After nearly five years of import restrictions, the Government has opened the gates to the global automobile market. As of February 1, 2025, all types of vehicles are once again permitted into the island, under a new regulatory regime aimed at balancing economic revival with foreign exchange discipline.
The decision marks the most significant shift in trade policy since the 2020 blanket ban on vehicle imports—a drastic measure imposed at the height of Covid-19 pandemic, which led to a foreign exchange crisis.
DMT Chief Kamal Amarasinghe
Although the Government lifted the vehicle import ban, it has imposed high taxes to control the number of imports. As of February 1, 2025, all vehicles classified under Chapter 87 of the HS Code are subject to a 20 percent import duty and an additional 50 percent surcharge on that duty—bringing the total tax to 30 percent of the vehicle’s CIF (Cost, Insurance, and Freight) value. These steps aim to boost Government income while limiting the pressure on Sri Lanka’s foreign currency reserves.
Many sole agents of reputed car brands will capitalise on the surge in demand on account of this, particularly in the small car and commercial vehicle categories. Leasing and finance companies will also benefit significantly, as the rise in vehicle imports fuels demand for vehicle financing. However, challenges such as high taxes and currency depreciation remain key risks. As the market adjusts to the new regulatory landscape, companies with strong operational networks and diversified offerings are likely to emerge as industry leaders.
Impact
Years of restricted imports have created significant unmet demand, particularly for small passenger vehicles and Sport Utility Vehicles (SUVs).
The lifting of restrictions on specialised vehicles such as dumpers, tippers and tankers is expected to boost business.
According to the Commissioner General of Motor Traffic Kamal Amarasinghe, the Department of Motor Traffic (DMT) has registered 40,704 vehicles between February 20 and May 14, 2025. “Almost all of them were emission-free vehicles—mostly electric or hybrid,” he said. “Some were fossil-fuelled, but they produce much less emissions.”
Among the newly registered imports were 4,422 cars, 32,199 motorcycles,1,060 land vehicles, 266 single cabs, 984 three-wheelers, 225 lorries, 535 trailers and browsers, two special-purpose vehicles, 358 dual-purpose buses and commercial vans and one fully equipped ambulance. The special-purpose category includes crane lorries, mobile drilling rigs, concrete mixers, fire trucks, and tankers.
The easing of the import ban was expected to bring down the prices of used vehicles which escalated during the import freeze. New vehicle arrivals are likely to stabilise the second-hand market while driving growth in related sectors, including spare parts, servicing, and leasing.
With higher vehicle imports, leasing and finance companies are poised for significant growth. Customers looking to finance vehicle purchases will increase demand for leasing services, especially for small cars and commercial vehicles.
Challenges in the system
Steep import duties have significantly driven up vehicle prices, threatening to dampen demand—particularly among middle-income buyers. At the same time, the continued weakness of the Sri Lankan Rupee is inflating import costs further, squeezing dealer margins unless pricing strategies are swiftly adjusted.
A new policy permitting individuals to import one vehicle per year was intended as a controlled re-entry into global markets. But it risks opening the door to a shadow market, especially for reconditioned vehicles, where unregulated competition could undercut formal importers and erode expected tax revenue.
When asked whether fraud had increased in the wake of the regulatory easing, Amarasinghe said that the Committee on Public Accounts (COPA) is currently investigating a string of serious breaches involving the Department of Motor Traffic (DMT).
According to DMT sources, these include under-declaration of vehicle values and misuse of import allowances—tactics that have cost the State significant revenue. One particularly egregious case involved the fraudulent registration of high-end vehicles under false categories, such as tractors or religious vehicles, to skirt duty payments. The scheme, allegedly involving DMT insiders, exposed glaring weaknesses in oversight mechanisms.
In another instance, importers allegedly fed false information into the DMT’s computer system to bypass Customs clearance entirely—dodging tax liabilities in the process.
Operational hiccups are also mounting. On April 28, the DMT abruptly suspended the issuance of number plates and registration stickers, citing a critical shortage of stock amid a surge in vehicle registrations. “People waited so long for the import ban to be lifted. Now they are waiting again—this time for a number plate,” said an official at a local dealership, speaking on the condition of anonymity.
The shortage stems from a failure to scale up production and supply channels to match the post-ban demand. Number plates, which require reflective, standardised materials, are produced by a limited group of authorised suppliers. The bottleneck has underscored the lack of preparedness among supporting institutions.
Critics said the gap between policy and implementation is glaring. “The reopening signalled economic normalisation,” said one transport analyst. “But the support systems still look like they’re stuck in the lockdown era.”
Revenue aspect
Central to the Government’s fiscal calculus is a bold projection: those vehicle-related taxes will yield approximately Rs.300 billion in revenue this year alone. This is expected to come from a cocktail of excise duties, VAT, and sharply hiked levies pegged to engine capacity and vehicle age.
Excise duties now range between 200 percent and 300 percent, while a 30 percent total import duty—a combination of customs and surcharge levies—applies to all vehicle imports. Vehicles valued above Rs.5 million attract an additional luxury tax, with rates climbing as high as 120 percent. However, this has not deterred the import of high end vehicles such as Range Rover, Rolls Royce, Bentley and Ferrari. Among the newly registered vehicles are a couple of Rolls Royce Cullinan SUVs worth around Rs.500 million each after taxes and duties.
The new car import policies are part of a wider fiscal strategy aimed at achieving a primary surplus of 2.3 percent of GDP and increasing Government revenue to 15.1 percent of GDP—ambitions aligned with the country’s IMF-supported economic reform agenda.
But while the numbers look promising on paper, not everyone is convinced.“A Rs. 300 billion target is ambitious, especially when high import taxes could suppress demand,” said a senior analyst at a Colombo-based economic think tank. “There is a fine line between raising revenue and choking off volume.”
To prevent a flood of imports that could once again destabilise the country’s fragile foreign reserves, the Government has introduced a series of stringent compliance measures. Individual importers are limited to one vehicle per year, and all vehicles must be registered within 90 days of Customs clearance, failing which a late fee of 3 percent per month (capped at 45 percent) is levied.
Importers must also present a Taxpayer Identification Number (TIN) and provide affidavits affirming they have not imported another vehicle within the past year. Individual customers should also submit a TIN number or tax file number at the time of registration, though this is not required if the car is leased and the vehicle identification sheet goes to the leasing company.
The reintroduction of vehicles into the market excludes concessionary permit holders, thereby denying tax breaks that once led to a surge in high-end imports under political patronage.
Effect on stock market
The resumption of vehicle imports has jolted the stock market into motion. Analysts expect a 60 percent revenue jump at leading car importing and leasing companies. The finance and leasing sector, which stayed afloat during the ban through secondary market financing, is now looking at a 15 percent to 25 percent revenue uptick over the next year. As customers rush to fund newly available imports, leasing companies are expected to post healthy portfolio growth.
Still, risks remain. Chief among them: the pressure on foreign exchange reserves. Each imported vehicle represents a dollar outflow. The country is still nursing wounds from its 2022 sovereign debt default. Officials said that the strict import limits and a harsh tax regime will regulate inflows, but sceptics warn of a replay of past crises.
“The Government is walking a tightrope,” said a former Central Bank official. “Too many imports could reverse the gains made in stabilising the rupee and rebuilding reserves.”
In parallel, currency depreciation and global price shifts could further dampen affordability. With retail prices soaring due to high duties and freight costs, the middle-income consumer—the mainstay of the vehicle market – could remain priced out. If the Government can enforce its regulatory framework effectively, vehicle imports could become a valuable engine of economic recovery.
But if buyers are deterred by the steep costs, or if loopholes are exploited to bypass official channels—such as under-declaring vehicle values or abusing the one-vehicle-per-person-per-year rule to create a grey market—the expected tax windfall may never materialise. In short, the Government’s revenue hopes hinge on disciplined enforcement and genuine market uptake. Any slippage on either front could stall the plan before it gains momentum.
