The Hon. Speaker

¶ 01 In addition, I present the regulation under Item 2 of the Order Paper — the Regulation under the Excise (Special Provisions) Act, the Order under Item 3 — the Finance Act, and the Order under Item 4 — the Construction Industry Development Act.

¶ 02 Hon. Speaker, in terms of the Order Paper, today’s proposals particularly include several measures applicable to institutions under the Ministry of Finance, Economic Stabilization and National Policies.

¶ 03 First: on vehicle imports, we needed to create new HS codes for new classifications. Globally accepted Harmonized System (HS) codes are used to impose the appropriate duties when goods are imported. For vehicles, there are four principal categories relating to the fuel used and the propulsion system: - Diesel and petrol: the engine operates with fuel. - Hybrids: both an internal combustion engine and an electric motor operate; within these, sub-types exist for diesel-hybrids and petrol-hybrids. - Electric: propulsion is exclusively via an electric motor.

¶ 04 That framework posed no issue earlier. However, after years with minimal imports (about 6% of typical volumes), vehicle technology evolved globally. New technologies within the “electric” sphere now include additional propulsion and energy systems. When Sri Lanka Customs examined such vehicles, it emerged they did not fit the existing classifications. Some designs use fuel in limited ways to energize systems, but did not align with current categories. Without a suitable classification, these fall into “other,” which attracts relatively higher duties. Electric vehicles currently enjoy comparatively lower taxes, but if new-tech EVs fall under “other,” they incur very high duties, making imports impractical.

¶ 05 Accordingly, with Cabinet approval, a committee was appointed and new HS codes were created to classify these technology-evolving vehicles placed between the existing electric and hybrid categories. With new HS codes, we must set the appropriate duty rates.

¶ 06 When setting specific/customs and excise (production) duties, diesel, petrol, hybrid diesel, hybrid petrol, and electric categories have progressively lower rates as one moves toward full electric. The new category is neither purely electric nor purely hybrid; it lies between. On a reasoned basis, the committee determined the duty rate should be between the rates for electric (lowest) and hybrid (next). Therefore, the excise (production) duty is imposed at a rate applicable to that intermediate category.

¶ 07 In imposing that duty, vehicle output (kilowatt rating) and other parameters, as well as vehicle price, were considered. Lower-priced vehicles face a lower tax burden; higher-end luxury vehicles carry a higher burden. That is the second element.

¶ 08 Third: excise collection is via Sri Lanka Customs. As a non-producing country for vehicles, we collect revenue at import. Some vehicles already attract the Luxury Tax. When we introduce a new category, it must be aligned for Luxury Tax as well. If the new category were excluded from Luxury Tax while others are included, market distortions could arise. Therefore, we propose to adjust the Luxury Tax accordingly.

¶ 09 Currently: - Diesel vehicles: if CIF value exceeds LKR 5 million, the excess is taxed at 120%. - Petrol vehicles: if CIF exceeds LKR 50 million, the excess is taxed at 100%. - Hybrid diesel: excess over LKR 5.5 million taxed at 90%. - Hybrid petrol: excess taxed at 80%. - Electric: if CIF exceeds LKR 6 million, the excess is taxed at 60%.

¶ 10 Under our proposals, the new intermediate category will align proportionally with the electric category’s Luxury Tax structure.

¶ 11 Accordingly, we present for approval: - The Resolution under Gazette Extraordinary No. 2434/02. - The Regulation under the Excise (Special Provisions) Act in Gazette Extraordinary No. 2434/04. - The Order under the Finance Act relating to Luxury Tax in Gazette Extraordinary No. 2434/05.

¶ 12 Our objectives are to maintain market balance, fairness in taxation, improve efficiency and compliance in revenue collection, and enhance efficiency and compliance in customs and excise administration. We seek Parliament’s approval.

¶ 13 On revenue: questions were raised last week about our revenue process and whether Customs can meet targets — LKR 1,550 billion last year; LKR 2,115 billion this year. The approach is not excessive new taxation but improved efficiency and compliance. We reached last year’s target and are on track this year; collections to date are LKR 1,316 billion — close to last year’s total. Vehicles were expected to yield only around LKR 300 billion; much of the gain is from broader compliance.

¶ 14 On operational issues: concerns arose regarding port handling and containers. We are addressing them promptly. Two public issues gained attention: (1) Delays in releasing BYD electric vehicles — the dispute centered on whether the declared motor capacity was lower than actual. Customs, being cautious, intervened; the matter is now before court, and we await the court’s decision.