Commentary

Will Cars Be Cheaper After GST? We Don’t Think So. Here’s Why…

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The GST debacle is without doubt a hot topic among Malaysians today, with how it will impact car prices being a commonly raised question. At TCG, we often get asked whether to buy a car before or after GST is implemented. So we’ve decided to put on our thinking helmet and set off in search of some answers.

GST, if you do not already know by now, stands for ‘Goods and Services Tax’. It is set to replace the current Sales and Service Tax (SST). You see, GST is a multi-stage tax charged based on supply, unlike SST, which is a single stage tax based on end margin.

 

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1st April is only a shade under a month away. Time to whip out your calculators!

What does this mean?

With SST, the primary weakness lies in compounding tax effects. Some businesses pay their taxes in full, while some get away with little to no tax payments. This tax structure is disadvantaged due to the lack of transparency as to what goods are subjected to tax. From a consumer perspective, SST is less of a burden, as its extent ends at services, while the upcoming GST is applicable for services as well as goods.

Why GST?

GST is a more effective, efficient and transparent tax system, if implemented properly. All businesses with annual sales turnover exceeding RM 500k must register with Customs. Only a registered business can charge and collect GST on the taxable supplies of goods and services made by the business.

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The bane of all car guys; balancing the books. Yeah, it’s not exclusively a car guy problem, but it definitely matters more!

How does GST work?

GST features a standard rate of 6%, and is charged on the value or selling price of taxable goods and services. The amount of GST incurred on input (input tax) can be deducted from the amount of GST charged (output tax) by the registered business. If the amount of output tax is more than the input tax in the relevant taxable period, the difference shall be remitted to the Government. However, if the input tax is more than the output tax, the difference will be refunded by the Government. Get it? No? Here’s a simple illustration:

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Under SST, some suppliers and retailers collect 10% government tax, but how sure are we as consumers that these are paid to the government? Therefore, with GST (ideally and if implemented properly) the government will be able to collect taxes across the process chains (hence, multi stage). Now comes the question, how do they track all these output/input taxes with all businesses, as well as ensuring differences are refunded timely by the government? With computer systems of course.

Will cars be cheaper post GST?

To answer this, let’s look at the tax and duty components that make up a cars price. These are on top of the “government approved selling price”.

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Source: Malaysia Automotive Association. AFTA – ASEAN Free Trade Agreement MFN – Most Favoured Nation

If you look at the duties and taxes that us consumers pay for a car, excise duties constitute the largest chunk. The difference between GST and SST is only 4%. Let’s not forget that car distributors need to upgrade their accounting system to cater for GST. So, it is highly unlikely that they will pass the 4% savings to us consumers immediately. Moreover, car distributors would have already bought cars (ready stock) pre-April 1st and paid SST. When they sell these cars, they would need to pay GST to the customs. The Star reported on 15th February that this scenario of double taxation has yet to be addressed by the government. So, do not expect a drop of 4% just yet.

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While GST will add to our financial woes at first, we expect things to improve after a turbulent start. Car prices will drop, along with other things. Like everything else, it takes a little time.

On top of that, you would need to pay 6% GST on the insurance premium and banks’ services as well, if you are taking up a loan for your car. We have not even talked about spare part components, of which some attract the 6% GST, while some are(thankfully) zero-rated.

Based on the above, we think that it is highly unlikely to see a drop in car prices in at least 3 months after GST implementation. However, if you could hold out on your car purchase a little longer, you may see some competition going on in the automotive, insurance and banking industries which would probably see them absorbing the 6% GST, resulting in a drop in car prices. Hopefully.

 

About Jack Lee

Jack Lee is an unqualified petrol head (some say, to be one, you have to own an Alfa Romeo) who is disappointed with cars which are getting more and more electronics and the lack of interest in cars shown by today's youths in general. He owns an almost 20 year car from Germany, which has almost 50:50 weight distribution, 3 pedals (manual, FTW!) and believes that everyone should spin at the last corner of Sepang circuit at least once in their life. He also holds the distinction in TCG as the person with the lightest right foot, of course, when compared with his colleagues' mutated cast iron right foot.

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