Sri Lanka’s practice of taxing vehicles by engine size is keeping some of the world’s best-known fuel-efficient cars out of the market while accelerating the arrival of battery-electric models, the brokerage JB Securities has said.
The criticism turns on a technical point with a large commercial effect. Because duty rises steeply on internal combustion engines above 1,500cc, full hybrids built around a 2.0-litre petrol engine are taxed as large-engined cars — even though the engine is only part of the powertrain.
The cars that are missing
JB Securities Chief Executive Officer Murtaza Jafferjee named the models the structure excludes.
“It is somewhat ironic that Sri Lankan consumers have limited access to globally acclaimed models such as the Toyota Prius, RAV4 Hybrid, and Corolla Cross Hybrid, despite their reputation for reliability, fuel efficiency, and strong resale values,” he said, the Daily Mirror reported.
“Their absence is largely attributable to a tax regime that penalises their 2.0-litre hybrid powertrains, while often favouring EV-first vehicles whose internal combustion engines play only a supporting role.”
He said using displacement as the key determinant “effectively rewards particular engineering solutions over others, creating market distortions that restrict consumer choice and exclude some of the world’s most successful vehicle models from meaningful participation in the Sri Lankan market.”
What July’s numbers show
Hybrid registrations fell to 2,288 units in July from 3,023 in June, with sport utility vehicles accounting for virtually all hybrid volume — led by Toyota, Honda and BYD’s Sealion and Denza ranges.
Electric vehicles held up far better. Pure-electric motor car registrations reached 992 units in July, of which BYD accounted for 801, ahead of BAW on 63 and Wuling on 53. In the electric SUV segment, 433 units were registered, BYD taking 314 of them, largely through its Atto crossover line.
The wider market was softening at the same time. Total vehicle registrations fell 8.5% month-on-month to 53,221 units in July from 58,151 in June, and were 15.2% below the May 2026 peak of 62,776, Daily FT reported. Overall EV registrations eased to 7,170 from 7,745 but remained, in the brokerage’s words, historically elevated — a total dominated by 5,544 electric two-wheelers.
Two financing figures, two different scopes
The reports carry financing numbers that do not describe the same thing, and should not be read as a contradiction.
The Daily Mirror reported that financing penetration dropped to 34.7% from 41.2% without specifying the segment. Daily FT reported that the financing share for brand-new cars was 42.8%, “broadly unchanged from recent months.”
A similar caution applies to BYD’s two near-identical figures: 800 registrations refers to BYD’s brand-new motor cars, while 801 refers to its pure-electric motor cars. The numbers are close by coincidence of scope, not because either is a restatement of the other.
The resale argument
Jafferjee’s case rests as much on residual values as on sticker prices.
Japanese full hybrids from Toyota and Honda have historically held their value in Sri Lanka’s second-hand market, supported by parts availability, modular battery repairs and a long track record. Battery-electric and complex plug-in models have tended to depreciate faster, on concerns about long-term battery degradation, the cost of out-of-warranty traction battery replacement, and rapid technological obsolescence as manufacturers iterate.
The tax structure, on this reading, pushes buyers toward the powertrain with the weaker resale position.
What the industry wants instead
Analysts cited in the reporting argue that decarbonisation without asset-value risk requires moving off the engine capacity formula altogether, to an emissions-based or lifecycle carbon basis for taxation.
Neither report said whether the Treasury is considering such a change, gave a timetable for any revision, or set out what a switch would cost in revenue.
Context
The vehicle tax structure sits inside a wider import picture the government is watching closely. Vehicle and fuel imports have been reported as a driver of the widening trade deficit, and the current account has now been in deficit for four consecutive months.
The Department of Motor Traffic, which registers every vehicle in these counts, changed hands this week, with Air Vice Marshal (Retd.) Thushara Indunil Fernando taking over as Commissioner General.