How the final excise tax could affect the prices of your favorite cars
In the last couple of months, the prospect of a new tax scheme for automobiles has played the market -and the sentiments of consumers- like a fiddle.
It's easy to see why: the initial versions of the proposed revisions to the excise, a tax computed based on the net manufacturer's/importer's selling price (NMISP), essentially the price they sell the car to the dealers), had such high and complex computations that it threatened real harm to a lot of car companies, particularly the low volume distributors of premium and luxury automobiles.
This impending increase in taxes on automobiles for 2018 spurred a veritable buying spree as consumers advanced their purchases to avoid extra taxes. This occurrence has been confirmed by industry executives as their stocks have been largely sold off, particularly the more expensive models such as executive cars, premium sedans, and large SUVs.
Now after the Tax Reform for Acceleration and Inclusion (TRAIN) has been signed into law as Republic Act 10963 by President Duterte, we can now more accurately predict how the excise tax will affect car prices starting next year.
The Final Excise Tax Schedule
The bicameral conference consolidated the two different versions of the TRAIN bill's excise tax schedule for automobiles. In short, the law that was signed by President Duterte had four price brackets/tiers and did away with the original system that had a fixed base amount (much like a taxi flag down rate) and an additional tax rate computed on the NMISP in excess of a particular bracket's starting amount.
It's confusing for the non-mathematically inclined, to say the least, which is why the new tiers and systems that came out of the bicameral conference is much better: it only has a rate (in percent) that is applied on the NMISP of a particular vehicle.
4% - up to PhP 600,000
10% - PhP 600,000 up to PhP 1,000,000
20% - over PhP 1,000,000 up to PhP 4,000,000
50% - over PhP 4,000,000
TRAIN also made some specific exemptions to the excise tax such as pure electric vehicles (EVs) and all pick-up trucks. Hybrid electric vehicles will only see 50% of the excise tax rate applied.
Before we go into the computations, we have to make it clear that the goal is not to get the exact prices of 2018 model vehicles. NMISPs are closely guarded secrets of car manufacturers and distributors, and they will not release that data willingly, if at all. What we at AutoIndustriya.com did, however, was to hypothesize a potential NMISP for certain types of vehicles to arrive at an approximation in price factoring in the excise tax, the value added tax, a presumed 20% profit margin across the board for all models, and we rounded up to either the nearest PhP 5,000 or 10,000 as most manufacturers like clean zeros on their prices.
After our last feature with an excise tax simulation, some auto industry executives pointed out that a 20% profit margin is not accurate, at least for their respective companies. But we have to keep it consistent for all becasue the goal of this exercise is to show the effect of the new excise tax schedule on the Manufacturer's Suggested Retail Price (MSRP) for a particular model category (i.e. top-of-the-line PPVs/SUVs) in percent. By keeping factors such as the hypothetical profit margins constant, we can arrive at a more indicative idea of the increases in price and in the case of this final excise tax, interestingly enough, potential decreases.
Passenger Car Excise Tax: 2017 vs. 2018
We grouped our computations based on different vehicle classes, not exact models. For this simulation, we also split the computations into two major categories: one for the popular passenger car classes, and another for the light commercial vehicle classes.
In the category of entry level cars, meaning those with NMISPs under PhP 600,000 and SRPs on or around that are most likely around PhP 700,000 or below, the effects are clear: a doubling of the tax. The reason is because from the current system where a flat rate of 2% is applied on that tier, the incoming model has doubled the rate to 4%. The resulting simulated MSRPs are a bit higher: just under 2% more.
For the compact cars with MSRPs around PhP 800,000 to around PhP 1.1 million, the computations show that there will be increases of around 3-5% overall on the prices. The estimated increase in this price range is higher than the computations original version that was approved by the House of Representatives (HB4774) a few months back.
Interestingly enough, the trend shows that as the cars get more expensive, the percentages of increase aren't as high as expected. Actually, if anything, some of the higher and more expensive categories have even registered decreases in price based on the same profit margin.
Light Commercial Vehicle Excise Tax: 2017 vs. 2018
In the LCV category, what becomes apparent is that vehicles with NMISPs close to the ceiling of their respective brackets will have minimal increases based on percentages. For instance, a C-SUV/Crossover with an NMISP of PhP 950,000 (falling in the PhP 600,000 to 1,000,000 bracket) and current hypothetical MSRP of PhP 1,390,000, would only see its prices increase by about 1.08%. This is a contrast to the B-SUV/Crossover with an NMISP of PhP 720,000 (still within the same PhP 600,000 to 1,000,000 bracket); we could see its prices going up by about 4.41%.
What is also apparent is that a very popular class of SUV, the pick-up passenger vehicle class, will see its prices go up significantly. Most of the vehicles in this category would fall under the third tier of the excise tax schedule, and will see a tax rate of 20% applied to the NMISP. A mid-grade PPV/SUV with a current MSRP of around PhP 1.630 million could see its prices go up by about 8.9% to PhP 1.775 million, while a top-of-the-line PPV/SUV with a current MSRP of around PhP 2.090M could see its prices go up by about 8.13% to PhP 2.260M
The higher end SUVs, particularly those in the midsize category and up, could actually have lower prices. This trend is similar to the high end vehicles in the passenger car classes.
What the simulation makes clear is that, with all the variables constant, the automotive excise tax that was signed into law is much milder than the bills that came from the House of Representatives, the Senate, and the early proposal from the Department of Finance.
The potential increases in price seem to be well under the initial estimates that would have spelled disaster for the premium and luxury automobile industry which accounts for just about 1% of annual car sales in the Philippines. Moreover, the lower increases in price would also mean that the Philippine auto industry could keep its growth on track as the price hikes can be mitigated through financing.
Now we can hope that the model categories that could end up with lower prices given the new tax scheme would actually go down in price, but the industry executives we spoke to unanimously refuted that possibility. A reduction in price will be bad for business, as customers who bought prior wouldn't be too thrilled at that prospect. It is expected that the distributors/manufacturers would use the opportunity to increase their profit margins.