Monday, January 16, 2017

Should We Be Afraid of the New Vehicle Excise Tax?


EDITOR’S NOTE (3): A version of the bill has just passed the House Ways and Means Committee. You can check how it will affect vehicle prices here (5/82017).

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
Now, the government is looking to overhaul this excise tax structure, simplifying the computation in the process:
  • 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 government has stated two reasons for proposing this new excise tax structure. First, they see it as a way to reduce traffic congestion because it limits new vehicle ownership. This, they hope, will make people consider using public transportation instead. Second is that the administration is looking to spend big on infrastructure and they need to raise funds for the development of new roads and such. Increasing the excise tax levied to carmakers, they find, is the most logical step. (Sino ba ang nakikinabang sa bagong kalye, government officials often quip).

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. 

56 comments:

  1. Sa mga bibili ng bagong sasakyan i phase out na ang 15 years old na sasakyan.

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    1. yeah because banning classics is clearly the right way to go...
      Don't you mean ban 15 yr old + PUVs

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    2. I don't actually mind banning 15+ year old cars but the ban must have exemptions, especially for car guys/gals who have/wants a classic, there should be an exemption card/license for well maintained classics. And the smoke test guys and/or LTO should be watched more stringently in order to prevent or at least lessen the chances of under-the-table payments for extremely "foggy"/"smokey" cars. To help diminish the air pollution, we would also need the support of oil/fuel companies or any other individual willing to invest in CHARGING STATIONS for electric cars, that way the price of electric cars or hybrids would diminish and be even more reachable to the masses. And car manufacturers should also redesign electric and hybrid cars so that it would appeal to the general public.

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  2. Citizens will buy more motorcycles, tricycles,e-bike, smoke belching owner-type jeepneys, pedicabs and habal-habal. This is the picture of the Philippine Transportation landscape in the future. Mabuhay ang masang pilipino! Mamatay DOT, MMDA, LTO, LTFRB ! BIR, CONGRESS AT SENADO!

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  3. People will be forced to buy eons, picantos, wigos instead of subcompacts(vios, mazda2, honda city, jazz). In other countries, the smallest car they would buy are compacts(Mazda 3, Civic, Corolla). The government is just milking the people and won't even let them experience some luxury due to ridiculous taxes.

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    1. With small cars, problem are the poorly maintained trucks, buses, dump trucks, delivery trucks that collides with these small cars. The life of the passengers are in utmost danger. Wouldn't be a problem if mostly small cars on the roads.

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  5. Instead of increasing excise tax on new vehicles, why not the government improve and modernize public transportation system and then encourage the public to use this system? If this is not effective, then it should be the time that they impose higher taxes on new vehicles! Tsk! Tsk! Tsk!

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    1. For sure Phils. Gov't should impose this excise tax ASAP.

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    2. You are absolutely right! People buy cars even used cars because the public transport is so inefficient and unreliable aside from being unsafe

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  6. Dapat kasi ang mga Ford ginagawang PUVs.

    Ford Fiesta and Focus = TAXI
    Ford Ranger FX = Jeepney

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    1. Ford is more expensive than Toyota taxis wtf. Of course people will go to the cheaper products if this happens. I bet you're just salty.

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    2. They wouldn't last more than a year as PUVs knowing Ford's reputation for (lack of) reliability

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  7. Increasing tax to reduce traffic in Metro Manila or other congested cities should be applied on car intended for the said cities only. And for cars bought outside the affected cities, easily accessible permits (with fees) should be secured before they can be allowed to enter the cities or much bigger penalty will be imposed to the car owner if caught inside the cities, Of course for legitimate medical emergencies rule should be different.

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    1. It's called congestion fee. I think Europeans cities like London imposes this kind of tax for vehicles not registered in the said city before entering and also to reduce pollution.

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  8. solve traffic? is traffic a problem the whole philippines face? diba metro areas lang? so why should this affect the provincial rural area buyers? the example is HK and Singapore. both are small countries that require it. manila lang ba ang PH?

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  9. This is just plain stupid and downright unfair. They should modernize our transport system first before deciding to shove these taxes up our throats.

    Palibhasa kasi when they travel may mga wang-wang and police escorts sila, that is why they are detached to the plight of the common Filipino.

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  10. Why not fix the public transport instead. If they want people to take public transport then why not fix it first. People are just gonna buy second hand cars now instead. These are only temporary solutions not long term.

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  11. For those WHINING about increased taxes,where the hell do you think gov't would get funds from infrastructure you want? If you won't be able to afford a car, MAG COMMUTE KAYO! A few years of commuting even in bad public transpo is a small sacrifice compared to the many years that you'll enjoy from the good infrastructure you've always asked for.

    If you worry about the industry going down, why not ban old cars? ALL CARS 10 YEARS OLD AND OLDER MUST BE BANNED! Bawas traffic and air pollution pa. Also tax used cars as well. This way, people will be forced to buy brand new even if cars are way more expensive. If some can't afford the, COMMUTE! DON'T BE WHINY! It's for the good of the country. DO YOUR PART!

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    1. Hurray! Porke mayaman ka kaya ok lang sau.
      Para sa aming mahihirap, ang 50k na pera ay limang taon na namin pag-iipunan. Mayabang ka..at bobo rin pala ...

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    2. new taxes for "the government and infrastructure"? non-sense!

      perhaps if their goal is to limit the volume of the vehicles in the streets due to the influx of very affordable new cars, this is quite acceptable...

      hirap satin, naka-loan lang ng bagong kotse e taas na agad ng ihi waaaahahahahahahaahahahahahahaah

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    3. If you can't afford, commute. We need to lessen the cars on the road. Significantly higher taxes and banning old cars is the way to go. Kayo din makikinabang dun. And btw, based on facts, our govt has a big budget deficit. If you don't know this, read up and use your minds. The govt lacks the funds for good public transpo and infrastructure. Kung gusto nyo status quo, wag kayo magreklamo sa traffic. You're such whiners! Wala naman ginawa to solve the traffic problem. Tsss...

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    4. ano nagawa mo except whine about banning old cars!!!! :-P
      ikaw itong reklamador dahil ngayon ka lang nagka-kotse ng bago tapos di naman mapaandar ng mabilis dahil sa traffic waaaahahahahahahahahahahaha

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    5. Wow Mr/Ms. Anonymous na mayaman at ignorante andali mong sabihin na "Significantly higher taxes and banning old cars is the way to go." Naisip mo ba tsong/ine na baka mawalan ng taong maglilinis ng mga toilet sa malls, resorts, restaurants, walang kuyang mag babantay ng mga tindahan nyo at kung ano ano pang blue collar jobs sa metro manila? Kapag na-ban ang mga more than 80% ng jeep at pipitsyuging sasakyan nila ano na mangyayari? Hindi kayang dalhin ng BUS at Tren ang mga yan at maaaring 4 na oras na sa isang terminal hindi parin makasakay sa dami ng tao, resulta walang darating sa trabaho.

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    6. magnanakaw sa government siguro yan kaya rich

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    7. Ang yabang. Di mana lang inisip ang ibang tao! Iniisip nyo lang sarili nyo. Porke may kakahayahan kayong bumili ng sasakyan ganyan nalang kayo mag salita! Bullshit!

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  12. It's ok to use the public transport system if its good. Yhe problem is the public transportation here is shit. In Singapore for example, the public transportation is extremely good and is therefore a real alternative to driving your own vehicle.

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    1. Well Singapore had crap public transpo before. But still, they gave up their cars and sacrificed. They endured shoddy infra for a while but look at them now. All good things come at a price.

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  13. People are the ones suffering for the incompetence and lack of foresight of all previous governments.

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  14. This is simply amazing. I am a fil-am now residing in the Philippines and I see the lack of foresight in these taxes. If they want to minimize car sales then they need to regulate the banks that are making it so easy to buy a car. If they want to increase revenue for infrastructure then they need to utilize and make the police and highway patrol to actively patrol the streets and highways and issue tickets and fines for the many many non-compliant vehicles and drivers on the streets. Check points are a joke. Don't punish the hard working filipinos with higher taxes.

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  15. Do not focus on taxing brand new vehicles. Instead, make the car ownership for years to come costlier. That would give buyers the second thoughts.

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  16. I suggest imposing a very heavy penalty on car breakdowns instead... Like 50k for 1st offense, 150k 2nd offense, 200k 3rd offense. I believe this is fair as it forces all of us to properly maintain our vehicles. Also, if you count the cost in fuel alone and not counting the time lost by all people who got affected by the traffic caused by the breakdown of one vehicle, it's probably worth way more than 1st penalty fee of 50k. Thus, cars beyond the help of maintenance would be automatically phased out. Next, I suggest similar penalties on cars illegally parked on public roads or even waiting in public roads and causing traffic. Next, car accidents should be pictured and cleared within 5 minutes or similar penalties applies. Last is the strict implementation of traffic rules especially on public transports who stops anywhere they want at anytime causing traffic for everyone behind them. I suggest similar stiff penalties.

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  17. papano na lang ung mga nangangarap makaroon ng bagong sasakyan na nagpakahirap magipon ng pambili ng pinamurang kotse tapos madadagdagan na naman pala dahil diyan sa EXCISE TAX na yan!!! Tell it to the Marines,pang anti-poor yan palibhasa mayayaman kau wala na ba kaming karapatang mahihirap ??????

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    1. Bobo di ka marunong magbasa! Halos walang Dagdag ang mga pinakamurang kotse!!! Yan ang mahirap sa tangang Gaya mo! Satsat Lang ng satsat, la namang binatbat!,,,,

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  18. Thud decision if left alone to economists and accountants and lawyers will miss the critical factor of consumer reaction ie lower sales etc as the article mentions. Yhis penalizes all car buyers regardless if their area has a traffic proble. Why not charge congestion fees, this is more fair and doesnt deny people of the privilege to buy a nice car.nthe price increase again favors the very rich and penalizes the middle class. And partly because of sloppy thinking...

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  19. Idaan na lang sa registration. The older the car gets the higher the registration fees. At sa matraffic na city centers lagyan nlng nga RFID tolls para mga users lng ang magbabayad. Kawawa naman po kaming inosente at peaceful na mga taga probinsya nadadamay po dahil sa traffic ng Metro Manila. Sana po di kami madeprive sa privillege naming makaaccquire ng brand new na sasakyan.

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    1. I have an old car,and was daily driven for 30 years before I had it repaired (engine rebuild and body repair), there are parts are plenty and some are cheap and some are bit pricey that's the price to pay for owning an old car.

      Back to your statement, you're saying that old cars need to pay higher registration fees than newer cars, for the basis of traffic decongestion? hah! you're unbelievable and stupid! why? pati mga lumang sasakyan idadamay mo pa! Mas gugustuhin namin na current registration fee na patas lahat luma man o bago, and don't deprive us the privilege on owning old cars, parang ring tao, patas lahat..

      for as long as well maintained and looked after which I faithfully doing it, passed the inspection especially the emissions test, it can proceed the registration process...

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    2. I have no problem with higher taxes, if really needed, bring down income taxes but tax consumption. However, my concern is, that people in government just steal the money and nobody ever gets jail. Those who are jailed are freed by the next administration, so back to zero every 6 years.

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    3. Lets all share our personal opinions. They are all subjective anyway. Respect begets respect. No personal opinion is more superior to another one's. Try to understand each others perspective. Your take could not be applicable to my side.

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  20. increasing excise TAX will not solve the problem as long as public transport is not improved. The excise TAX will only make the rich enjoy more luxury as usual because for them the excise TAX is "barya lang". but for the middle class and lower classes they will contonue to suffer from the bad public transportation infrastructure and still have a low standard of living same as before. worth mentioning the cost of living will be higher because of the various taxes to be imposed on commodities. it will end up that the rich will become richer while the poor will become poorer. i am not an expert but this already happened in other countries and our government is so ignorant about what is happening outside the Philippines. Countries who are successful like Singapore and other european countries had a good infrastructure and government funds to back up all their projects. Philippines is so poor that major part of the nation's wealth were siphoned by corrupt government offcials and left the common citizens suffering since the past 30 years. If the government continues to impose new taxes it will trigger mass emigration out of the country and people will bring their wealth with them. The poor will be left behind as the nation will continue to become poorer.

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  21. Inosente kaming mga asa probinsya sa traffic. Spare us sa tax na yan at di naman applicable ang mass public transpo sa kabukiran. Bka pati kuliglig magmamahal na rin.

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  22. If you guys only knew kung gaano ka stressful ang public transpo specially on peek hours... haaays

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  23. As a Cano living in the Philippines and spending around 2 millions per year on living expenditures a tax like this will mean I give up and leave. It's already more expensive to live here than in both US and Europe. Most Canos and Pinoys don't know this. The food prices for instance are higher here even if the salaries are 20-30 times lower. I feel truly sorry for the millions of Filipinos that are doomed to a life in poverty and being in debt because of far to high prices for everything.
    Prices for cars are also higher here. Second hand cars are around 5-10 times more expensive than in Europa for instance.
    Philippines need to get old cars and trucks of the streets, they are dangerous both to people and enviroment. To put even higher taxes on new cars will doom Philippines to a future of polluted air and even more sick and dead because of the traffic.
    The tax should be applied based on emission rates. Philippines needs more new cars and lesser old. Simple as that.
    This tax idea is beyond stupid. Let's hope Duterte have the sense to stop it.

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  24. Better buy cars this year while prices are still low, and maybe you could sell it at 2018 once prices increase and earn a profit. That way you could take advantage of the gov. problematic tax solution, instead of complaining better be smart and take advantage. Cheers :)

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  26. vehicle 600.000 php and below not so good
    excise tax they will just high jack it

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  27. This wont contribute to nation eradication of poverty... least percentage of the population could really afford to buy this cars and surely small amount of tax can be contributed... and car companies have contributed munch in paying their business tax.. what if this will lead them to slow down or worst to bankruptcy .... Car Consumers will most likely drop abruptly.

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  28. Manila needs an underground/subway/MTR system like London, Munich, Shanghai and some regional and inter-island railroad tracks like Japan. It takes 3 to 4 hours to drive 100km from Manila to Candelaria. A regional train would cut this to 90 min easily. Or an extension of the SLEX to Bicol ... but that'd be for cars. The problem with tax raises is that the money will end up in some politicians' pockets anyway.

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  29. The only thing to prevent traffic in the Philippines is: follow the road rules & regulations. ( like here in Australia, they follow rules and the road is very smooth,even if one family has 3 or more cars.) tax excise/increase won't work in the Philippines.

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  31. If the public transpo system is efficient & reliable, I will not mind using it even if I can buy multiple vehicle just to get around our coding system and MM. This one big step will decongest and preserve our roads (which also needs upgrading)

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  33. I understand the reason why the government wants to impose higher taxes. The problem is this: is it not the government's incompetence, sheer corruption, and lack of foresight that brought us to this situation? And now the people will pay the price by paying higher taxes? Let's admit it: our government is one of the most corrupt in Asia!! Also note that the Philippines imposes some of the highest taxes in Asia! Where do all the taxpayers' money go? Given the higher taxes Filipinos pay compared to our neighboring countries, our infrastructure is very bad, government services are ALSO bad AND SLOW, most government offices are in poor condition, government personnel are grouchy and rude, etc.!! And now they want to tax us even more??? Let's not kid ourselves: does anyone really honestly think the additional taxes will be put to good use?? Look how long government infrastructure projects take! They declare x amount to fund a project but only x/2 actually goes to the contractor and the rest goes somewhere else! This is why the contractors that do the work are undermanned and the materials used are cheap!!

    So really, the ONLY people who will benefit from these higher taxes are the officials that smile on TV but rob us day and night!! And you, hardworking Filipino, will have to work EVEN HARDER to be able to afford a car!!

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