The hanging threat of vehicle excise tax

Implementing a law in a country where there are too many lobbyists and too much politics is never easy. This is certainly the case for the local automotive industry where some of the biggest companies operating in the country are each in a position to exert some influence on policy-making.

What started as a simple attempt to correct a revenue regulation that caused tax leakages has been blown to astronomic proportions that could have adverse effects on the underground economy and may even, at the end of the day, decrease government’s expected income.

Congress is in the process of finalizing a new excise tax structure on vehicles that is value-based instead of on fuel type and engine displacement. There is much debate on the new taxation levels, and the lively argumentation has dragged on. The House had passed its version; the Senate will resume discussion after July 27.

In the meantime, the executive branch of government–specifically the Department of Finance and the Bureau of Internal Revenue – has been stymied in its attempt to enforce the new Revenue Regulation 4-2003 to plug a loophole in the 10-seater exemption rule for Asian Utility Vehicles (AUVs).

Originally slated for implementation on Feb. 16, the DOF and the BIR agreed to postpone the regulation to March 31, then to May 19, then to June 6. The revised revenue regulation has once again been deferred; this time rumored indefinitely, purportedly anticipating the passage of legislative amendments to vehicle taxation.

Playing havoc on sales

All these uncertainties have produced mixed results in vehicle sales. For example, purchases of commercial vehicles – including AUVs currently exempt from excise tax payments – were abnormally increased 37 percent during the first four months of the year compared to 2002.

There is general apprehension the new excise structure will increase commercial vehicle prices. Clearly, the Philippine market shows strong bias towards this mix-use transport mode, as Filipinos favor the use of AUVs during the week to conduct business, and on weekends for the family.

While AUV transactions dramatically surged during the last two quarters of the year, the passage of the new law will be expected to cut sales by as much as 25 percent during the rest of the year.

Passenger car sales, on the other hand, which are now at the lowest since 1998, account now for only 15 percent of total sales. Prospective buyers are reportedly holding off purchases until the new law – which is perceived to result in a reduction in sale prices – is passed.

While passenger cars are expected to become more affordable, the industry feels that the anticipated increase in sales after the passage of the new law will not compensate for the slackened volumes during the last half of 2003.

Revenue collections gone awry

Funny, but now it looks like the finance department is experiencing more problems – and ultimately may end up losing on the whole business of trying to bring in more collections for the widening national budgetary deficit.

From where finance chief Isidro Camacho is coming from, the loopholes in past BIR regulations, specific to AUVs, had shrunk the government’s tax take from the automotive industry at a time when motor vehicle sales had been going up despite the overall economic slowdown.

Unfortunately, any estimates of "lost government revenue" are purely hypothetical. It can be argued that the past robust sale of AUVs is because of their tax-exempt prices. Thus, if AUVs were to become more expensive, sales may not be as healthy, and correspondingly mean lower tax collections.

Therefore, the excise tax issue is not just a matter of ironing out the fiscal collection mess. It involves understanding the economics of market pricing, and appreciating social implications. Lifting the exemption on AUVs and increasing the excise taxes on commercial vehicles, for instance, would drive up costs to prospective vehicle owners by as much as 35 to 50 percent.

When this happens, total vehicle sales would definitely plunge since commercial vehicle (CV) prices, particularly AUVs’, would rise beyond the reach of their target market – the average Filipino-turned-entrepreneur who now strongly contributes to the resiliency of the economy through small businesses.

Battling to save each one’s interests

It doesn’t help that pending before the Senate are several versions of the bill amending the current excise tax structure on automobiles, each one influenced by the different industry stakeholders, from the local parts makers to assemblers and multinational manufacturers.

Emerging as the stronger version is a bill filed by Sen. Serge Osmeña that still provides for the exemption of vehicles worth P600,000 and below. Osmeña proposed six tax brackets instead of the four tiers approved by the Senate ways and means committee and backed by the DOF.

Instead of a graduated rate of three percent, 15 percent, 30 percent and 50 percent, Osmena’s version ranged from 13 percent all the way to 90 percent.

The senator says that the government must give preferential tax rates on low-end vehicles but apply higher rates on pricey models that only the moneyed consumers can afford. With this proposal, it seems industry players are getting what they want and are generally happy.

Except, it seems, the government. The problem with the pending shift to value-based taxation is that nobody is really sure whether the government would stand to gain from the new policy.

In 2002, the BIR raised P1.96 billion while Customs collected P655 million from vehicle excise taxes. The DOF estimates that using an industry growth projection of 36 percent, the government should chalk additional revenues of about P1.5 billion yearly as a result of the shift.

Some members of the car industry, however, are not so optimistic. They point out that the proposed new tax policy would actually shrink revenues by some P1.8 billion because sales could actually considerably drop.

After all the trouble that everybody went through – from the complaints as early as year 2000 of abuses in the AUV tax exemption to the uproar against the proposed stricter revenue regulations and the horse trading in the august halls of Congress – government may find itself eventually holding an empty bag.

In the end, it may just be the lobbyists who will go to the bank with filled moneybags.

Reviving SSS on TV

"Isyung Kalakalan at Iba Pa" on IBC-13 News (4:30 p.m. and 10:30 p.m., Monday to Friday) completes today the discussion of issues being confronted by the Social Security System (SSS) officials as they struggle to revive the institution. The welfare of millions of its members is seriously at risk as the effects of politics take its toll on the institution’s financial condition. Watch it.

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