Will cars be cheaper in Malaysia post-GST?

Will cars be cheaper in Malaysia post-GST?

Players in the automotive industry are concerned about how the GST is going to affect them, particularly during the transition period.

I am not kidding, says Datuk Aishah Ahmad, president of the Malaysian Automotive Association (MAA).

"Car companies make only a very small profit margin. It is about 4 per cent to 6 per cent. The dealer has to make a margin, the distributor has to make a margin. It is very small," she says.

The industry is concerned about how the GST is going to affect them, particularly during the transition period, because the automotive industry is structured very differently compared to other industries.

Currently, the automotive industry is already paying a 10 per cent sales tax on cars so when the GST comes in April with the lower 6 per cent rate (which replaces that 10 per cent sales tax), people expect this to mean cheaper cars for them.

Not so, says Aishah.

She says the sales tax was based on the "open market value of the car."

"This means you go to the Customs Department and get the value of the components of the whole car that you brought in, then pay the 10 per cent sales tax on it.

"But the GST is going to be charged based on the selling price of the car on the road, so it would now include accessories, road tax and insurance (and profit margin).

"So you are actually paying 6 per cent on a higher base. That is why it doesn't correspond when the 10 per cent SST goes down to 6 per cent GST that you get a 4 per cent savings. The savings would actually come up to only 1 per cent to 2 per cent."

A car dealer who wants to be known as "CK" explains this in simple terms.

"With the old SST, say the 'government approved price' for a model is RM40,000 (S515,000) and there's a 10 per cent tax on it, we pay a tax of RM4,000 for it.

"If our profit margin is RM5,000, then the customer pays RM49,000 for the car (which is car and tax RM44,000 plus RM5,000 profit margin).

"But with the GST, the customer is charged 6 per cent of RM45,000 (the RM40,000 car plus RM5,000 profit margin), which comes up to a tax of RM2,700.

"Add this up, and it comes to RM47,700 for the car, which is a savings of RM1,300," he says.

But one should not be jumping for joy, as Aishah points out, because it does not include the car insurance and other extras which would also have a 6 per cent GST on them.

"If there are any savings on GST, these will be passed down to the consumers. The government has the Anti- Profiteering Act in place which charges companies RM500,000 to RM1mil if they try to profiteer. These are big corporations we are talking about. They will not do that (profiteer)," she says.

But there are a number of other issues which may see car prices going up.

For one thing, the ringgit has depreciated significantly against the US dollar over the past year.

Transactions for a lot of the automotive components and parts for locally-assembled cars are in the US dollar, which makes it a lot more expensive than before.

Then there is the sticky problem of existing stocks of cars, which is proving to be an issue for the industry during the transition period of the GST.

Typically, car companies and dealers have about a two-month stock of cars.

So on April 1, what happens to these stocks on which the 10 per cent sales tax has been paid?

From April 1 when the GST is implemented, that 10 per cent sales tax would be replaced by the lower 6 per cent GST rate.

The Customs Department says that for stocks held on hand at March 31, it will refund 100 per cent of the sales tax "if they can show they have the import documents or local invoices from assemblers or manufacturers that show the 10 per cent sales tax clearly on their invoices."

While this looks good on paper, because of the way the automotive industry is structured, it does not always work out for the best to either the dealers or the consumer.

If a company buys a locally assembled vehicle from a "licensed manufacturer", Aishah says, then it would be able to claim back 100 per cent of the sales tax.

But many companies buy their vehicles not directly from a licensed manufacturer but through a distributor, and the distributor is the one who buys it from the manufacturer.

"And these companies that buy from the distributor cannot claim back 100 per cent of their sales tax and are only allowed to claim 20 per cent, which means they lose 80 per cent of the sales tax they have already paid.

"And 80 per cent of a 10 per cent sales tax works out to 8 per cent, which means that on April 1 with the GST coming in, customers would now have to pay another 6 per cent GST (on top of the 8 per cent that these distributors could not claim as refunds). So that would make it a total of 14 per cent (during the transition period with existing stocks) tax.

"So in actual fact, the car prices will go up (during the transition period) because now you have to pay double tax on the cars," Aishah says.

But why do car companies not buy directly from the licensed manufacturer?

"Maybe because when they first set up the business, they were not buying their cars from the plant but from another company which was buying from the plant for them.

"These are arrangements that they might have had for a long time so they cannot switch the arrangements just like that," Aishah says.

She warns that dealer stocks are all going to be affected because the 10 per cent sales tax has already been paid upfront (prior to April 1).

Like many others in the industry, Alan Harris, managing director and CEO of BMW Group Malaysia, has concerns. "They (the Customs Department) think we are the importer but we are not. We work with a local AP franchise holder to bring in our cars. They import the cars while BMW manages the brand.

"We paid for the stocks and the tax and we are the ones holding the stock. But on March 31, if we have vehicles in stock, we are not allowed the full refund because we are not the importer!

"So technically, we are paying double tax. It's a loop in the system and a problem of documentation."

It is same problem for dealerships, he says, pointing out that these are local Malaysian entities who set up their businesses and have forked up money to keep 1.5 to two months' stock of cars.

"The taxation on these companies is going to be a hefty burden," he adds.

Harris says they are still discussing with the Customs Department and the Finance Ministry to sort this problem out.

"If you are asking me if car prices are going to come down, there are benefits from the GST and we do want to pass it down to the end consumer.

"But the taxation in the value chain and the channel has to be flexible enough to help us to do that."

Aishah says the industry has appealed to the Prime Minister on the double taxation aspect and it is still waiting for his decision.

"It's less than two months away. By the time we get the answer, maybe everything will be over," she says.

For now, car companies and dealers have all started cutting back on new stocks.

"It's happening. Every car company has done that and only after April will they try to beef up, especially dealers' stock in inventory, to mini­mise the impact (from the double taxation)."

But she does not foresee a situation where there is a shortage of certain cars as a result of companies holding back on getting in new stock of cars pending the GST.

Aishah feels the implementation of the GST is particularly significant for the industry during the transition period because of the double taxation.

"They have to clear existing stocks first. Only after all these stocks have cleared can they start selling at the lower GST rate."

She reckons that it could take two to four months, maybe even six months, to clear the stocks.

And even after this, there are still questions as to how much car prices can come down.

Even with the drop from the 10 per cent sales tax to the 6 per cent GST, it remains to be seen just how much car prices can come down.

After all, the import tax and the excise duty on cars, which range from 65 per cent to 105 per cent, remain unchanged.

"You are actually paying more in car price duties than the imported value of the car," says Aishah.

The industry has been asking "at every dialogue and every meeting" for years for the excise duty on cars to be reduced so that Malaysians can get cheaper cars, she adds.

But she thinks it is unlikely, because the government gets a revenue of RM7bil a year from duties from the industry.

"It is too huge an amount for them to lose," she says.

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