EDITOR’S NOTE (2): We have put up a comparative study of this Department of Finance proposal versus House Bill 4774. You can check out the story here (1/29/2017).
EDITOR’S NOTE (1): This report pertains to the Department of Finance’s initial recommendation to increase the excise tax on new vehicles. A new version, House Bill 4774 is being considered as well. In both cases, it’s important to know that NOTHING IS FINAL. The pricing scenario here may change once the law has been passed. Regardless, we will update this with a more detailed breakdown once that happens (1/25/2017).
This will be the biggest motoring headline for 2017 and one that will have a long lasting repercussion for the entire automotive industry. With the automotive industry enjoying a robust double-digit growth during the past few years, a new regulation is being proposed that may curtail this growth. This regulation is the proposed change to the current vehicle excise tax.
In the late 1990s, several carmakers, most notably Ford, lobbied hard to change the vehicle excise tax from the engine displacement based system to the value based system that the industry is using today. The current structure levies an excise tax based on the net manufacturer’s price (this includes importation duties and tariffs):
- Below P 600,000: 2 percent
- P 600,000 to P 1,100,000: P 12,000 + 20 percent in excess of P 600,000
- P 1,100,000 to 2,100,000: P 112,000 + 40 percent in excess of P 1,100,000
- P 2,100,000 and over: P 512,000 + 60 percent in excess of P 2,100,000
- Below P 600,000: 5 percent
- P 600,000 to P 1,100,000: 20 percent
- P 1,100,000 to P 2,100,000: 40 percent
- P 2,100,000 and over: 60 percent
The first reasoning makes little or no sense at all. Even if the tax on the best-selling vehicle segments were to increase, it won’t stop people from buying a second or even a third car. With bank loan rates at a record low, the additional price increase means little or nothing to the would-be consumer (especially if the loans are stretched to five years). At the same time, increasing the tax on the highest vehicle bracket won’t really raise a lot of revenue given luxury players account for a small percentage of the total vehicle market. Some might even go the used car route.
The second reasoning, the one about infrastructure development, makes more sense. If the government needs to raise much needed cash to improve road networks, bridges, overpasses, and what have you, then increasing the excise tax on new vehicles will fill up the government coffers. The question is: by how much? Well, that depends.
The Philippine automotive industry as a whole has already warned that vehicle sales will slow down with the implementation of the new excise tax scheme and this will simply offset the supposed increase in government collection. But how slow is slow? Currently, carmakers are hitting 16 to 18 percent growth annually, more than double the annual Gross Domestic Product (GDP) rate of 7.1 percent (analysts say GDP is expected to soften to 6.2 percent in 2017-2018).
Now, assuming car sales do pick up temporarily before the implementation of the new excise tax scheme (putting it at 40 percent or half of when Thailand implemented its first-car buyer incentive), it needs to drop 81 percent at the end of the first year of the new excise tax implementation for the government to collect less money compared to the current structure. Otherwise, as long as annual vehicle sales grow more than that, the government stands to collect more for the first year of implementation. This, of course, assumes that all other factors remain constant.
Now, what does this all mean for the car buying public? Well, it’s simple. In exchange for better roads (and hopefully, less traffic), you will indeed pay more for your new car be it an entry-level car or a full-blown luxury SUV. But how much damage will it do on your wallet? The new Suggested Retail Price of SRP must be computed. To arrive there, it’s important to nail down the net manufacturer’s price + excise tax + margin + VAT.
Assuming all factors aside from the excise tax remains constant, it’s easy to determine what the new selling price of vehicles would be. The base is the net manufacturer’s price which is landed cost + importation duties + tariffs (if it’s built in the Philippines, then it’s Cost of Goods Sold or COGS). Carmakers then tack on the excise tax before putting their profit margin. In this case, the assumption is 15 percent split between the carmakers and its dealers (the global industry rates floats wholesale margin as 8 to 14 percent and dealer margin as 7 to 10 percent). Finally, Value Added Tax or VAT of 12 percent is computed based on the total of the margin + excise tax + net manufacturer’s price.
If all this sounds confusing, here’s a chart to explain the increase in SRP in both peso and percentage terms:
Clearly, there’s a huge increase percentage-wise in terms of excise tax collected, affecting lower-end cars the most. In this case, a vehicle selling below P 600,000 will see a 150 percent jump in taxes equating to about P 9,000 to P 14,000. The impact in SRP though is still fairly minimal: just 3 percent or P 12,000 to P 17,000. This is the reverse for cars worth around P 3.5 million. Tax increase could be just 23 percent (about P 748,000), but it will affect the SRP significantly by growing 7 to 27 percent (about P 963,000). Opting for the popular PPV or Pickup-based Passenger Vehicle like the Toyota Fortuner or Ford Everest? Well, the new excise tax scheme will mean an increase of about 27 percent in SRP or roughly P 422,000 additional.
On a per brand basis, the effect of the new excise tax will affect the SRP this way (this is assuming carmakers will pass on the additional tax to the customer completely and assuming all other factors are constant):
Drilling down further, here’s a sampling of now the new excise tax will affect these ten vehicles: Toyota Wigo, Toyota Vios, Toyota Fortuner, Mitsubishi Mirage G4, Mazda3, Honda Mobilio, Honda Civic, Ford Ranger, Ford EcoSport, and Chevrolet Trailblazer:
For the car buying public, it’s obvious that the new vehicle excise tax will mean more expensive cars, but it’s far from being “anti-poor”. In fact, cars below P 600,000 will still remain affordable. The big brunt of the increased excise tax will be shouldered by buyers opting for cars ranging from P 1.1 million upward. And that could put the brakes on the runaway success of the PPVs. That said, it won’t be surprising if some carmakers will simply take a hit on their profit margins to try to maintain their SRPs close to the levels where they are now. Some may even resort to tactics having them undervalue their importations drastically (although, the government does have a safeguard against this).
This analysis is quick and dirty and there could be other factors which could have both positive and negative effects on this proposed new tax scheme. Things like foreign exchange can possibly affect the net manufacturer’s price and a tightening of bank lending could result in a shorter lending period or lesser people having the liberty of financing. Even an increase in fuel prices and the corresponding inflation in the prices of basic goods could mean the deferment of a new vehicle purchase.
Plus, it cannot be forgotten that this new excise tax scheme will affect the carmakers in more than just the excise tax. It can affect other factors such as corporate income tax collection, employment, supplier orders, and many more. This can reduce total government collection if taken as a whole. Plus, the new excise tax will dampen the rosy outlook of carmakers who signed up for the Comprehensive Automotive Resurgence or CARS program. Not only will the increase in excise tax may affect their ability to sell 200,000 units within a six year period, but some have already warned of full scale closure of their local production facilities.
With a GDP per capita of US$ 3,042, the Philippines is at the right time for mobilization. Riding on a strong economy (it doesn’t matter who the president is), the country’s automotive industry is strong enough to weather any storm. Sales might slow down or even dip, but in the end, it’ll all be temporary. There’s no stopping the increase in the number of vehicles plying the roads—it’s a sign of growth after all—so it’s about time that the government plans ahead and invests in new infrastructure to help ease the traffic situation. Is increasing the new excise tax the right way to do it? Maybe, maybe not; no one knows for sure what impact this proposed excise tax would bring. One thing is for sure though: with the automotive industry accounting for a sizeable chunk of the economy, the government must really think things through or else they may risk killing the goose that lays the golden eggs.