When the Philippine government rolled out a Php27-billion six-year program to boost domestic car production called Comprehensive Automotive Resurgence Strategy (CARS) program in 2016, one of the promises made to the public was that it would eventually bring down retail prices of car models enrolled in the scheme.
The program aimed to boost the country’s chances of becoming a regional automotive manufacturing hub by providing generous fiscal incentives to three vehicle makers that would manufacture at least 200,000 units of a car model each within a period of six years, or from 2016 to 2021. Currently, domestic production accounts for only 30 percent of car sales. The CARS program aims to increase that in the next few years, increasing local employment and helping develop a local car parts industry.
Automotive industry leaders were one in hailing the CARS program, citing benefits not only to the carmakers and local suppliers but also to consumers. For example, Vicente T. Mills Jr., president of the Federation of Automotive Industries of the Philippines, told the Philippine Daily Inquirer in February 2016: “The local production of 200,000 units of particular models will bring about economies of scale that could impact product cost and prices for the benefit of consumers.”
Now on its second year of implementation, the CARS program has two participating carmakers—Toyota Motors Philippines and Mitsubishi Motors Philippines Corp. (The third slot is reserved for the still-to-be accredited manufacturer of public utility vehicles as part of the government’s PUV modernization program). In return for incentives from the government, Toyota promised to produce 230,000 units of its Vios model (1.3 and 1.5 variants) while Mitsubishi will make 200,000 units of the Mirage and Mirage G4 models in the country over a six-year period. They also vowed to invest a combined Php11.2 billion, create a total of 13,500 jobs and source parts from more than two dozen Philippine-based suppliers.
Unfortunately, the government’s carefully crafted program is at risk of being upended after the Senate approved its version of the tax reform package, or the Tax Reform Acceleration and Inclusion (TRAIN) bill last week. Senate Bill No. 1592 aims to simplify the current four-tier excise tax system on motor vehicles to only two tiers: 10 percent for cars selling for a million pesos or less and 20 percent for those selling over one million pesos.
One of the consequences of the Senate tax bill is to almost double the average excise tax rates on low-priced cars while reducing those on the most expensive automobiles. For example, the average excise tax rate on cars with a net manufacturer’s selling price of Php600,000 or less will increase from the current 14.3 percent to 23.2 percent, according to a study done by a group of economists led by Department of Trade and Industry (DTI) Assistant Secretary Rafaelita Aldaba, who helped craft the CARS program. That’s a lot higher compared to the 16.5-percent average tax rate resulting from the version of the tax package (House Bill No. 5636) passed by the House of Representatives months before. In contrast, cars selling for over Php3.1 million will see a cut in the average excise tax rate from 58.7 percent to only 34.4 percent (which is a lot lower compared to the 94.4-percent average tax rate under the House version).
Apart from Aldaba, other authors of the study entitled “Assessing the Potential Impact of HB 5636 and SB 1592 on the CARS Program” are DTI consultant Kris Francisco and Francis Mark Quimba of the Philippine Institute of Development Studies (PIDS). In a note in the study, the authors state that the views expressed in the paper are theirs alone and do not necessarily reflect the position of the DTI.
The study also found that the retail price increases resulting from SB 1592 seem to be larger on car models and variants enrolled in the CARS program compared to those that are not, potentially undermining the objective of the program to produce more affordable cars.
A ranking of the projected retail price increases of 22 car models listed by the study shows that three of six car models and variants with the highest price increases are in the CARS program. These are the Mitsubishi Mirage, whose price seen to rise by 7.8 percent, the Mirage G4 by 7.64, and Toyota Vios 1.3 by 7.2 percent. All three are currently priced by manufacturers below Php700,000. (Under the House version, prices for these car models and variants will rise by only 1.92 to 2.49 percent)
The other three models with the highest price rises (7.30 percent to 8.96 percent) are Mazda Pick-Up, Ford New Ranger and Honda CR-V, all with net manufacturers’ prices of between Php1.35 million and Php1.5 million. Oddly, the four most expensive car models in the list, currently priced Php2.5 million and above, will see retail prices go down by 1.69 percent to 10.63 percent.
The study warned that the hefty price increases under the Senate’s tax bill could hurt the CARS program. “The increase in prices might lead to huge reduction in demand, affecting the domestic scale that needs to be built for the program to be successful,” it said. The authors’ preliminary estimates show that while demand for CARS program models will likely fall by four to 10 percent under the House version of the tax package, the Senate bill will lead to a much bigger 10 to 24 percent plunge.
It concluded with an appeal to lawmakers: “There may be a need to review the tax rates on the low-priced versus high-priced models and introduce additional tax tiers that would ensure that the goals of the CARS Program are not reversed and at the same time address the equity issues arising from the proposed Senate bill.”
Representatives from the Senate and the House of Representatives are currently in discussions to reconcile their different versions of the TRAIN bill. They are expected to wrap up discussions by early next week.