The Sri Lankan automotive landscape has been rocked by one of the most significant tax controversies in recent years, involving Chinese electric vehicle giant BYD and allegations of systematic tax evasion worth billions of rupees. What began as a seemingly routine customs investigation has evolved into a complex scandal that exposes fundamental weaknesses in Sri Lanka’s vehicle import regulatory framework while casting a shadow over the island nation’s nascent electric vehicle revolution.
The Genesis of the Controversy
The scandal emerged in July 2025 when Sri Lanka Customs detained nearly 1,000 BYD electric vehicles at the Port of Colombo, triggering what industry observers describe as the most significant automotive import dispute in the country’s recent history. At the center of this controversy lies a deceptively simple question: what is the actual motor power output of the imported BYD Atto 3 electric SUVs?
The vehicles in question were imported by John Keells Holdings PLC (JKH), one of Sri Lanka’s most prominent blue-chip companies, through its subsidiary JKCG Auto, which serves as the official BYD distributor in the country. Import documents declared these vehicles as having 100-kilowatt (kW) motors, placing them in a significantly lower tax bracket. However, Sri Lanka Customs suspects the vehicles may actually be equipped with 150kW motors—a classification that would dramatically increase their import duty liability MENAFN.
The Mathematics of Tax Evasion
The financial implications of this motor power discrepancy are staggering. Under Sri Lanka’s current vehicle import tax structure, which was revised in February 2025, electric vehicles with 100kW motors attract excise duties of approximately Rs. 2.4 million per unit. In contrast, vehicles with 150kW motors face excise duties of around Rs. 5.4 million—a difference of Rs. 3 million per vehicle Rediff Money.
With over 1,000 vehicles involved in the investigation, the potential tax revenue loss could exceed Rs. 3 billion, representing one of the largest customs fraud cases in Sri Lankan history. This calculation becomes even more alarming when considering that most of these vehicles have already been sold and registered to private buyers, creating a complex web of legal and financial complications.
The Regulatory Framework Under Scrutiny
Sri Lanka’s electric vehicle taxation system, implemented in February 2025, represents a complete overhaul of the country’s approach to automotive imports. The new framework bases excise duties on motor power output (measured in kilowatts), vehicle age, and CIF (Cost, Insurance, and Freight) value, creating distinct tax brackets that significantly impact final vehicle pricing.
The current tax structure operates as follows:
- Up to 100kW: 200-300% of CIF value for vehicles under 3.5 years
- 100-200kW: 300% of CIF value for vehicles under 3.5 years
- Above 200kW: Higher tier rates apply
- Additional levies: Include 30% customs import duty, 60% luxury tax for vehicles exceeding Rs. 6 million CIF value, 18% VAT, and 2.5% Social Security Contribution Levy
This system was designed to encourage the adoption of smaller, more efficient electric vehicles while generating substantial revenue from luxury imports. However, the BYD controversy has exposed critical vulnerabilities in the implementation and enforcement of these regulations Lanka News Web.
BYD’s Strategic Market Entry
The timing of this controversy is particularly significant given BYD’s remarkable success in the Sri Lankan market. After the government lifted a five-year vehicle import ban in February 2025—imposed during the country’s severe economic crisis—BYD quickly emerged as a dominant force in the electric vehicle sector. By May 2025, the Chinese manufacturer had captured nearly 90% of the EV market and over 10% of overall car sales, demonstrating unprecedented market penetration in a highly regulated environment.
BYD’s success strategy involved what industry analysts describe as “shrewd tax engineering”—configuring vehicles to fall just below critical tax thresholds while maintaining competitive pricing. In most international markets, the BYD Atto 3 features a 150kW motor, but the Sri Lankan variant was marketed with a 100kW rating, making it significantly more affordable for consumers South China Morning Post.
The Technical Complexity of Motor Power Declaration
The controversy highlights a fundamental challenge in modern electric vehicle regulation: the distinction between physical motor capability and software-limited power output. Unlike traditional internal combustion engines, electric motors can be electronically limited to produce different power outputs while retaining the same physical hardware.
This technical reality creates regulatory gray areas that manufacturers can potentially exploit. A vehicle might have a physical motor capable of 150kW output but be electronically limited to 100kW performance through software restrictions. The question facing Sri Lankan authorities is whether taxation should be based on physical motor capacity or declared performance specifications.
Independent technical assessments and inspections have reportedly raised concerns about discrepancies between declared specifications and actual motor capabilities. However, John Keells Group has maintained that their imports comply fully with manufacturer documentation, citing similar configurations sold in other markets including Singapore and Nepal.
The Investigation Deepens
The Customs Directorate of Revenue Protection has launched a comprehensive forensic investigation covering every BYD Atto 3 imported since 2023, including vehicles already delivered to customers. This retrospective approach has created significant anxiety among current vehicle owners, who may face retroactive tax bills or even vehicle recalls if the investigation confirms higher motor capacity ratings.
Opposition MP Mujibur Rahman, who previously exposed other customs irregularities, has been particularly vocal in demanding government accountability on this issue. His parliamentary interventions have brought national attention to what he describes as systematic tax avoidance that disadvantages ordinary citizens while benefiting large corporations.
The investigation has been complicated by what customs officials describe as insufficient cooperation from John Keells Group, leading to delays in technical assessments and documentation reviews. This has prolonged the detention of vehicles at the port, creating logistical challenges and additional costs for all parties involved.
Industry-Wide Implications
The BYD controversy extends far beyond a single manufacturer or importer, raising fundamental questions about Sri Lanka’s readiness to regulate an increasingly complex automotive sector. The electric vehicle market relies heavily on sophisticated technology and software systems that traditional customs procedures may be ill-equipped to assess accurately.
Industry stakeholders have expressed concerns that overly aggressive enforcement could discourage electric vehicle adoption, potentially undermining the government’s stated environmental objectives. The Vehicle Importers Association of Sri Lanka (VIAL) has issued warnings about BYD purchases, though critics argue this represents protectionist behavior rather than genuine consumer protection.
The scandal has also highlighted the need for internationally standardized testing and certification procedures for electric vehicles. Without reliable third-party verification systems, customs authorities must rely on manufacturer declarations, creating opportunities for disputes and potential fraud.
International Precedents and Comparisons
Sri Lanka’s struggle with electric vehicle classification is not unique. Similar disputes have emerged in various international markets as governments attempt to balance environmental incentives with revenue generation. Singapore, frequently cited by BYD’s defenders, does indeed allow lower-rated electric vehicles to qualify for certain regulatory benefits, demonstrating that market-specific configurations are common industry practice.
However, the scale and systematic nature of the Sri Lankan controversy appear unprecedented. The involvement of over 1,000 vehicles and potential revenue losses exceeding Rs. 3 billion suggest either a massive regulatory failure or sophisticated tax avoidance scheme, depending on one’s perspective.
The case also reflects broader tensions between developing nations and Chinese manufacturers regarding technology transfer, regulatory compliance, and fair competition. As Chinese electric vehicle brands expand globally, similar disputes may emerge in other markets with complex tax systems.
Legal and Financial Ramifications
The legal implications of this controversy are far-reaching and complex. If customs authorities conclude that vehicles were misclassified, current owners could face several scenarios:
- Retroactive tax liability: Vehicle owners might be required to pay additional duties, potentially amounting to Rs. 3-4 million per vehicle
- Vehicle recalls: In extreme cases, incorrectly classified vehicles might be recalled for re-assessment or modification
- Legal disputes: Mass litigation between consumers, importers, and government agencies appears inevitable
- Criminal charges: If deliberate fraud is established, criminal prosecutions could follow
John Keells Holdings, as a publicly listed company, faces significant reputational and financial risks. The company’s stock price and credit rating could be affected by prolonged legal proceedings, regardless of the ultimate outcome.
The Broader Economic Context
This controversy unfolds against the backdrop of Sri Lanka’s ongoing economic recovery following the 2022 financial crisis. The government faces intense pressure to maximize revenue collection while encouraging economic activity and foreign investment. The vehicle import sector represents a crucial source of tax revenue, making aggressive enforcement politically attractive despite potential economic disruption.
The electric vehicle sector was positioned as a key component of Sri Lanka’s green economy transition, with the government providing various incentives to encourage adoption. The BYD controversy threatens to undermine this strategy by creating uncertainty and potentially increasing vehicle prices.
Moreover, the dispute has implications for Sri Lanka’s relationship with China, a crucial trading partner and investor. How this controversy is resolved could influence future Chinese investment decisions and bilateral economic cooperation.
Regulatory Reform Imperatives
The BYD scandal exposes fundamental weaknesses in Sri Lanka’s vehicle import regulatory framework that require urgent attention:
- Technical expertise: Customs authorities need enhanced technical capabilities to accurately assess modern vehicle specifications
- International standards: Adoption of internationally recognized testing and certification procedures
- Clear guidelines: Unambiguous regulations regarding software-limited versus hardware capacity
- Appeal mechanisms: Efficient dispute resolution processes to handle complex technical disagreements
- Stakeholder consultation: Regular engagement with industry participants to identify emerging regulatory challenges
Consumer Impact and Market Dynamics
Current and prospective BYD owners find themselves in an extremely challenging position. Those who have already purchased vehicles face potential retroactive tax bills that could dramatically increase their effective purchase price. Prospective buyers confront uncertainty about final pricing and legal compliance.
This consumer impact extends beyond individual financial consequences to broader market confidence. The electric vehicle sector in Sri Lanka was experiencing rapid growth, but regulatory uncertainty could significantly dampen consumer enthusiasm and delay adoption of cleaner transportation technologies.
Traditional vehicle importers, who have long complained about BYD’s competitive pricing, may view this controversy as validation of their concerns about unfair competition. However, consumers who have benefited from more affordable electric vehicles may see the investigation as protectionist interference.
The Path Forward
Resolving the BYD vehicle import tax scandal requires careful balancing of multiple competing interests and objectives. The government must ensure tax compliance while maintaining market confidence and international relationships. Several potential outcomes emerge:
Compromise Solution: Authorities might accept current classifications while implementing stricter future oversight, allowing existing owners to retain their vehicles without additional payments.
Partial Reclassification: Some vehicles might be reclassified with negotiated settlement amounts, spreading financial impact across multiple parties.
Full Enforcement: Complete reclassification of all disputed vehicles, potentially triggering extensive litigation and market disruption.
Regulatory Reform: Comprehensive overhaul of vehicle import procedures to prevent future disputes, regardless of current case resolution.
Lessons for Emerging Markets
The Sri Lankan BYD controversy offers valuable lessons for other developing nations implementing electric vehicle policies:
- Regulatory capacity building: Substantial investment in technical expertise and infrastructure is essential before implementing complex tax systems
- International coordination: Cooperation with established automotive markets can provide valuable regulatory models and technical support
- Industry consultation: Early engagement with manufacturers and importers can identify potential compliance challenges
- Phased implementation: Gradual introduction of new regulations allows for adjustment and refinement based on early experience
- Transparent processes: Clear, predictable regulatory procedures reduce uncertainty and encourage compliance
Conclusion: A Watershed Moment
The BYD vehicle import tax scandal represents a watershed moment for Sri Lanka’s automotive sector and broader regulatory capability. The controversy exposes fundamental tensions between revenue generation, environmental objectives, consumer interests, and international trade relationships.
How Sri Lankan authorities resolve this dispute will establish important precedents for future regulatory enforcement and international business relationships. A balanced resolution that ensures tax compliance while maintaining market confidence could strengthen the country’s position as an attractive destination for clean technology investment.
Conversely, overly aggressive enforcement that ignores legitimate business practices and consumer interests could damage Sri Lanka’s reputation as a reliable business partner and delay crucial environmental transitions.
The stakes extend far beyond the immediate financial implications. This controversy will likely influence Sri Lanka’s regulatory approach to emerging technologies, its relationship with Chinese businesses, and its ability to achieve sustainable development objectives in the transportation sector.
As this complex saga continues to unfold, stakeholders across government, industry, and civil society must work collaboratively to establish a regulatory framework that promotes both compliance and innovation. The ultimate resolution of the BYD scandal will serve as a crucial test of Sri Lanka’s institutional capacity and regulatory sophistication in an increasingly complex global economy.
The ongoing investigation continues, with final determinations expected to have far-reaching implications for Sri Lanka’s electric vehicle market, regulatory credibility, and broader economic development strategy. Whatever the outcome, this controversy has fundamentally altered the landscape for automotive imports and electric vehicle adoption in Sri Lanka, establishing new precedents that will influence policy and business decisions for years to come.
