How Much Would Car Prices Come Down If Excise Duties Were Abolished?

I’ve made no secret of the fact that I’m leery of the notion that cars in Malaysia should be made cheaper. The negative externalities arising from fossil fuel use, which would be exacerbated by cheaper cars, would be a social and public cost that wouldn’t be accounted for in the retail price of cars.

But leaving that aside for the moment, how much should car prices fall if the currently high rate of excise duty levied on the production and sale of cars be reduced or abolished?

It’s not as much as you think.

On the face of it, excise duties are an onerous addition to the price of Malaysian cars. You can check the current rates from the MAA website – for motor cars (excluding 4WDs and MPVs) the duty ranges from 75% for 1.8 litre cars to 105% for cars with engines larger than 2.5 litres. Sales tax of 10% is added on top of that for the final retail price.

Doing the math, abolishing excise duty would for instance reduce the price of a small sedan (say a Toyota Vios) by about 38.9%; for a full size executive sedan (say an S-class Mercedes Benz), by about 46.6%. Such reductions would be a huge boon for lower and middle income families.

Unfortunately, the numbers don’t quite add up. For one thing, unlike the sales tax, the excise duty on cars is not a flat rate based on manufacturer’s retail prices, but is actually adjusted downward for local content i.e. the published rate is just the maximum rate and won’t apply to all cars equally.Both the nominal and effective rate of excise duty can and would be considerably lower in practice.

Second, from what I’ve been made to understand, excise duty is levied on the ex-factory price and not at the distribution level, which means that it doesn’t take into account the profit margin on distribution.

But rather than take my word for it, let’s look at what the data says:

1. Sales data on motor cars is available through the Quarterly Survey on Distributive Trade. I excluded sales of parts and motorcycles, as well as revenue from maintenance.
2. Excise duty collected on motor cars can be gleaned from the Treasury’s detailed estimates of 2012/2013 revenue.

Actual sales of passenger vehicles reached RM74.85 billion in 2012, while excise duty collection on the same reached RM7.14 billion. My calculator says that the average excise duty levied is thus just 9.5% of sales.

That’s a far cry from the 40% implied by a straight line calculation. The idea that cutting out the excise duty for cars alone would see prices drop that much is thus largely wishful thinking.

In fact, for the average Malaysian family car (national or otherwise), the 9.5% estimate would be conservative since excise duty progressively increases for larger cars and for fully imported cars. The tax burden is lower for entry-level and mid-sized sedans, but so too would any reduction in prices from abolishing excise duty.

That still leaves the question of why Malaysian cars are expensive in the first place.

There’s no doubt that industrial policy (AKA protecting Proton) has had a historical and still relevant impact on the structure of car prices in Malaysia. But rather than speculate on causes or effects, I’d rather resort to the data, for which we’ll need to go back a couple of years, to 2010:

1. Sales data on motor cars again is available through the Quarterly Survey on Distributive Trade.
2. Excise duty collected on motor cars from the Treasury’s detailed estimates of 2010/2011 revenue.
3. Ex-factory sales from the 2011 Economic Census for Manufacturing.
4. Import value of motor cars from DOS’ External Trade Statistics System (HS classification 8703).

You have to make some heroic assumptions here to get plausible estimates, and even then there’s going to be a great deal of uncertainty.

Total sales reached RM67.99 billion, excise duty collection was RM5.2 billion and ex-factory sales reached RM21.46 billion. Import value reached RM8.06 billion and I estimate sales tax collection at RM6.2 billion (which is a gross over-estimate, based on actual overall sales tax collection – there’s unfortunately no breakdown given in the source I used).

Nevertheless, assuming that imports are all CBUs (pretty unreasonable given that they attract the full weight of excise duty, but a conservative assumption), total input value before distribution would be RM29.51 billion (gross ex-factory sales plus imports).

That gives an effective excise duty rate of just 7.6% at retail (based on sales of RM68 billion) and 17.6% at the factory/import level. Again, a far cry from the 40% implied by the top excise duty rate.

More important is the resulting residual – headline sales of RM68 billion less input cost, excise duty and sales tax, suggests that a massive 39.9% of the sales value of a car is captured in the distribution sector.

This is largely corroborated by the slightly earlier 2009 Census of Distributive Trade which implies an even higher “value-added” of 70% on the sale of cars on distribution.

Again, I don’t wish to speculate here – there’re possibilities of inefficiencies at manufacturing level, imperfect competition at the retail level, menu costs at all levels, that could explain Malaysia’s structurally high car prices.

One comment I would make however is that historical protectionism of Malaysia’s national car manufacturers also effectively insulated non-national car brands from competition as well – shades of the US experience of the 1980s (quotas on Japanese imports resulted in these manufacturers making abnormal profits).

What’s clear however is that while excise duty does play a role in higher car prices, it is by no means the only or even the biggest culprit. For that, we’ll have to look elsewhere.

Technical Notes:

All data from the Department of Statistics unless otherwise noted:

1. Quarterly Survey on Distributive Trade
2. 2011 Economic Census on Manufacturing (warning: pdf link)
3. 2009 Census on Distributive Trade
4. Motor car imports from the External Trade Statistics System (accessed June 14, 2013)
5. Buku Anggaran Hasil Kerajaan Persekutuan 2013 from the Ministry of Finance
6. Buku Anggaran Hasil Kerajaan Persekutuan 2011 from the Ministry of Finance