The governing law on excise tax on automobiles dates back to 2003, upon implementation of Republic Act No. 9224, otherwise known as “An Act Rationalizing the Excise Tax on Automobiles, Amending for the Purpose of the National Internal Revenue Code (Tax Code) of 1997, and for Other Purposes.”
In the eyes of consumers, this may not mean much, but recent chatter about the possible effect of the proposed tax reform on the prices of automobiles has pushed the issue of excise tax to the forefront. Thus, we have to ask: What exactly is excise tax?
Excise tax is an indirect tax applied to goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition, and to things imported. There are two types of excise tax, namely, specific tax and ad valorem tax.
The former draws tax based on weight or volume capacity or any other physical unit of measurement, while the latter is a tax based on the selling price or other specified value of the good. As a matter of rule, excise tax shall be paid prior to the removal of the goods from the place of production or assembly or from the Bureau of Customs’ custody.
VAT, which is a tax shifted by the seller to the buyer, is a form of consumption tax, whereas excise tax is an indirect tax levied on goods manufactured or imported and subsequently sold in the country. Unlike VAT, excise tax is already incorporated into the selling price, which is why we do not see excise tax on invoices or receipts.
Excise tax on automobiles is ad valorem, hence based on the value of the unit. With that, consumers can now take a closer look at how the proposed tax reform will affect the prices of automobiles.
Under the current excise tax scheme for automobiles, a rate of 2 percent is charged on automobiles with net manufacturer’s price of up to P600,000, and this could go up to as much as 60 percent tax in excess of P2.1 million on top of the P512,000 base tax for units priced at P2.1 million and above.
Current tax table for excise tax on automobiles: (See table A)
With the proposed tax reform on excise tax for automobiles contained in House Bill No. 4774, the floor base of 2 percent tax on up to P600,000 net valued automobiles may go up to 4 percent—that’s a 100 percent increase. As astounding as that may sound, the top bracket may go as high as 200 percent tax (currently at 60 percent) in excess of P2.1 million on top of the P1.22 million (currently P512,000) base tax for a P2.1 million net valued automobile.
Proposed tax reform on excise tax for automobiles: (See table B)
This means that the excise tax on a P2.5 million net valued automobile would be estimated at P2.02 million using the proposed tax scheme, as opposed to the current excise tax rate, which would only yield P752,000 excise tax on the same automobile. Essentially, there would be about a 169 percent increase in the excise tax. All else being equal, the new selling price of a P2.5 million net valued automobile would be P4.82 million, incorporating the proposed excise tax and VAT, computed as: P2.5 million + 12 percent VAT of P300,000 + excise tax of P2.02 million.
Under the current tax rate, that same car would sell for P3.55 million—over a million less. If this doesn’t drive consumers crazy, we don’t know what will.
On another note, the proposed excise tax rate may not only hit the end consumers who use automobiles privately but also the public commuters. Public transportation, specifically taxis that fall under the P1.1 million and below category, may also be greatly affected. Higher prices of cab units may also drive up the fare for commuters – who would already be burdened by the proposed increase in excise tax for petroleum.
Some would say that now is the best time to purchase an automobile before we all start paying through the nose for one. Others say this new tax scheme will hurt the automobile industry and, in effect, harm the country’s economic status as a whole.
One potential casualty is the government’s Comprehensive Automotive Resurgence Strategy (CARS) program under Executive Order No. 182, signed by former President Benigno Aquino 3rd in 2015. The said program is an initiative of the Board of Investments and was implemented to attract new investments, stimulate demand, and effectively implement industry regulations that will revitalize the Philippine automotive industry, and develop the country as a regional automotive manufacturing hub. Some of the participants are Toyota’s Vios and Mitsubishi Mirage G4, which are widely patronized by consumers.
What does the government have to say about all of these?
In a report by the Department of Finance, Secretary Carlos Dominguez 3rd said that local sales will still grow at a healthy rate as a result of the lower personal income tax rate, which is also being proposed in the tax reform. The Secretary recognizes that this new excise tax model on automobiles may slow down the sales of car manufacturers and dealers but the industry will be able to recover and sales growth will still be healthy.
Whether consumers are thinking of getting a subcompact or a luxury car, prices are bound to change radically. The tax reform may entail lower personal income taxes resulting in higher purchasing power, or it could pave the way for higher indirect taxes and lower consumption rate. We do not know for sure. What we do know is that the first package of the new comprehensive tax reform is set to be implemented come the third quarter of this year. This means consumers still have a few months left to decide whether to invest in an automobile prior to the “big change.”
With this, we’re left with another question: How does our tax system work? One of the concepts of the Philippines’ progressive tax system is to shift higher tax to higher income earners. Consumers who are able to spare some amount for a family car, or millennials who opt for the subcompact as a starting vehicle, are more evidently affected in this case. So, should the proposed excise tax rate shift the burden to the wealthier people who can afford luxury vehicles? Perhaps the government can spare a second look.
The author, Karla Mae Nogoy, is an assistant manager with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd., a member firm of Deloitte Touche Tohmatsu Limited—comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.