ECONOMYNEXT – Sri Lanka’s vehicle registrations fell sharply in February from the previous month with mini-trucks and three-wheelers used by small businesses among the worst hit by highly iniquitous and distortionary taxes and import restrictions, an equities research house said.
Sri Lankans pay between 26% to 175% more for a car compared with the Philippines, a similar lower middle income country, whose GDP per capita of US$ 3,000 is lower than Sri Lanka’s which is around US$4,000, JB Securities said.
“The current vehicle taxation policy is detrimental towards greater inclusive development and impedes higher economic efficiency by distorting the market for vehicles,” said Murtaza Jafferjee, chief executive of JB Securities.
“Continuing with such a policy will have electoral repercussions,” he warned.
The analysis of motor vehicle registry data by JB Securities showed higher import taxes had killed demand for mini trucks and three-wheelers, a common form of transport used by micro enterprises like small retail stores, garages and bakeries.
Registrations of mini trucks that were normally around 1,400 units a month crashed to 298 in February 2017 while three-wheeler registrations crashed from around 6,000 a month to 900 in February.
In the government’s 2017 budget a minimum excise tax of Rs 1 million was imposed on imports of goods vehicles, effectively increasing the duty by three times with the selling price of mini trucks jumping from Rs 1 million to around Rs 1.8 million.
The loan to value (LTV) ratio on a three-wheeler was capped at 25%, making the initial down payment jump from Rs 200,000 to Rs 485,000.
Jafferjee said the current vehicle taxation policy is detrimental towards greater inclusive development since an integral capital input for a micro enterprise – of less than 5 people – is a basic utilitarian vehicle like a three-wheeler or mini truck.
“The marginal return to capital is very high,” he explained.
“A baker who has access to a mobile retailing unit through a modified three-wheeler or mini truck enjoys much greater sales – carrying and displaying capacity is greater, radius of travel is 10 times more, the alternator can charge the battery that can power a fan or food warmer.”
Similarly, a tradesman can fit out a truck as a mobile workshop permitting him to carry a larger range of tools, spares, material for the job, and power his electrical tools, he said.
“A farmer growing vegetables can carry his product to the wholesale market before spoilage. The uses are limitless,” Jafferjee said. “Acquiring such a vehicle is a function of the initial down payment and monthly instalment.”
Government surveys show micro enterprises account for 91.8% of the total establishments in the island and employ 44.6% of the total employment.
Increasing the productivity and economic output of the large number of the employed workforce is important to speed up economic growth in the short term, Jafferjee said.
“The goal is to increase the output of the butcher, the baker, the plumber, the shop keeper, the farmer.
“It would be nice to have cutting edge high technology industries but even in the most advanced of economies they employ a small fraction of the population whilst the balance labour force is in low productivity manufacturing and service jobs, like flipping burgers.”
Restricting credit via directed LTV caps will force the poor to go to informal channels, with higher interest rates for the borrower and lower taxes for the state, Jafferjee said.
“Taxing mini trucks to the point where they are unaffordable destines the under privileged to poverty. It also creates huge social pressures as an individual who bought a truck before the budget is significantly better off than one who did not.”
Jafferjee said that if the aim was to increase revenue, a more just and equitable outcome would have been to limit tax holidays enjoyed by firms earning super profits rather than imposing a high burden on the economically under privileged through indirect taxes.
“In the last decade, we have seen a profusion of such establishments who continue to enjoy economic rents through rent seeking behaviour,” he said. “Since May 2016 the provision of tax holidays for new projects has been significantly minimized but there remain many enterprises who will continue to pay no taxes for a considerable period.”
Jafferjee said that if the aim was to reduce pressure on the balance of payment, it would be far more effective to increase fuel prices to reduce demand.
And if the aim was to manage traffic congestion, most acute in the western province, a combination of higher fuel prices, priority lanes for buses, and congestion charging are better measures, Jafferjee said.
“The inability to widen the tax net is not a reason to create a highly distortionary vehicle taxation system. It deprives choice, distorts the playing field and is unfair for those who pay their fair share of taxes.”
(COLOMBO, March 31, 2017)