Check out any website, newspaper or even your local news channel and it doesn’t take a rocket scientist to find out that the latest buzz in the automotive scene is not the introduction of some snazzy new vehicle or even the entrance of a new luxury car make. In fact, it has nothing to do with one specific manufacturer/importer, and yet, its effects are far reaching—touching everyone from suppliers to assemblers to buyers: the revised vehicle excise tax.
Formally known as Republic Act 9224 (An Act Rationalizing the Excise Tax on the Automobile), it has been met with excitement and criticism from the different players, and there’s no wondering why. On one hand, it creates a more balanced market for importers/assemblers of passenger cars at the expense of reducing the protective shield enjoyed for so long by light commercial vehicle assemblers.
However, is plugging the gap in the excise tax system really going to help raise much needed revenue for the government, or will it be the case of killing the goose that’s been laying the golden eggs?
The previous excise tax system, which is Section 149 of the National Internal Revenue Code of 1997, is primarily based on engine displacement. Depending on the type of propellant used (gasoline/diesel); the tax could be as low as 15 percent to as high as 100 percent. Vehicles, which are used in the transport of goods (pick-ups, etcetera) or people (AUVs, vans, etcetera) are exempted.
During the Asian Crisis, this system made a lot of sense. With oil prices steadily going up in the world market and the peso-dollar exchange rate slipping rapidly, the government thought it would be logical to reduce oil consumption and heighten awareness for fuel conservation by rewarding vehicles with lower petrol consumption, and/or those which could ferry more people such as those used in carpools.
However, this system presented a huge loophole. At its height, close to 70 percent of new vehicle registrations were not paying excise tax, thanks to Filipino ingenuity. According to the government, the reason for this is that most, if not all manufacturers, were guilty of using the ten-seater technicality to come up with so-called troop carrying capability in vehicles with an exterior size akin to a sardine can.
Now, the tale’s different. After constantly being pushed by several manufacturing player under the flag of globalization, the government decided to drum up a system that would address this issue by re-thinking the way they slapped excise tax on vehicles.
Instead of using a vehicle’s engine displacement, seating capacity or drivetrain (4×4, 4×2), the tax will be computed off the manufacturer’s or importer’s selling price net of excise and value-added tax. A common misconception is to compute the effective price of a vehicle depending on the ‘pre-excise’ list price minus the old excise tax scheme then adding the new one. In truth, the excise tax comes from the price offered for sale by the manufacturer or importer to their respective dealers. Assuming that the cost of manufacturing did not change from 1997 to the present, it could theoretically be computed as follows:
Old System
Engine: 1.3-liter
Manufacturer’s Price: 369,636.96*
Plus: 15% Excise Tax
Plus: 10% Value-Added Tax
Plus: Minimum Industry Profit Margin
(M/80%) – M
Suggested Retail Price: PHP 560,000.00
New System
Engine: 1.3-liter
Manufacturer’s Price: PHP 369,636.96*
Plus: 2% Excise Tax
Plus: 10% Value-Added Tax
Plus: Minimum Industry Profit Margin
(M/80%) – M
Suggested Retail Price: PHP 507,141.91
Savings: PHP 52,858.09
* – where Manufacturer’s Price (M) = 80% x (Suggested Retail Price – Excise Tax – Value-Added Tax)
The Minimum Industry Profit Margin is set by the Bureau of Internal Revenue as stated in Revenue Regulations No. 25-2003. Realistically though, profit margins would vary from manufacturer to manufacturer, product to product and even variant to variant.
Would the revised excise tax scheme bring out loopholes such as bringing out ‘barebones’ variants and having dealers fit optional items as accessories? Not so, according to the aforementioned revenue regulation. It states that the selling price shall always include the value of the air conditioner, radio and mag wheels including installation, whether or not they were actually installed on the vehicle at the time it leaves the assembly plant/warehouse and before it reaches the customer. Likewise, removable accessories such as wheel covers and the installation cost thereof are considered part of the selling price.
In a nutshell, vehicles that used to enjoy exemptions such as pick-up trucks, passenger vans, AUVs (Asian Utility Vehicles) and SUVs (Sport Utility Vehicles) will no longer have the same privilege as they did before. On the other hand, passenger cars of every class from economy to luxury will enjoy a more favorable excise tax that’s not too taxing; pardon the pun, on the vehicle’s engine displacement.
Will Republic Act 9224 kill the goose that laid the golden eggs? No. In fact, this will make the automotive scene more exciting in the years to come. Opportunities for manufacturers/importers that have never existed before have been opened. With the Asian Free Trade Agreement or AFTA, economies of scale can be used to source parts from cheaper places, which in turn could push costs lower and profits higher. Will this cause some assemblers down the road of bankruptcy? No. Some, such as those whose product line is majority commercial vehicles may find it hard at first, but with the right market reorientation they will flourish. Besides, the new system will allow more dynamism by removing barriers that crippled them before. Will this reduce our ballooning budget deficit? Surely. All vehicles regardless of seating or cargo lugging capability will pay taxes, even if the tax brackets have been significantly reduced compared to the old excise tax system.
In the end, a bold prediction could actually foresee the Philippines to adapt an automobile industry that’s fairly similar to other nations, particularly the United States. Where engine displacement and seating capacity are no longer issues, emergence of new market segments is highly possible. For instance, small bodied sedans such as the Ford Lynx and Honda Civic may inherit bigger engines (they already do in some countries). At the same time, long time protected product lines may see vast improvements just to survive the slew of newer and better equipped choices.
With the amount of choices that will be made available soon, vehicle buyers couldn’t be happier.
Sources:
Bureau of Internal Revenue, Revenue Regulations No. 25-2003
Congress of the Philippines, 12th Congress, 3rd Regular Session, Republic Act 9224
By Ulysses Ang
Disclaimer: The comments uploaded on this site do not necessarily represent or reflect the views of management and owner of Cebudailynews. We reserve the right to exclude comments that we deem to be inconsistent with our editorial standards.
