Malaysians pay over RM 10 billion in car taxes every year. How did we end up like this?

Malaysia is known for having one of the world’s highest taxes on cars. Sales of new cars and spare parts for motor vehicles are the single largest contributor in import and excise duties collection, eclipsing tobacco and alcohol products.

How much taxes do car sales contribute to the Malaysian government?

The government doesn’t provide a breakdown of its tax collection by industry, but it is safe to estimate that the automotive sector contributes well over RM 10 billion in taxes every year.

So important are cars to the Malaysian Treasury that in the Ministry of Finance’s (MoF) “Fiscal Outlook and Federal Government Revenue Estimates 2020” document, the Ministry actually said:

“Excise duties collection in 2020 is expected to increase 4.9% to RM 11 billion due to higher demand for motor vehicles. The MAA anticipates a 2% growth for total industry volume following continuous demand for new model of vehicles and aggressive promotional campaign by automotive companies.”

Of the RM 11 billion in excise duty revenue, it is estimated that sale of new cars contribute about RM 6 billion, estimated based on a 2017 version of the same document, when MoF puts contribution from excise duty of 2018 cars at RM 6.2 billion.

The MoF went on to say “…sales tax collection is targeted at RM15.5 billion following higher demand on four wheels drive (4WD) and sports utility vehicles (SUV) as well as machines and spare parts.”

We don’t know the contribution of new car sales to SST collection but since a RM 50,000 car (customs value, excise duty, import duty included) pays RM 5,000 in sales tax, it is safe to estimate that the 600,000 cars sold annually contribute at least RM 5 billion in sales tax.

Import duties are worth about RM 2.8 billion a year but since alcohol and tobacco contribute no more than RM 300 million, imported cars are estimated to contribute over RM 1 billion, with the rest coming from import of machineries and spare parts.

Why are cars so expensive in Malaysia?

The reasons behind high car prices are complex but at the core of it, it’s a combination of our small market size, weak local currency, and high taxes on imports which in a rather counterintuitive manner, actually raises prices of locally-assembled cars.

We will address the simplest reason first:

1. Small market size

Malaysia’s car market is worth 600,000 cars a year, but this figure doesn’t mean much because nearly 60 percent of the market is controlled by Proton and Perodua, which enjoy substantial tax rebates thanks to their high level of local development work.

Realistically, any foreign car company looking to do business here can only work within a market size of around 250,000 cars – the volume of non-national cars sold here, which is miniscule volume compared to Thailand’s and Indonesia’s 1 million plus cars per year.

Imagine this: When two competing businessmen are buying something from a wholesaler (in this case, a car plant), who do you think will get a better price, the guy ordering 10 units or the guy ordering 1,000 units? It’s the same with cars.

2. Weak currency

In 1980, our Malaysian Ringgit was trading at around RM 2.20 to 1 US Dollar, and about RM 1.20 for 100 Japanese Yen.

Today, our Ringgit is trading at around RM 4.10 to 1 US Dollar, and RM 3.70 to 100 Japanese Yen.

It wasn’t very long ago that RM 10 buys you 100 Thai Baht. Today, you will need RM 13.

No car can be produced by one country alone. Even a Proton or a Perodua require either raw materials or components imported from other countries. Even the most advanced car producing nation needs to hedge to buy steel from another country.

With a weaker currency, we have to pay more to buy the same parts/raw materials to produce a car here.

3. Tax structure

Finally, we have a tax structure that penalizes imported cars to encourage the setting up of vehicle assembly plants here so more jobs are created but here’s the irony – it actually costs more to produce a car in Malaysia than it is to import one, import taxes aside.

Let’s take the imported from Thailand Toyota Camry 2.5V as an example. Without taxes, the D-segment sedan sells for just slightly over RM 123,000.

A similar range but locally-assembled Honda Accord 2.4 VTi-L (outgoing generation) costs RM 127,500 without taxes – that’s about RM 4,000 more than the new generation Camry, despite the Camry being a far more sophisticated product, with a more premium interior and tauter handling chassis.

The true value is then artifically distorted by taxes. That RM 4,000 advantage in favour of the imported Camry will quickly change to a nearly RM 30,000 penalty after the imported Camry is slapped with an additional 30 percent import duty and 90 percent excise duty.

Below is a table comparing the after-tax and before tax prices of many popular models in Malaysia.

Why does it costs more to assemble a car locally but cheaper to import one?

Like all heavy industries, the cost of vehicle manufacturing is a function of scale. The more you produce, the lower the unit cost.

Typically, a car manufacturing plant runs most efficiently when it is producing at least 150,000 - 200,000 vehicles annually. There’s only one car manufacturer here that can operate at that scale, Perodua with over 240,000 cars produced in 2019.

Less than 150,000 cars, you are actually paying more to complete a job that can be done cheaper and faster at a larger plant in Thailand, Japan, Korea, Germany, or even China.

Most car plants in Malaysia operate at less than 100,000 units/year capacity.

With such small scale, the level of investment and technology transfer is quite limited, – which defeats the purpose of promoting local assembly anyway.

When a plant operates at such small scale, it’s not feasible to introduce complex automation.

It’s same with local parts sourcing. The Malaysian parts supplier making just 20,000 dashboards a year for a Proton X70 can’t possibly offer a lower price than a supplier in China that makes 20,000 units of the same dashboards in a month.

Without sufficient scale, there can be no meaningful level technology transfer. Yes, our local talent will still benefit from the exposure and opportunities to learn about lean manufacturing etc. but none of these is going to lift the country’s manufacturing know-how to the next level.

What about exports you ask? Well why would Indonesia or Australia import from Malaysia when it’s cheaper for them to buy directly from the main plant in Thailand or Japan.

4. Free trade agreements don’t always lead to cheaper car prices

Wait…the table above shows 0 percent import duty. So why haven’t prices come down?

When Malaysia signed the ASEAN Free Trade Agreement (AFTA) in 2004, we agreed to abolish import duties for cars, so long as at least 40 percent of its value come from ASEAN-sourced parts.

By the way, ASEAN is short of Association of South East Asian Nations, it’s a trade bloc but many locals confuse it with Asian and read it as such.

While agreeing to AFTA, our government quietly raised excise duties, which are not covered under the agreement, thus maintaining prices. Sneaky eh?

Thailand complained to the World Trade Organization but decided to move on to trade with other bigger and more lucrative markets.

The only real beneficiary of AFTA are pick-up trucks, which under Malaysian tax laws, are exempted from excise duties because pick-up trucks are commercial vehicles.

It also explains why pick-up trucks are the only type of cars whose prices mirror the ones sold in countries with liberalized markets.

We also have a free trade agreement with Japan and in theory, all Japan-made cars can be imported without tax (but excise duty still applies).

We say in theory, because in order to ascertain that a car is indeed made in Japan, our Customs require importers to submit the necessary ‘Certificate of Origin’ documents, listing the origin of each part.

This is normal requirement but a car has tens of thousands of parts, maybe more. Toyota is not going to waste time producing that document for a market that sells so little cars. This explains why a Lexus remain so prohibitively priced.

There’s also the reality of today’s global supply chain. To qualify for import duty exemptions under Japan-Malaysia FTA, a Japan-made car must have at least 70 percent of its total parts value originating from Japan but nearly every car today is made from a mix parts sourced from various countries so they are unlikely to qualify.

So now that you have educated yourself on why car prices are so expensive in Malaysia, the next time some politician promises cheaper car prices if you vote for him, tell him to shut up, sit down, and explain how is the gap in the government's revenue going to be plugged. By the way, where is Rafizi Ramli?

Until someone can explain how our economy is able to at least plug the RM 6 billion plus gap in excise tax revenue contributed by cars annually, promises of cheaper car prices are empty vote-baiting talks.

The bigger question you should be asking our politicians is why our economy can’t generate higher value activities so we rely less on oil and car taxes.

Look at the news headlines, see the topics that our country is busy debating and it’s easy to see why even communist Vietnam is pulling ahead, never mind Indonesia and Thailand.

Improve the topics of debate – more real issues, less religiosity and playing the racial card - and the brain drain will slow and enterprising Malaysians will soon find a way to produce the next Internet unicorn.

Grab is South East Asia’s biggest unicorn. It was started by Malaysians in Malaysia but the company has since moved to Singapore. Now, even Indonesia’s Traveloka and Gojek want a piece of our pie. 

Until we can plug the gap in tax revenue, there is no way the government can abolish excise duties to lower the prices of cars.