The automotive industry will continue growing at a “healthy” pace despite the proposed adjustments in car excise taxes, the Department of Finance (DoF) said in an emailed statement on Thursday.
Price increases in mass-market vehicles would be readily absorbed by buyers because of a corresponding increase in their take-home pay as a result of the proposed reduction in personal income tax, the department noted.
Car buyers would hardly feel the effects of the price adjustments for mass market cars such as the Toyota Vios and the Mitsubishi Mirage from the proposed excise tax increase, Finance Secretary Carlos Dominguez 3rd claimed in the statement.
He cited the flexible financing schemes of car dealers that stretches up to seven years for some models, which the Cabinet official claimed will become even more affordable amid the country’s low interest-rate regime.
There may be an initial slowdown in car sales, but the industry would be able to quickly recover and continue its robust pace of growth as it did in the past two years, when car sales went up by 25 percent, Dominguez further claimed.
“We think that the sales will continue to grow at a healthy rate. With the increasing incomes of people, the drop in the income taxes, you know, [the car industry]can hit very well another 20 percent a year,” the Cabinet official said.
“So, I don’t think this will kill the industry, it might slow down the sales, but the sales growth is still going to be very healthy,” Dominguez was quoted as saying at a hearing of the House ways and means committee on Package One of the Comprehensive Tax Reform Program (CTRP).
“When this package is passed, there will be a reduction in income taxes, so somebody earning half a million pesos (annually) will get to increase his purchasing power by about P27,000. At that time, he can decide: Is he going to buy a car, will he put his kid in a better school?” the Cabinet official said.
DoF estimated that middle-income taxpayers, or those earning between P21,000 and P60,000 a month will get tax relief ranging from P21,800 to P48,000 per year.
On the other hand, the government stands to gain some P31.4 billion in additional revenue from the automobile excise tax adjustments, said Finance Undersecretary Karl Kendrick Chua.
The DoF-proposed tax reform plan is contained in House Bill (HB) 4774 that was filed last January by Representative Dakila Carlo Cua, who chairs the House ways and means committee.
HB 4774 consists of a significant reduction in PIT rates plus a corresponding set of revenue-compensating measures which include lowering the rates for estate and donor’s taxes. The bill seeks to expand the VAT base while retaining exemptions for senior citizens and persons with disabilities and increasing automobile and fuel excise taxes.
Chua said car sales will not be adversely affected by the tax reform plan, as proven by historical data, contrary to the concerns aired by certain players in the local automotive industry.
“The concerns of the local car sales industry are valid but historical data show that such fears are not likely to occur,” Chua said.
“Car sales, even when oil prices tripled, continued to grow in the last 10 years,” Chua noted, “because there is also an income effect in addition to a price effect.”
Citing data from the Land Transportation Franchising and Regulatory Board, the DoF said car registration continues to grow despite very high oil prices. In 2011, oil prices rose by around 40 percent yet total car registrations grew by around 8 percent and new registrations increased by 13 percent.
Chua said the revenue from the car excise tax, which has not been adjusted over the last 13 years, will be earmarked for improving traffic management solutions and funding climate change-resilient infrastructure.
“The effect of low interest rates and a very strong economy can more than offset any increase in prices caused by higher fuel rates and higher car prices resulting from higher taxes,” Chua said. “Moreover, the higher take-home pay from lower personal income taxes will also increase purchasing power even as auto and fuel excise taxes are increased progressively.”
The proposed fuel excise tax adjustments under HB 4774 calls for staggered increases from July 2017 to 2019 on the excise tax for gasoline, aviation turbo fuel and other non-essentials from around P4.35 to P10 per liter.
The excise taxes on diesel, kerosene, bunker fuel and LPG will also increase from P0 to P6 per liter, also on a staggered basis from 2017 to 2019.
After the tax adjustments are made to reflect the cumulative inflation from 1997 up to the present, the fuel excise tax will be indexed annually to inflation by 4 percent starting 2020.
“Under the House tax plan, there will be no indexation for the year if the average Dubai crude oil price in the month preceding the scheduled indexation exceeds 100 US dollars per barrel,” Chua said.
As part of the House-revised tax reform package, automobile excise taxes will also be adjusted from 2 percent to 4 percent for cars with a net manufacturing or importation price of up to P600,000.
Vehicles priced at P600,000 and above will be taxed higher per unit. Cars worth more than P2.1 million will be taxed at P1,224,000, plus 200 percent in excess of P2.1 million.
Exempted from the excise tax would still include buses, trucks, cargo vans, jeepneys, vehicles with single cab chassis and special purpose vehicles, as the DoF originally proposed, Chua said.
Recent history showed the economy was able to weather the financial shocks from the Reformed Value-Added Tax in 2005 and the global oil price shock of 2011, which both significantly raised fuel prices, he added.