Sri Lanka to tax car crashes in drastic budget

Sri Lanka slapped a tax on road accidents in a drastic austerity budget unveiled Friday as the country faces a major foreign exchange crisis.

Finance Minister Basil Rajapaksa said vehicle accidents will be taxed under new revenue proposals to keep the budget deficit at 8.8% of GDP in 2022, down from 11.1% this year.

“It is proposed to impose a fee on vehicles meeting with accidents,” Rajapaksa told parliament. “Through this initiative, it is expected to reduce the number of motor vehicle accidents.”

He did not give details of the crash tax.

Sri Lanka’s roads are among the most dangerous in the world with over 3,000 traffic fatalities and some 25,000 seriously injured every year.

Rajapaksa admitted that the country was facing a serious crisis with foreign reserves at US$2.3 billion, down from US$7.5 billion when his brother Gotabaya took over as president two years ago.

“We have to accept that the increase in prices is due to a shortage of goods, the imposition of import restrictions, the overreliance on imports, the depreciation of the rupee together with the failure to adequately encourage manufacturers,” he said.

There were no measures to ease the import ban on a host of goods, including vehicles, spares, tiles and even some essential food imports, imposed in March last year.

However, Rajapaksa increased taxes on cigarettes, liquor and slapped a one-off tax on companies earning profits of over 2,000 million rupees (US$10 million) and raised the VAT on financial services from 15 to 18%.

He also announced raising the retirement age of public servants from 60 to 65 years, a move that will delay the payment of terminal benefits to thousands of employees and thereby reduce government spending for the next five years.

The budget deficit of 1,628 billion rupees (US$8.14 billion) will be bridged with borrowings, including US$5.08 billion in foreign borrowings, according to official figures.

Central Bank officials have said the country is facing its worst foreign exchange crisis since the advent of a free economy in 1978.

Ratings agency Moody’s downgraded Sri Lanka’s foreign debt rating last month.

The decision was fuelled by the absence of “comprehensive financing” to make looming debt repayments, according to Moody’s.

Sri Lanka’s economy shrank a record 3.6% last year because of the Covid-19 pandemic.

The central bank expects growth of 4-5% this year with the gradual reopening of the economy and the rollout of a vaccine programme.