Car market trends you can expect with the new taxation scheme

By the time you read this, chances are President Duterte will have already signed into law the newly minted Tax Reform for Acceleration and Inclusion (TRAIN) Act, which aims to enable government to collect more taxes to fund its ambitious infrastructure projects. Players in the automotive industry are particularly concerned because the proposed excise tax revision will affect car prices.

To wit, vehicles with a net selling price of P600,000 and below will now be taxed 4% (a maximum P24,000), compared to the previous 2% ( a maximum P12,000). Vehicles with a net selling price of more than P600,000 up to P1 million will now be taxed a flat rate of 10%. Before, vehicles with a net price of more than P600,000 up to P1.1 million followed a graduated taxation formula of P12,000 ( 2% of P600,000) plus 20% of any amount exceeding P600,000.

Vehicles with a net selling price of more than P1 million up to P4 million will now be taxed a flat rate of 20%. Before, vehicles with a net price of more than P1.1 million up to P2.1 million were taxed P112,000 plus 40% of any amount exceeding P1.1 million.

Vehicles with a net selling price of more than P4 million will now be taxed a flat rate of 50%. Before, vehicles with a net price of more than P2.1 million were taxed P512,000 plus 60% of any amount exceeding P2.1 million.

Crucially, the new TRAIN Act will completely exempt (0%) fully electric vehicles and pickup trucks, and tax hybrid vehicles just 50% of the rates applicable to their regular counterparts with internalcombustion engines.

I expect three things to immediately happen if these changes are implemented. First, pickup sales will go through the roof, unless the much- awaited implementing rules and regulations somehow state that only single- cab, commercial- purpose pickup trucks are covered by the exemption. Pickups have enjoyed a more consumer-friendly reputation lately as lifestyle vehicles, and they are now being purchased by city dwellers who otherwise wouldn’t touch leaf- sprung trucks with a 10- foot pole. Imagine what tax exemption would do for their popularity.

Second, hybrid cars will now be much more widely accepted in our market as their prices get significantly lowered. Expect more brands to follow the lead of Toyota in bringing in their hybrid models. That’s more environment- friendly choices for Filipino car buyers.

Third, we will now see electric vehicles on the road. You might recall that Manuel V. Pangilinan made the news four years ago for complaining that he couldn’t have his electric Tesla Model S registered in the country. With EVs now included in the official vehicle taxation framework, clear and concrete mechanics on how to register them with the Land Transportation Office should follow.

As for the sales of conventionally powered vehicles, I see the following happening:

The robust sales of small cars will continue unabated. A maximum P12,000 price increase for these affordable vehicles won’t mean much to buyers, especially if they avail of a four- to five-year financing plan. That 2% bump in excise tax will hardly be felt in the final computation.

For the next two tiers, let’s do a couple of sample equations:

A car with a net selling price of P700,000 will now be taxed P70,000 (10%). Before, the same car would be taxed just P32,000 (P12,000 plus P20,000).

A car with a net selling price of P1.2 million will now be taxed P240,000 (20%). Before, the same car would be taxed just P152,000 (P112,000 plus P40,000).

This means vehicles in the P600,001 to P2.1 million price bracket will cost significantly more. And it will not be a stretch to project that many car shoppers in these segments might consider downgrading.

Now, for the last tier, let’s do a similar sample computation:

A car with a net selling price of P5 million will now be taxed P2.5 million (50%). Before, the same car would be taxed P2.252 million (P512,000 plus P1.740 million).

A car with a net selling price of P10 million will now be taxed P5 million ( 50%). Before, the same car would be taxed P5.252 million ( P512,000 plus P4.740 million).

A car with a net selling price of P15 million will now be taxed P7.5 million (50%). Before, the same car would be taxed P8.252 million ( P512,000 plus P7.740 million).

As you can see, in the luxury car segment, the new excise tax actually gets lower the higher the manufacturer’s selling price is. Which means sales of premium sedans, luxury SUVs and exotic supercars should hold steady, if not grow even further.

This is how I see the automobile excise tax revision impacting car sales in the coming years. As for the goal of collecting more taxes, the government just needs to make sure nobody is cheating ( read: undervaluing or flat- out smuggling) on the part of vehicle importers and distributors. And that’s easier declared than done.