Sri Lanka is heading for a blowout budget deficit in 2016 with statistics in January 2016 indicating that the government’s tax revenue collected from motor vehicle imports are freezing sharply, a top analyst cautioned last week. The Treasury is targeting to raise around Rs. 280 billion in 2016 with 2015 being a record year, in which the state coffers collected a mammoth Rs. 230 billion in taxes from importation of motor vehicles, significantly higher than the previous record of Rs. 134 billion achieved in 2011.

Murtaza Jafferjee
Murtaza Jafferjee

“If January is an indication of things to come, revenue collections will probably fall short by 50% and that is around Rs. 140 billion. This will further compound the revenue collection efforts of the treasury and unless drastic steps are taken to revise tax policy or a dramatic cut in capital expenditure in hard and soft infrastructure, we are heading for a blowout budget deficit in 2016,” Chairman and CEO of JB Securities, Murtaza Jafferjee opined.

He said that like many things, tax also has elasticity and hence beyond a certain point it is counterproductive to keep increasing taxes especially on items that the rich view as a discretionary purchase.

“They have to be enticed to buy by keeping the tariffs at attractive levels. For the lower middle class for whom a 2-wheeler or 3-wheeler has a greater functional purpose permitting them mobility, demand would be more inelastic while for the higher income groups who have already acquired a form of mobility, e.g. Japanese car, trading up to a higher spec vehicle is more an indulgence. Thus tariffs on cars have to be set at a level that is revenue elastic,” Jafferjee pointed out.

He further advocated that thresholds should not be set on engine sizes or fuel type, but on value, which will then be tax progressive at each threshold level.

“A three wheeler pre budget cost around Rs. 500,000, some players offered 90% LTV so the initial down payment was Rs. 50,000. Tariff increases and depreciation of the currency increased the price to Rs 600,000, based on a LTV of 70% the initial down payment has increased to Rs. 180,000 — this is a hurdle too high for many low income groups,” JB Securities Chief highlighted.