Car Prices and GST: Bogus Arguments

Datuk Aishah of MAA on the impact of GST on car prices (excerpt):

MAA unclear of GST implications to car prices

PETALING JAYA: The Malaysian Automotive Association (MAA), which has projected a total industry volume (TIV) forecast of 680,000 units for 2015, is in doubt whether the implementation of the Goods and Services Tax (GST) would actually lower car prices.

Its president Datuk Aishah Ahmad said one of the issues is that for current stock held by distributors and dealers, Customs regulations denote that car companies cannot claim back the entire sales and service tax of 10%, but only 2%, meaning that the remaining 8% has to be borne by the company or be passed on to customers.

"When GST is implemented, we have to pay another 6% GST, which adds up to 14%. Now it's 10% and that's the issue. That means the prices of cars are going to be higher for whatever inventory that you have in stock," she told a press conference after announcing the market review for 2014 and outlook for 2015 here yesterday….

…She explained that dealers usually keep one-and-a-half months of stock and they are small businessmen who cannot survive the blow if they are to absorb the 8% sales and service tax….

…Last week, the Malaysia Automotive Institute (MAI) had said that the 6% GST that will replace the sales and service tax of 10% in April 2015 should reduce car prices by some 1% to 3% due to the drop in tax being paid.

Aishah also pointed out that if the ringgit continues to weaken against the US dollar, car companies may need to resort to increasing car prices as the components sourced overseas are paid in US dollars.

"Even if we do 50% localisation, which is the average of some of the brands, with the increase in the exchange rate, the car prices are going to go up. But we can hold back now for a short time frame but how long can car companies hold back prices? If they lose money, they have to increase prices. It's not that we want to do it but it's beyond our control if the exchange rate weakens further."

First argument: We have stock that we paid SST on, which we can’t claim back as input tax credit.

Gosh, a full 45 days worth of stock. That’s worth keeping prices up for the next umpteen years….not. Value add at the distribution level is an amazing 70%. I think the dealers can bear a reduced margin for a month or two.

Second argument: The decline in the Ringgit means our USD denominated CBU/CKD/parts are going to be more expensive, justifying prices going up.

Now this is really bogus. Unless you’re sourcing the parts from the US, the decline in the Ringgit shouldn’t be a big factor at all, because the USD is climbing against nearly everybody. For 2014 as a whole, the Ringgit is actually up against the Yen (9.1%) and the Euro (4.3%) and only slightly down against the Won (-0.7%) and down against the Baht (-4.3%).

The fact that shipments are denominated in USD is neither here nor there – it’s just a convenient way of billing, since USD liabilities are easy to settle because most countries will have USD liquidity. But prices of cars and parts would originate with pricing from the country of origin. On that basis, we’re talking minimal price adjustments at worst, and it would depend a great deal where the cars and parts come from. For Japanese and European branded cars, there’s simply no excuse.