Saturday August 4, 2012
Suffering reduced car taxes
A Question of Business by P.GUNASEGARAM
JUST about everyone outside of government and the national car industry agrees that car taxes must come down. But we are in a bind because of molly-coddling our car industry, still one of the most inefficient anywhere.
No matter how the car taxes are reduced – and they must be reduced in the interest of equity to car buyers and to promote competition within the industry – there is going to be pain.
It is a question of how much we can reduce the pain which will be caused to existing car owners whose car values will take an immediate dip when taxes are reduced. That can also force down sales of both used and new cars as customers hold off purchases to wait for new lower taxes, affecting the overall car industry.
Because of the huge amount of taxes on cars, it will be foolhardy, dangerous and highly disruptive to remove all of this in one go. It will have to be done gradually but then it has to be decided whether it is done under a set schedule or as and when the Government decides.
It is interesting to look at the tax structure for cars – we will be looking at just cars which includes station wagons, sports cars and racing cars and our reference is the website of the Malaysian Automotive Association. But the structure is similar for 4-wheel drives, multi-purpose vehicles and vans. Commercial vehicles have much lower duties.
The problem rose in the first place from the imposition of massive import duties to protect the national car industry by then Prime Minister Tun Dr Mahathir Mohamad which began with Proton rolling out its first car in 1985. This was extended to other car manufacturers such as Perodua later.
With Asean opening up its markets, Malaysia reduced its import duty but then increased correspondingly the excise duty on the cars which basically kept cars at the same price as before, giving no benefit to the car buyer.
For cars below 1800cc, the locally assembled cars have a tax of 10% if the completely knocked down (CKD) packs from which cars are assembled come from a country with most favoured nation status (MFN). For others, duties can be higher. If it is from Asean, there is no tax.
But what is the killer is the excise duty – it is 75% and to make matters worse, on top of that is a sales tax of 10%. That means the total tax on a locally assembled car is 95% and on a national car it is 85% as there is no CKD pack. In addition, national car manufacturers receive tax breaks and grants to offset the development costs of the cars.
For completely built-up units of below 1800cc, there is a duty of 30% for MFN countries and with the other taxes, the total tax comes up to 115%. This goes up to 145% for cars above 2500cc because of progressively higher excise duties.
Without a doubt, Malaysia is one of the most highly taxed countries in the world for cars with the total tax rate varying from a low of 85% for national cars to a high of 145% for fully imported cars above 2500cc. Clearly that imposes a huge burden on the car buying public, especially the lower middle class.
If there was an effective tax rate of say 10% on cars, compared to 85% now on national cars, a car which costs RM50,000 now would cost about RM30,000 instead, a massive saving of RM20,000. That would go to boost effective disposal income and lead to a better quality of life.
Any immediate adjustment to a zero tax regime would cause utter disruption to the market place with car prices in some cases plummeting to less than half of their current values, which shows just how costly bad policies can be to the country.
What is more reasonable and which will not compound the terrible mistakes of the past is to bring down the tax rate gradually over a period of time. That’s going to be painful but sometimes there is simply no gain without pain.
What that time period will be is open to debate but given that we have allowed this problem to compound itself over some 27 years, a quick fix is definitely not on the cards. But as much as national car industry players may like it, we should not wait 27 years to put things right.
Perhaps one figure to work with is over 10 years, aiming to reduce all duties fron cars over that period to 10%. For national cars that means cutting the duties from 85% to 10%. That’s 75 percentage points or 7.5 percentage points a year.
A national car costing RM50,000 now will therefore in a year cost about RM2,000 less. That should cause minimal disruption to both new and second hand car markets and the fall in the value of cars would be easier to take for car owners.
Whether these measures should be announced in advance is debatable, but making such an announcement may cause more damage as far as public perception is concerned because the eventual quantum of reduction over 10 years is large.
Also 10 years is a long time and policies can easily be changed at anytime, rendering any long-term commitment useless in practice.
Still, the Government should commit to a long-term policy of reducing car taxes, recovering any revenue lost by a simultaneous adjustment of unnecessary subsidies which benefit the more affluent and industry instead of the poor.
In the overall context of producing a competitive economy which is market driven and being fair to car buyers, we cannot put off any longer the reduction of the high taxes on cars anymore, despite what the national car manufacturers are likely to say.
> P Gunasegaram (firstname.lastname@example.org) believes that the rollback of subsidies must be accompanied by lower taxes.