Excise tax: ‘Carmageddon’ for the auto industry?

While waiting for the proposed tax reform to be enacted into law, I often tend to daydream about what I am going to do with the extra money I’ll get from my take-home pay. Should I start investing in a house and lot for my family? That would be a great investment; but then, I was suddenly reminded of how much I currently have in my bank account which is not even close to half the down payment I’ll need to make. And as the bitter reality struck me, I thought of reconsidering my top priorities -- at least for now.

Maybe a small-time business venture sounds like a much better idea. But for someone like me who doesn’t really have first-hand experience of running a business, I think it would be better if I go for something where critical business management skills aren’t really that much of a requirement. And so, what probably was an influence of the ads I often scroll on my social media feeds, the first thing that came to my mind was partnering with a transportation network company (TNC) such as Grab or Uber. Basically, all I need is a car that fits the requirements of the TNC that I’ll be partnering with, accomplish some paperwork and I’m good to go.

I excitedly shared my plans with one of my colleagues and he told me that if I am a hundred percent committed in going ahead with it, I might want to consider purchasing a vehicle soon before the proposed new excise tax rates on automobiles becomes law.

For those who are not familiar with what excise tax is, it is a tax applicable to goods manufactured or produced in the Philippines including imported goods intended for domestic sale or consumption or for any other disposition. It is imposed in addition to the value-added tax. The excise tax may either be based on weight or volume capacity or any other physical unit of measurement, in which case it is called ‘specific tax,’ or it may also be based on selling price or other specified value of the good, in such case it is referred to as ‘ad valorem tax.’ In the case of automobiles, the ad valorem tax applies.

Under the House Bill No. 5636, also known as the Tax Reform for Acceleration and Inclusion (TRAIN) bill, the proposed increase on automobile excise taxes, which will be implemented in two phases -- the first one will take effect on Jan. 1, 2018 while the second will take effect on Jan. 1, 2019 -- will be as follows:

Vehicles with a manufacturer or importer selling price of around P870,000 currently have a suggested retail price of around P1,243,200. This could rise to P1,280,160 in 2018 and P1,317,120 in 2019, assuming no increase in selling price. Luckily for me, for low-end vehicles, the increase in retail prices will be small, considering that any rise would be offset by the expected rise in my purchasing power. However, it would be a totally different story for luxury cars whose prices are likely to fall under the last two brackets of the proposed excise tax table. Just imagine, a Lamborghini that sells at around P20 million today will soon be bearing a tag price of around P23 million in 2018 and more or less P26 million in 2019, assuming no increase in selling price. Considering this, buyers will likely be compelled to save more based on their car-buying preferences. 

Thus, car manufacturers and dealers are now faced with the challenge of protecting their sales, especially their high-value vehicles, once the excise tax rates increases take effect. Also, though there might only be a slight decline in the sale of low-end vehicles, the automobile industry would still be at a disadvantage if buyers were to turn to second-hand cars instead.

Of course, what use is a brand new vehicle if it doesn’t have fuel to run on? Aside from the expected increase in car prices, prospective buyers should also watch out for the changes proposed in the TRAIN on the excise tax on petroleum products. Shown below are the proposed increase on excise tax on certain petroleum products in comparison with the existing tax system:

With the proposed increase in excise taxes, I can’t help but wonder if the proponents of the bill actually intended to discourage people from buying new cars and take public transportation instead. Could this be one of the government’s indirect means of easing road congestion in Metro Manila? One can only guess.

I do hope that additional revenue that the government may generate once the TRAIN starts to run redounds to the benefit of all Filipinos, especially the poor. The bill needs to get through the Senate and then the President’s signature before it finally becomes a law. Who knows? But maybe buying that Lamborghini will need to wait.

Arianne Cyril L. Mandac is a senior with the Tax Advisory and Compliance division of P&A Grant Thornton.

As publsihed in BusinessWorld, dated on 13 June 2017