The numbers tell a remarkable story: Sri Lanka’s vehicle import tax revenue predicted to surpass Rs. 700 billion in 2025, exceeding the original Rs. 460 billion target by 52%. Yet as Budget 2026 approaches parliamentary approval, Japanese auction prices are softening and buyer caution has reshaped the market. What does this mean for importers navigating 2026?

The 2025 Market Surge: Beyond Expectations

When Sri Lanka lifted its five-year vehicle import ban in February 2025, the market response exceeded all projections. According to Sri Lanka Customs, vehicle imports are on track to hit approximately Rs. 700 billion in tax revenue, representing roughly one-third of total customs revenue for the year.

Japanese used car imports dominated, with first-half 2025 imports valued at $318 million USD, nearly breaking six-month records according to Finimize set in 2018.

Current Market Dynamics: The Pre-Budget Pause

As Budget 2026 approached, market behavior shifted noticeably:

Japanese Auction Prices Easing

Prices for popular models in Japan have softened considerably through Q4 2025 as consumers waiteed for the 2026 Budget to see how it may affect vehicle pricing. According to Sri Lanka Mirror:

• Honda Vezel and Toyota Yaris (2025 models): Down Rs. 200,000
• Suzuki Alto Hybrid and Wagon R: Down Rs. 500,000–600,000
• Some vehicles previously at Rs. 25.5 million now available at Rs. 23.5 million

This price correction was exacerbated by seasonally reduced domestic demand in Japan and increased auction availability which creates opportunities for strategic importers.

Buyer Caution Takes Hold

In the months leading to the budget announcement, import volumes slowed as dealers and consumers awaited policy clarity. The initial fever for Japanese imports that characterised early 2025 has moderated, leading to:

• Declining sale prices in the Sri Lankan market
• Increased inventory holding periods
• Pressure on dealer margins

The Indian Import Factor

While Japanese imports dominate (accounting for more than 10x the volume of Indian passenger cars according to IndexBox), Indian vehicle imports have grown in the commercial segment:

Popular Indian Models:

• Budget segment: Suzuki Alto, Maruti Swift, Tata Tiago, Tata Nexon
• Commercial vehicles: Tata Ace, Ashok Leyland trucks, Mahindra pickups

Japanese vs. Indian Comparison:

• Quality: Japanese imports maintain superior build quality, technology, and reliability
• Price: Indian vehicles offer lower entry prices but lack the advanced hybrid technology and resale value of Japanese models
• Market preference: Sri Lankan buyers consistently favor Japanese brands (Toyota, Honda, Suzuki) for durability and left-hand-drive compatibility

Notably, the broader trend shows electric vehicles and Chinese brands (BYD, MG, GAC) gaining ground against both Japanese and Indian imports in the new vehicle segment.

Budget 2026

The Budget 2026 proposals introduce one significant new cost factor:

Social Security Contribution Levy (SSCL) on Vehicles

Effective: April 2026
Rate: 2.5% of vehicle value
Application: At importation, manufacture, or first sale

According to official government announcements, this removes the previous vehicle exemption from SSCL, directly increasing landed costs by 2.5%.

Other Budget Measures:

Customs Duty Restructuring:

• New standardised bands: 0%, 10%, 20%, 30%
• Maximum duty band raised to 30%
• Aims to simplify calculations and improve revenue predictability (EconomyNext)

Vehicle Age Limit Maintained:

• 3-year maximum for motor cars confirmed
• No relaxation to 5 years despite industry advocacy
• Sri Lanka Customs regulations maintain strict age restrictions

The Age Limit Debate: A Question of Priorities

The maintained 3-year age limit reveals an interesting policy tension.

The government’s stated primary objective is foreign currency conservation. Yet the substantial influence of new car dealerships appears evident, they benefit from the 3-year restriction that effectively devalues older pre-owned vehicles and pushes consumers toward newer (and more expensive) options.

The logical question: If foreign currency conservation is truly the priority, why not extend the limit to 5 years?

A 5-year age limit would:

• Reduce per-vehicle foreign exchange outflow (older vehicles cost less)
• Increase import volume potential (broader supply)
• Improve affordability for consumers
• Still maintain reasonable quality and safety standards

This is a question that warrants serious policy discussion, perhaps one the Japanese Ambassador should pose to the President, given Japan’s significant stake in Sri Lanka vehicle import market.

Nichibo Market Outlook: Strategic Positioning for 2026

Based on current market dynamics and policy developments, Nichibo forecasts the following trends:

Japanese Auction Prices: Continued Softening

We expect Japanese auction prices to remain favorable through year-end 2025 and into Q1 2026:

• Reduced domestic Japanese demand continues
• Increased auction inventory of popular models
• Opportunity window before April 2026 SSCL implementation
• Strategic importers can capitalize on 2.5% cost advantage by landing vehicles before April

Import Volume NormaliSING

The initial 2025 fever for Japanese imports is transitioning to a more sustainable pattern:

• Declining sale prices in Sri Lanka as supply catches up with demand
• Strong underlying demand remains, particularly for:
  • Fuel-efficient hybrids (Aqua, Prius, Vezel)
  • Compact family vehicles (Fit, Vitz, Note)
  • Small SUVs (Raize, Rocky, Vezel)
• Market stabilization expected through 2026 as inventory levels normalise

Competitive Landscape

The Sri Lankan market is diversifying:

• Japanese used imports: Dominant in quality and volume, but facing price pressure
• Indian vehicles: Growing in commercial segment, limited passenger car appeal
• Chinese EVs and new cars: Emerging threat in the new vehicle segment
• Hybrid technology: Remains Japanese competitive advantage

Strategic Recommendations for Importers:

1. Timing: Maximize pre-April 2026 shipments to avoid 2.5% SSCL
2. Model selection: Focus on proven high-demand hybrids and compact SUVs
3. Price positioning: Adjust for softer auction prices and competitive market
4. Quality assurance: Maintain high vehicle condition standards as price competition intensifies
5. Inventory management: Avoid over-stocking as market normalises

Parliamentary Timeline and Policy Certainty

Budget 2026 underwent its Second Reading on November 7, 2025, and is expected to receive final parliamentary approval in early December 2025. Once passed, the SSCL vehicle provisions will be legally binding for the April 2026 implementation.

The official Appropriation Bill contains detailed fiscal measures, and we will provide further updates following formal passage.

Conclusion: Navigating the New Normal

Sri Lanka’s vehicle import market has proven remarkably resilient in 2025, exceeding all revenue and volume expectations. Budget 2026 introduces measured cost increases through SSCL while maintaining the policy framework that has governed imports since February 2025.

For Sri Lanka vehicle import, the key is strategic timing and model selection. The softening Japanese auction market combined with the pre-April 2026 window creates opportunities for those who act decisively.

The maintained 3-year age limit remains a policy question worth debating but for now, the market operates within clear parameters. Success in 2026 will belong to importers who combine market intelligence, quality assurance, and strategic timing.

Sources:

• Parliament of Sri Lanka – Budget 2026
• Sri Lanka Customs – Motor Vehicle Unit
• Ada Derana – SSCL Vehicle Changes
• EconomyNext – Budget 2026 Analysis
• Sri Lanka Customs Revenue Report
• EconomyNext – Vehicle Import Data

For expert guidance on navigating Sri Lanka vehicle import, visit Nichibo Japan