Mass-market cars to remain affordable despite higher excise taxes under TRAIN

Date Posted : June 28, 2017

Mass-market cars to remain affordable despite higher excise taxes under TRAIN

Date Posted : June 28, 2017

The Department of Finance (DOF) has assured senators that subcompact sedans such as the Mitsubishi Mirage and compact multipurpose vehicles such as the Toyota Innova models will remain affordable to families wanting to buy them despite the proposed automobile excise tax increases under the tax reform bill because they are bound to get significant personal income tax rate (PIT) cuts that will more than offset the slight price markups in these types of cars.

DOF Undersecretary Karl Kendrick Chua said the reforms in the excise tax system for automobiles under the proposed Tax Reform for Acceleration and Inclusion Act (TRAIN), will, however, impact luxury vehicles such as the Land Cruiser, given that the objective of tax reform is to make the system more progressive by imposing stiffer consumption taxes on the wealthy, or those who can well afford to pay these higher rates.

He said a household with two working members can, in effect, raise their combined take-home pay by P44,000 per year under TRAIN because of the PIT cuts, which is more than enough to cover the slight increase in the prices of mass-market cars.

“And because the non-rich will amortize or borrow, and given the low interest rates, this is actually still going to be affordable,” said Chua at a recent hearing of the Senate ways and means committee on the proposed TRAIN.

“However, people who will buy, for instance, a Land Cruiser will have to pay up to P950,000 more because that is the way we have designed the tax system–to be progressive,” he added.

Chua said that when the DOF did a price elasticity analysis, it found out that for every 10 percent increase in car prices, the income elasticity is much higher because buyers of mass-market vehicles are also the primary beneficiaries of TRAIN, which provides for substantial cuts in the PIT rates.

“We think that the overall impact (of TRAIN) is simply to slow down the sale of cars, but not to contribute to a contraction,” he said.

As an example, Chua said entry-level models such as the Toyota Vios will only increase by P10,000 and the high-end model of the Mitsubishi Mirage only by P13,000 per unit.

The increase in the take-home pay of a call center agent by P22,000 a year as a result of the PIT cuts under TRAIN will more than cover this slight price hike, which will be made even more affordable because of the current low-interest rate regime and the flexible payment schemes offered by car dealers.

“If two of them are working, the couple will take home P44,000. So the increase in the price of Vios and Mirage will be much less compared to the increase in the take-home pay of these families,” Chua said.

Chua said that in anticipation of the increase in automobile excise taxes, the local car industry has been frontloading sales, which grew 30 percent year-on-year in the first quarter alone, and an even higher 700 percent for one of its most popular models—the Toyota Fortuner—that sold 8,000 units in the first three months of 2017.

He said this high demand belies claims by some manufacturers and dealers that the proposed adjustments in the excise tax system for automobiles will “cripple” the industry.

“We do not see that this tax will cripple the automobile industry. In fact, the industry is raking in a lot of sales and profit as we speak,” Chua said.

Chua said a survey done by the DOF showed that 80 percent of families in the Philippines do now own cars and, thus, support the proposed adjustments in automobile excise taxes.

Moreover, private cars in Metro Manila only carry 30 percent of passengers but occupy 70 percent of road space, in contrast to public transport that carry 70 percent of the passengers but only occupy 30 percent of road space, he said.

Adjusting the excise taxes on automobiles, he said, will thus help accomplish the government’s primary goal of raising revenues to help fund its massive investments in infrastructure, human capital and social protection for the poor, while fulfilling its secondary objective of easing traffic congestion.

“We don’t think that the strategy going forward is simply to make cars affordable because we in the government believe that the key merit of development is not that the poor will have cars but the rich will take public transport — and that is what we are proposing to do under the tax reform program,” Chua said.

Chua said that far from being threatened, local car sales continue to grow at a rapid pace, with advertised industry data showing that for the Toyota Fortuner model alone, sales grew from 1,000 units in the first quarter of 2016 to 8,000 units in the same period this year.

“The Fortuner was selling (with) 700 percent growth; the Innova, 100 percent; Mitsubishi Montero, 100 percent; Honda Civic, 1,400 percent. So these are some of the brands that are selling,” Chua said at the hearing.

He added: “So that is why we think that the market or the automobile industry will not be significantly affected because they’re merely frontloading a lot of these.”

Chua also pointed out that with the substantial cuts in PIT rates, Filipinos would have more money in their pockets, making entry-level cars more affordable for them.

“What more if we return P140 billion to the people next year (in the form of PIT cuts)? There will still be a lot of demand for new cars. This is an economy growing at 10 percent real plus nominal growth. Income, poverty {reduction] and jobs are improving so we think that there will still be sufficient demand,” Chua said.

The representative from the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI), however, refuted Chua’s statements at the hearing, saying that the Fortuner, for instance, was only selling 2,900 units per month.

But Chua said that the DOF, which is “very much committed to data-driven analysis”, stood by his statement, citing a newspaper article quoting car industry officials as saying that the Fortuner “sold from 1,009 units in Q1 2016 to 8,235 units in 2017.”

“So we are not fabricating these data. I commit to you that the Department of Finance will use data to provide evidence for our policy recommendations,” he said.

The TRAIN, which was approved by the House of Representatives as House Bill 5636 last May 31 before the Congress adjourned sine die, provides for substantial cuts in personal income tax (PIT) rates while, at the same time, also implementing revenue-enhancing measures such as increases in the excise taxes on automobiles and petroleum products.


-oOo-

Date Posted June 28, 2017

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