Should excise duty on cars be reduced? (under Budget 2013)

Based on the article written in The Edge Malaysia, 24-30 September 2012 entitled “Quiet automotive shake-up”, in the upcoming Budget 2013, there might be a cut in excise duty for vehicles. Before I start, I would like to add a brief introduction on the automobile industry. The world of automotive industry has been a top notch compared to other industry. In Malaysia today, everyone is in need of their own transportation due to the country’s inadequate public transport not to mention the question of safety as crime rates have seen to increase dramatically over the years.  But due to the highly taxed levied on automotive vehicles, a lot of consumers are faced with one big problem; car loans. This has been such an issue to the country and the leaders of this country are not pleased with this therefore resulting in another shift categorized under Budget 2013. 

 Prime Minister Datuk Seri Najib highly supported the statement as he mentioned that car loans are one of the major causes of the bankruptcy and contributes 25% over other loans spectra. Due to this, there has been a decrease in sales as consumers are waiting for the budget to be established. The government is now under pressure to decide whether or not excise duty is to be reduced for the best of both buyers and automotive industry as well as the economy of this country not to mention, opposition coalition has declared that if they are able to win the election, there might be a cut in car prices. Therefore, resulting in consumers procrastinate in purchasing cars as there are expecting a reduction in car taxes leading to even more slowdown in car sales.

With the current situation of excise duty being charged over 75% to 105% to the consumers, the consumers have to face such a great burden that most of the major group especially those with lower incomes are forced to look into alternatives like second hand cars or cars that have a lower standard of safety due to the affordability. A bigger family group will cut its cost and purchase a smaller car due to a lower price and neglect the safety of the family members. In economic term, this is what is known as ‘substitution effect’ where quantity demanded for new local cars tend to decrease as consumers will seek for substitutes available. Quoted from an article from The Malaysian Times, “if a person buys a car he has to pay 36 times of his monthly income which is very burdening”. Consumers have to strive for each ringgit he can earn to pay his car loan as well as other household loans. Now, the purpose of this deal is that not only does it help to loosen the burden of car dealers; it might turn out to be a good turnover for the economy of this country.

On the other side of the same coin, there is also a lot of concern regarding the abolishment of excise duty. One of them is Datuk Seri Mohd Khamil Jamil, DRB-Hicom Bhd group managing director. He states that lowering the tax might create another uncertainty and should be taken into account both local automotive companies and foreign investors. Furthermore, he also mentioned that this might also result in incentivized reduction. Many have seen to argue that a cut in excise duty will bring a drastic change to the automotive industry and this might possibly last for years.

The downside of this deal is that the reduction in car tax might result in national cars facing a higher competition against non-national cars as non-national cars are cheaper and have easier access to the country resulting in decrease of sales of national cars. As the price of national cars are higher than cars that are manufactured overseas, the will be a change in supply. The rise in price of cars due to the excise duty charged will lead to supply curve shifting rightward as the demand for the sales in local cars decreases causing a decrease in supply and quantity of national cars. If there is a big decrease in sales, this might even lead to workers facing unemployment as consumers have a higher demand for better car facilities that is of a cheaper price. A cut in excise duty will only result in consumers upgrading their cars and not purchasing more cars. In the end of the day, sales of car especially national cars will eventually drop.

According to Perodua managing director Datuk Aminah Rashid Salleh, owners from a low to middle income that have nine year loans might face a bad turnover rate over the five years. This could only mean that those that are still paying for the loans might lose out since their cars will depreciated if the excise duty is to be abolished. “ If there is accelerated depreciation of used vehicles from a possible reduction in new vehicle prices, bankers need to consider their collateral value”. Bankers can raise interest rates or lower the loan-to-value ratio and this might turn out to be a negative outcome for new vehicles sales. These whole inter-related consequences only prove that an abolishment in excise duty might not be a good idea after all.

Such a move will bring in more disadvantages than its advantages because it only help a small aspect of the issue which is to reduce burden of household loans of each consumer in this country. The government should look into other perspective in engaging a proper solution to solve this issue rather than abolishing the excise duty which in return increases the sales of foreign cars and not our local cars.

Nevertheless, a proper and well-thought plan in scheduling the reduction in excise duties should be done before it is published under Budget 2013. I strongly believe that more research on statistics test on this issue is to be made so that it is done equally fair to the automotive industry as well as the consumers and the best of all the parties that are involved in this industry.
      
                                                                                               By Chuah Yean Yean