Government Mulls Lower Excise Duty For Cars - How Low Will Prices Go? How Realistic Is It?

Earlier last month, Deputy International Trade and Industry Minister Dr. Ong Kian Ming said during a press conference by MITI (Ministry of International Trade and Industry) and MAA (Malaysia Automotive Association) that the government is considering a reduction excise duties for cars.

The argument is that the shortfall in tax revenue will be compensated by an increase in sales revenue of new cars and automotive parts.

Apart from the standard 10 percent Sales and Services Tax (SST), cars are also slapped with excise duty and import duty. The former ranges from 60 to 105 percent depending on vehicle type and engine capacity while the latter can reach up to 30 percent depending on the car’s country of origin.

These hefty excise duties are often blamed as the cause of high car prices in Malaysia.

Against this backdrop, it is not surprising that Dr. Ong's announcement, despite lacking in details, has triggered a lot of uncertainty among car buyers. Should they buy a car now or wait later for prices to come down?

How much does the government rely on cars for taxes?

If you are hoping to see significant reductions in prices, don’t count on it. A quick look at Malaysia’s tax revenue breakdown will tell you how much the Malaysian government relies on taxes on car. Until the government announces any concrete plans on compensating for the shortfall in tax revenue, talks of slashing excise duties are best treated as populist moves to shore up support, at the expense of businesses and their forecasts for the year.

Remember that this is the same government that repeatedly says that our Treasury is short of money because of mismanagement of the previous government, and that stabilizing the country’s finance is their highest priority. To expect the same government to cut taxes is contradictory.

Dr. Ong Kian Ming, file picture

Thirteen percent of the government’s forecasted revenue of RM314.5 billion for 2019 comes from indirect taxes, which excise and import duties are grouped under. Within this category, more than 15 percent (over RM6.3 billion) will be contributed by the automotive sector – the single biggest contributor, eclipsing tobacco and alcohol (RM 2.5 billion).

Taxes on tobacco and alcohol are already very high and a further increase will be counterproductive as the high gap in prices will simply create stronger incentives for smuggling, which would then entail higher cost by the government to police against.

How low can car prices drop?

Not by much. To know how much cheaper can prices of new cars drop to, one only needs to compare the difference in prices between duty-free Langkawi and mainland Peninsular Malaysia.

Imported cars aside, the prices of a Perodua Myvi or a Honda City – the types of cars bought by majority of working class Malaysians - differ by no more than RM 10,000. Remember that the difference is also due to the waiver of 10 percent Sales and Services Tax (SST) in Langkawi, so the differences is a lot less if we are are looking at just excise duties alone.

Currently, many locally-assembled cars are already paying little or no excise duties as the government has various funds from which manufacturers can claim rebates/discounts on excise duties based on the amount of local parts used/investments made.

The Industry Linkage Programme (ILP) is one such example.

Take the Perodua Myvi for example, where over 90 percent of the parts are local content. It sees a mere 7 percent difference in prices (RM44,590 vs RM41,598 for the cheapest automatic model) between Langkawi and Peninsular Malaysia - a big chunk of it contributed by SST. In other words, prices for a Myvi is already as low as it is realistically possible.

For a foreign make locally-assembled model like a Honda City, which still has fairly high local content, the gap will be a bigger 14 percent (base price of RM73,836 vs RM64,730). 

For comparison, a premium locally-assembled Mercedes-Benz C200 will naturally have a lot less local content, so it has a much bigger 42 percent gap – RM259,888 vs RM183,176 between Peninsular Malaysia and Langkawi.

The important thing to note here is that none of the three models mentioned above are paying anywhere near the minimum 60 percent rate in excise duties, thanks to existing incentives. So how much more do you think prices can go down if excise duties are slashed? Surely the government won't be so generous as to abolish it completely. 

With or without excise duties, even regular mass-market cars will still be perceived as expensive for the average person. The bigger issue here is stagnant wages, sometimes stemming from a person’s own low productivity and limited skill sets, and other times due factors like a weak Ringgit, which is beyond a common person’s control.

Everyone Wants Cheaper Prices But Nobody Wants Lower Resale Values

Consumers need to understand that any reduction in new car prices will result in a proportionate reduction in resale value of their existing cars, which could be a serious problem for those who finance their cars with the maximum 90 percent margin and 9-year tenure period.

While it’s fair to argue that overcoming short-term pain (reduced resale value) is necessary before we can all enjoy cheaper car prices in the longer term, a poorly thought through announcement that’s lacking in details will only result in all the pain but none of the gain. As explained earlier, excise duties make very little difference in entry-level cars that 50 percent of consumers are shopping for – the Axias, Myvis, Cities and Vioses.

Any move to reduce excise duties, while welcomed, will be enjoyed more by premium brands - which because of their lower local parts count - are the only ones still paying significant excise duties and thus have more room to reduce their prices. The high local content mass market locally-assembled cars that an average middle-class family is shopping for, have little room to go down any further.  

It’s fair to reason that the shortfall in collection of excise duties will be compensated by an increase in sales revenue but without any estimated numbers from an exhaustive analysis, such ‘thinking aloud’ response from a government ministry will only serve to throw a spanner in the automotive industry’s fragile economic machinery as consumers withhold purchases and stall the industry.

The latest Auto sector report by RHB Research Institute expressed the same concern and noted that when the 2006 National Automotive Policy announced changes in duty structure, new car sales took a dip and didn’t recover until 12 months later. RHB also said that sudden corrections in used car prices could result in a systemic risk to the banking sector. If collateral value falls short of the outstanding loan value, banks could see an increase in non-performing loans.

In short, Malaysians will certainly support any move to reduce car prices, but please, no more thinking aloud. Anything that affects prices of big ticket consumer goods should only be announced once all the details are finalized, after consultation with stake holders.