Friday, 27 July 2012

Car tax cut good for the public, say economists

July 27, 2012
KUALA LUMPUR, July 27 — A cut in car duties — which currently run as high as 105 per cent — could help stimulate the economy by boosting disposable income and reducing household debt burden, analysts say.

Their comments come after Pakatan Rakyat’s (PR) made an electoral pledge to slash the hefty excise duties and taxes on cars that have caused Malaysians to bear some of the highest sticker prices in the world.

File photo of cars in the car park of a car company in Emmering, near Munich, Germany. Cars, both foreign and local, would be cheaper in Malaysia if car duties were cut. — Reuters pic
This has resulted in about 20 per cent of the RM581 billion total household debt in the country last year being held in cars, an asset that depreciates over time.
 Economist Datuk Mohd Ariff Abdul Kareem said that consumers will be “very happy” with the tax cuts as cars, which are currently priced far above what consumers in many other countries pay, will become more affordable.

“Car prices are high and very distorted,” said the former chief of the Malaysian Institute of Economic Research (MIER).

“Cutting taxes would mean better allocation of resources and consumers could spend more on other things which would have some stimulating effect on the economy.”

Now with the Global University of Islamic Finance, Ariff said the move to put more disposable income in people’s pockets would help the economy as it becomes more dependent on domestic consumption to drive growth.

He noted however that the issue should be seen in totality and reforms should also address any abuses in the AP (approved permit) system as well as other mitigating measures to control the current high rate of congestion on Malaysian roads.

The senior economist suggested one way was to shift the tax to the petrol pump so that consumers are taxed by how much they drive rather than on the car itself.

Such a move could also help boost the usage of public transport.

Ariff also said he doubted that former national carmaker Proton, which was recently taken over by DRB Hicom, would “collapse” as a result of a cut in duties.

“It will be forced to do better,” he said.

Wan Saiful Wan Jan, chief executive of the Institute for Democracy and Economic Affairs (IDEAS), said the proposal to cut high auto duties was overall beneficial to the public.

He noted that objections to such a proposal appeared to put the welfare of companies above that of the wider public.

“The problem we have is that Malaysia practises state capitalism,” he noted.

“The typical thinking is that it is not about the rakyat but about how it will affect the local car companies.”

Malaysians are currently paying eye-watering excise duties of between 65 and 105 per cent on cars they buy on top of 10 per cent in sales tax, which means that if a Malaysian consumer pays RM100,000 for a car, as much as RM55,000 goes to the government.

The duties are a lucrative form of revenue for the federal government but have also helped push up household debt levels in Malaysia which, as a percentage of GDP, are the second highest in Asia.

Apart from the duties, a system of APs is given to a select number of companies and car importers, allowing them to bring in cars and charge up to RM40,000 for the permit to the customer.

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