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Analysis: Current vs Proposed Excise Tax on Cars

Analysis: Current vs Proposed Excise Tax on Cars image

Vince Pornelos / Autoindustriya.com | January 25, 2017 15:31

The Taxing Exercise of Excise

By now you've been reading about the chart with potential tax schedule that is being mulled in the House of Representatives. Among the many other revisions on taxes proposed on goods such as fuel, House Bill 4774 seeks to levy heavier excise rates on the automotive industry to compensate for the lower income taxes promised by the administration and generate income for public coffers.

Yesterday, we published a piece based on a chart we acquired detailing the effects on vehicle pricing. But the final prices in that story are the most likely dealer prices, meaning there is no profit margin factored in yet for the dealer. VAT is not factored in as well.

Now, after quite a bit of computing, we're presenting what the potential Manufacturer Suggested Retail Price (SRP) increases are in selected vehicle classes; so chosen for their significance in the market. Mind you, our calculations were based on hypothetical Net Manufacturer's/Importer's Selling Prices (NMISP), and was also based around an estimated dealer margin.

Dealer margins or profit margins are, much like NMISPs, closely guarded secrets of the car companies. Our confidential contacts within the auto industry tell us that a conservative profit margin is 20%, though it could be higher. For the sake of our calculations, we applied the 20% margin across the board to come up with hypothetical MSRPs to illustrate how much prices would increase for the consumer.

To do so, our tables will factor in the current tax scheme, the proposed schedule under House Bill 4774, as well as the now-superseded proposal from Department of Finance (DoF), all of which categorize vehicles under four brackets based on NMISP: (a) below Php600k, (b) Php600k to under Php1.1M, (c) Php1.1M to under 2.1M, and (d) Php2.1M or higher. The computations also result in numbers with a lot of change, so we also applied a round up principle to all, rounding up the prices to the next Php5,000 increment.

The Taxing Exercise of Excise

As you can see, the current tax scheme mandates a 2% excise on NMISPs under Php600,000, but has a mixed tax plans for the higher brackets that combine a fixed amount with a variable amount based on the applying a percentage on balance over the base amount of the category. Confusing, right?

HB4774 follows the same style as the current system, but quite literally doubles up (at least) on everything across all aspects of the excise tax plan. The minimum tax rate for the NMISPs under 600k are at 4%, while the fixed amounts are doubled from Php12,000 to Php 24,000, from Php112,000 to Php224,000, so on and so forth. Some are even more than tripled, particularly at models with NMISPs at Php2.1M or higher.

The Department of Finance's scrapped proposal is by far the simplest of all, applying a particular flat tax rate across each price bracket, doing away with the fixed sums mandated by the other two. As such, the rate is simply applied to the NMISP to come up with an excise tax.

(UPDATE) HB4774 covers a wide array of vehicles, but a vital component is the definition of the vehicles covered by the proposed excise tax scheme, as it appears to purposely exempt full electric vehicles (EV). Depending on the legal interpretation, vehicles with alternative fuels could also be exempted, but that matter will have to be discussed further in a legal environment.

(UPDATED) Also of significance is the exemption of vehicles such as trucks, cargo vans, jeeps (i.e. "owner" type, not the brand), jeepneys, jeepney substitutes (i.e. FB body), special purpose vehicles (i.e. cement mixer, crane trucks, etc.) and single cab pick-up trucks. Double-cab pick-ups are covered by the bill.

With that out of the way, here's how each tax plan works out in certain vehicle classes based on prices indicative of their respective categories. If you were shocked yesterday, our new calculations will shock you even more.

The Taxing Exercise of Excise

The A segment is a class that has experienced a lot of growth in the last couple of years, given that their SRPs were somewhere around Php500k to Php600k. Affordable, practical and efficient, superminis proved to be a reasonable alternative to getting used cars.

Under the current 2% tax scheme, an A car with an NMISP is expected to sell at around Php550,000, but with the 4% excise tax under HB4774 applied, it jumps up 1.8% to Php560,000. The DoF plan is heavier at 5%, meaning the price of the same car would go up to Php565,000 or 2.7% more.

Php15,000 or even Php10,000 may not sound like a lot, but this is a category where every peso counts, and thus the market is highly sensitive to price increases.

The Taxing Exercise of Excise

The B segment is the most popular car class in the Philippines and it is where the country's number one automobile, the Vios, competes in. More importantly, the subcompact segment encompasses three models that are locally assembled, and with one more on the way.

A car with a hypothetical SRP of Php750,000 will most likely have an NMISP of Php550,000, meaning it has a 2% excise tax applied to it based under the current rules. Under HB4774's 4% excise, the price goes up to Php770,000, while under the DoF's proposal, the same car is Php780,000.

Excise taxes in this category could have a strong impact on overall vehicle sales because, like the A segment, this is a very price sensitive class. Also, a dip in sales in this category brought about by excise taxes could affect employment at the factories and have implications against the CARS manufacturing program.

The Taxing Exercise of Excise

The C segment or compact car class is not as price sensitive as the A or B segments, but a lot of models in this category will most likely fall under the second tier of the excise tax ladder; meaning fixed taxes are applied on top of the variable tax-on-balance.

For instance, a compact car that sells for Php985,000 will have an NMISP of Php700,000. Under the current scheme, a fixed tax of Php12,000 is applied along with 20% of the Php100,000 in excess of Php600,000.

Under excise tax rules of HB4774, the price jump is more substantial to Php1,030,000 (+4.6%), while the DoF plan is even more so, pushing the price of the same vehicle to Php1,130,000 (+14.7%).

The Taxing Exercise of Excise

As we move higher up the market range and higher up the NMISP latdder, the price increases are far more dramatic. If you're in the market for a compact crossover (J segment), a vehicle with an NMISP of Php950,000 should have a hypothetical MSRP of Php1,390,000.

Under HB4774, the same vehicle will cost Php1,500,000 (+7.9%) while the DoF plan will be even more at Php1,535,000 (+10.4%).

The Taxing Exercise of Excise

If you're in the market for a PPV, a good price point is at around Php1,820,000 under the current scheme, meaning a good set of features and standard equipment. A vehicle at that MSRP could potentially have an NMISP of Php1,200,000 and so it falls into the third bracket of the excise tax plan.

If HB4774 is implemented, the same model will cost Php2,050,000 (+12.6%) as it applies a Php224,000 minimum fixed excise with the balance of Php100,000 above Php1,100,000 effectively added, making the total excise Php324,000. The DoF proposal is even heavier, as the 40% tax rate applied to the entire NMISP means an excise tax of Php480,000, raising the price to Php2,260,000 (+24.2%).

The Taxing Exercise of Excise

Looking for an executive saloon (D segment)? Well, under the current scheme, a vehicle with an MSRP of Php2,010,000 could hypothetically have an NMISP of Php1,300,000, meaning the excise tax is a total of Php192,000.

If the DoF proposal is applied, the total excise is Php520,000, bringing the price up to Php2,450,000 (+21.9%). In HB4774, the price for the same car escalates to Php2,320,000 (+15.4%).

This price point is particularly interesting because up until this point, the DoF proposal has been steadily escalating in the price increase rate, but has tapered off from +24.2% in the previous PPV segment calculation to just +21.9%. The tax scheme in HB4774, however, continues to track upward from +12.6% in the PPV segment to +15.4% in the D segment.

The Taxing Exercise of Excise

The large SUV or large crossover category is where the two proposals make a big switch. Under the current scheme, a large SUV with an MSRP of Php2,950,000 should hypothetically have an NMISP of Php1,800,000.

In the DoF proposal, the same vehicle will have a total excise tax of Php720,000, bringing the price up to Php3,390,000 (+14.9%). But under HB4774, the increase is even more, as a total of Php924,000 in excise alone will be collected, bringing the price up to Php3,665,000 (+24.2%).

In our exercise to show the differences in the excise tax plans, this is the first time that an MSRP under HB4774 exceeded the MSRP of a model under the DoF's proposal.

The Taxing Exercise of Excise

In the premium executive sedan category, the trend continues of HB4774 dramatically increasing the price of premium and luxury vehicles.

A vehicle with a price tag of Php4,590,000, under the current excise tax rules, will likely have an NMISP of Php2,600,000.

If the DoF's proposal was applied, the same vehicle will incur a Php1,560,000 excise tax bill, bringing the price to Php5,595,000 (+21.9%). Under HB4774, the same car will cost Php6,485,000 (+41.3%) after taking a hit of Php2,224,000 in excise taxes.

The Taxing Exercise of Excise

If you're looking for a premium SUV, well, you'll be stunned by the increase in price from the current tax scheme to the one of HB4774.

A premium SUV with a hypothetical MSRP of Php9,965,000 will likely have an NMISP of Php5,100,000. The current excise tax means the government collects Php2,312,000 on that model alone.

Under the DoF proposal, a 60% tax on the NMISP means an excise of Php3,060,000, leading to a hypothetical MSRP of Php10,970,000 (+10.1%). But under HB4774, the same SUV will incur Php7,224,000 in excise tax, meaning the hypothetical MSRP will be around Php16,565,000 (+66.2%).

The Taxing Exercise of Excise

Lastly, you may want to rethink getting a supercar if HB4774 is passed into law.

Under the current tax scheme, a supercar or super sports car with an MSRP of Php19,000,000 should have an NMISP of Php9,300,000. In that tax plan, the government collects Php4,812,000.
Under the DoF's proposal, the same super sports car will be priced at Php20,000,000 (+5.3%) after incurring an excise tax of Php5,580,000.

But if HB4774's excise tax provisions are applied, the already exclusive price goes up astronomically to Php33,500,000 (+76.3%).

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Keep in mind that our calculations are hypothetical but based on realistic current MSRPs to come up with reasonable NMISPs, which in turn gave us an idea of what automobiles could cost us in the very near future. Of course there are variables such as the actual NMISPs of each manufacturer, each importer, or distributor, as well as the variations of the profit margins of their respective dealers, but the goal of this exercise in excise was to provide a a clearer overall picture of what the future of motoring holds for the Philippines. But if our calculations and conclusions are correct, then we'll be seeing far less luxury automobiles, far less premium SUVs, and definitely far less supercars in the years to come.

Where you stand on the upcoming excise tax rules depends on what class of vehicle you're shopping for (or selling) as there are clear differences between the current tax scheme, the now-scrapped DoF proposal, as well as the one made in HB4774. The Department of Finance proposal is no longer on the table, but it's application would have affected all manufacturers and importers significantly. HB4774 is more favored towards volume sellers, but very harsh on the premium and luxury sectors.

Regardless of which way the excise tax law goes, one thing is certain: the house always wins.