Locally assembled vehicles may cost more following the possible restructuring of automobile duty rates by the government, The Star reported. “With the excise duty gazette released on Dec 31, completely-knocked-down (CKD) vehicles will most likely be liable to pay more taxes. We are still analysing the impact,” a source familiar with the matter was quoted by the news daily as saying.

News of the duty restructuring first emerged earlier this month, where finance minister Lim Guan Eng said that finance ministry and the ministry of international trade and industry (MITI) are involved in discussions. The matter is being studied by a joint committee comprised of officials from both ministries and chaired by the two ministers in charge, The Malaysian Insight reported last week.

The mechanics of the restructuring of duties and taxes were not revealed, and MITI said last year that it was considering a reduction in excise duty for vehicles as a possible way for bringing car prices down. While any reduction in excise duty would mean less direct revenue, it would be offset by total collection due to increase vehicle sales, deputy minister of international trade and industry Ong Kian Ming said at the time.

It remains unclear for the time being how the review will affect overall duties for cars at this point, though higher car prices will be politically unpopular, RHB Research said in a report, pointing out that a potential rise in car prices could lead to lower vehicle sales given the current soft consumer sentiment.

“In the Pakatan Harapan election manifesto, it promised to reduce the excise duty on imported cars below 1,600cc engines for first-car buyers with household income below RM8,000 a month. However, lower car prices will not mean higher car sales immediately and could bring about other unintended consequences,” the research arm said.

With a large proportion of vehicle sales in Malaysia comprised of locally assembled vehicles, the potential tax hike could make fully imported (completely built-up, or CBU) cars more attractive, however approved permits for these models cannot exceed 10% of CKD total industry volume (TIV), an industry observer said.

The current vehicle duty structure dictates that in addition to the 10% sales and service tax, all vehicles sold are laden with excise and import duty. Excise duty is between 60% and 105%, calculated based on the car and its engine capacity, while import duty can reach up to 30%, depending on the vehicle’s country of manufacture. That said, vehicles built in Japan and ASEAN countries are not imposed with import duty.

The industry observer opined that the tax structure has come under review because local CKD manufacturers ‘have been known’ to under-declare the foreign content levels of the vehicles produced and ‘escape with huge profits’ as a result. Another industry observer noted that raising car prices will benefit local makes due to their lower price points, though it will also deter foreign direct investments into the industry, the source added.

While lowering car prices could lead to longer-term positive outcomes, this could also eventually lead to a negative impact on the industry, the research firm added.

The objective to lower car prices is achievable in the medium term. The overnight implementation of lower new car prices could result in a significant upheaval for car residual values, until the market is able to fully digest the changes,” the firm said, adding that a change in the duty structure from revisions in the 2006 National Automotive Policy (NAP) resulted in a collapse in new car sales and it took more than 12 months for the market to recover to pre-NAP TIV sales levels.

RHB Research expects consumers to postpone vehicle purchases as the possible price changes take effect, and new car sales will suffer in the short run as a result. “The resulting correction in used car residuals, due to lower new car prices, would also affect new car sales due to the erosion of the equity value embedded in used car residuals, which car buyers typically usually use as a down payment when buying new cars.”

“The banking sector could see an uptick in impairments, if there is a significant correction in used car residuals as collateral value falls short of the outstanding loan value,” the research firm said, also adding that ultimately the potential restructuring of duty rates on automobiles is a significant regulatory risk.

Malaysian vehicle sales for November year-to-date saw 549,445 cars sold, which was marginally down from the 550,526 vehicles sold in the same period for 2018. The Malaysian Automotive Association (MAA) will be announcing TIV figures for 2019 later this month. As of July, the association maintained its full-year forecast of 600,000 sales, in light economic uncertainties.