trade deficit due to increased imports.

The government has pursued this decision with expectations of higher revenue and economic stimulation, yet it simultaneously faces the risk of depleting foreign reserves—a dilemma that underscores Sri Lanka’s economic challenges.

Environmental concerns also pose a critical issue. While the government aims to promote eco-friendly vehicles, the overall increase in automobiles could worsen air pollution and other environmental problems.

To mitigate adverse effects, the Sri Lankan government is enforcing import restrictions and strengthening monitoring systems. However, it must continuously assess the evolving economic situation. Public sentiment is currently mixed, with both optimism and concern surrounding the import resumption.

Moving forward, the government must listen to public feedback and carefully balance economic growth with the well-being of its citizens.

This policy shift has the potential to become a turning point for the Sri Lankan economy. How the government’s strategies, market trends, and public responses unfold will significantly influence the country’s economic trajectory.

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Japanese auto auctions operate as B2B (business-to-business) platforms, meaning general consumers cannot participate directly. Furthermore, auction participation requires strict membership screening and registration fees, which is why many used car dealers and exporters rely on intermediary auction agents rather than becoming direct auction members. However, using an intermediary adds extra fees, which ultimately increases the final cost for end consumers.

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