Sri Lanka’s engine displacement-based vehicle taxation system is creating significant distortions in the automotive market, penalising some of the world’s most established and fuel-efficient hybrid models while giving electric vehicles a strong fiscal advantage, according to equities and research firm JB Securities.
The firm’s Chief Executive Officer, Murtaza Jafferjee, highlighted what he described as a systemic bias against proven Japanese hybrid vehicles, particularly models equipped with 2.0-litre powertrains. Despite strong consumer demand for reliable Japanese hybrids, punitive duties on vehicles with internal combustion engines above 1,500cc have limited the availability of several globally recognised models in Sri Lanka.
“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,” Jafferjee said.
He argued that the current tax structure effectively rewards certain vehicle technologies over others because taxation is heavily influenced by engine displacement rather than overall environmental performance. As a result, hybrid vehicles with larger but highly efficient powertrains can face a heavier tax burden than some electric or extended-range vehicles whose internal combustion engines serve a supporting role.
The impact is already visible in registration figures. Total hybrid vehicle registrations fell to 2,288 units in July from 3,023 units in June, with sports utility vehicles accounting for almost the entire hybrid segment. Toyota, Honda and BYD were among the leading brands, with BYD expanding its presence through models such as the Sealion and Denza ranges.
The taxation structure also raises questions about the long-term value of vehicles in Sri Lanka’s secondary market. Japanese full-hybrid systems, particularly those produced by Toyota and Honda, have historically benefited from strong resale demand, widespread availability of replacement parts and established expertise in repairing hybrid battery systems.
Electric vehicles and newer plug-in or extended-range powertrains, meanwhile, face a different set of concerns among second-hand buyers. Battery degradation, potentially expensive traction-battery replacements outside warranty and the rapid pace of technological development can create uncertainty around long-term residual values.
Despite these concerns, Sri Lanka’s electric vehicle market continues to experience strong demand. Passenger electric motor car registrations reached 992 units in July, with Chinese manufacturer BYD accounting for 801 units. BAW and Wuling followed with 63 and 53 units respectively.
BYD also dominated the electric SUV category. Of the 433 electric SUVs registered during the month, 314 were BYD vehicles, with the company’s Atto crossover range contributing significantly to its market share.
Overall electric vehicle registrations remained at historically elevated levels, although the market experienced some moderation. Financing penetration also declined, falling to 34.7 percent from 41.2 percent.
The figures highlight the growing influence of Chinese electric vehicle manufacturers in Sri Lanka, particularly BYD, as the country’s tax structure increasingly encourages consumers towards battery-electric and newer electrified vehicle technologies.
However, industry analysts argue that encouraging cleaner transportation does not necessarily require favouring one powertrain technology over another. They suggest that Sri Lanka could move towards an emissions-based or lifecycle carbon taxation model instead of relying primarily on engine displacement.
Such a system would assess vehicles according to their overall environmental impact rather than simply the size of their combustion engines. This could allow efficient 2.0-litre hybrid vehicles to compete more fairly with fully electric models while giving consumers greater freedom to choose vehicles based on factors including fuel efficiency, reliability, infrastructure requirements and long-term ownership costs.
The debate ultimately reflects a broader challenge for Sri Lanka: how to accelerate automotive decarbonisation without creating unintended market distortions or exposing consumers to greater risks in the secondary vehicle market.
Image Disclaimer: Images used in this article are the property of their respective copyright holders and rightful owners. No ownership is claimed over the images.
