Want cheaper cars in Malaysia? Best solution is to pay higher fuel prices

Cars in Malaysia are expensive to say the least. We pay well over RM 10 billion in car taxes every year in import and excise duties from sales of new cars and spare parts. Of that amount, it is estimated that sales of new cars contribute about RM 6 billion in excise duty revenue.

We’ve explained how cars are taxed in Malaysia and why exactly are cars so expensive, you can read about it here. We’ve also said that Malaysia no longer has a national car policy which favours any local car brands. 

Regardless of where it's assembled, any car that isn't Proton or Perodua will incur higher taxes. And it’s all based on how much local investment a car manufacturer makes and the value of locally-sourced parts purchased.

Also read: It’s time to stop using the term national cars to describe Proton and Perodua

Now, the government isn’t going to give up RM 6 billion annually in excise tax revenue from cars. Unless, something else can substitute it. My suggestion would be – as you may have guessed it from the title – fuel.

RM 6 billion you say?

Well, the government recently announced a RM 6 billion fuel subsidy plan for this year to maintain prices of RON 95, diesel, and liquified petroleum gas (LPG). With it removed, that’s excise duty from new car sales covered.

Let’s take things a step further - fuel tax

To try and fill the gap of over RM 10 billion in car taxes, fuel tax can be implemented. This isn’t some sort of revolutionary idea because many countries in the world have already imposed fuel tax for decades.

Each country may have its own tax rates for different fuels including petrol and diesel. At the time of writing, petrol prices in regions of India have crept over Rs 100 (about RM 5.60) per litre, and reports estimate that fuel tax comprises about 60% of the price. Can you imagine paying RM 3.00 in tax for every litre of petrol in Malaysia?

In Australia, the current excise duty rate for fuel is 0.427 AUD (about RM 1.33) per litre for petrol and diesel. The rate is said to be adjusted from time to time according to inflation, and there's even GST imposed on top of fuel tax. Yup, GST, still remember that?

Anyway, imposing fuel tax whilst removing fuel subsidies will of course be opening a can of worms, a bit like removing the national speed limit, but with far more consequences from the chain reaction it sets.

Also read: Should Malaysia’s national speed limit be increased to above 110 km/h?

Subsidy reform

Reforming subsidies alone will already prove to be a challenge. For one, it could cause inflation. The increased cost of transportation will trigger a price hike in commodities. Almost all goods from raw materials to foods like rice and sugar will see an increase in price.

In Nigeria, efforts to reduce fuel subsidies have been an ongoing affair for years, even at the risk of riots. Amidst the oil price crash last year, the country announced that it had ended fuel subsidies.

However, subsequent rises in crude oil price have led to the reimplementation of fuel subsidies. This is not unlike our case with the price ceiling for RON 95 and diesel.

Indonesia saw greater success, the reform has been gradual to reduce its impact and its benefits has been communicated well to the public. Promises such as free healthcare in exchange for higher petrol prices have resonated with the majority.

Also, with increased fuel prices, it creates incentives to use more efficient methods such as electrification. This means it supports Indonesia's ambitions to become the regional electric vehicle (EV) hub of Southeast Asia.

Also read: While Malaysia dithers, Thailand and Indonesia have overtaken Malaysia in EV race

Which ironically indicates that in this example, the commucation that fuel subsidies will be removed in Malaysia for "mere" cheaper cars isn't likely to be accepted by majority of the public. Or will it?

Lower fuel price, lower income

Here's a theory - there's a correlation between low wages and low fuel prices (one exception is perhaps the US). This may be an oversimplication of the matter but do bear with me for a moment.

Although it varies according to different statistics, countries like Nigeria and Indonesia with relatively low fuel prices tend to rank lower in the list of countries by average wages. Malaysia ranks below average in most lists as well.

Employers in our country prefer cheap labour which, like cheap fuel, is cheap energy and it limits the job potential for greater skillsets. Our local talents would rather explore their capabilities elsewhere, likely in countries that pays better with coincidentally higher fuel prices.

Until local companies are willing to pay more for energy, our wages aren't likely to see significant changes. And we might even be encouraged to work two jobs to tackle the rising cost of living.

But enough digression, let's talk more about the raised fuel cost. The chain effect of fuel tax on top of removing fuel subsidies will have a further impact on the economy.

Without diving too deep into the details, suffice to say that businesses and consumers will have to adapt to skyrocketed fuel prices. Then, it’s a matter of economic trade-offs.

To drive, or not to drive, that is the question

Our public transportation system has been criticised as inefficient, unreliable even. In my personal situation, taking the public transport to the office takes at least an hour. If I were to drive, it would slash the commute time by about half depending on traffic conditions.

So, I’d have to make a choice in this hypothetical situation - spend less money but more time commuting via public transport, or spend less time commuting but way more money on astronomical fuel prices. 

In present situation, I’ve worked out the fuel cost to only be slightly higher than taking the train, so it’s a rather easy choice for me to make. But if fuel price skyrockets, I’d have rethink the decision.

For those living in the outskirts where there’s limited to no access to public transport, tax-free cars mean they’re more accessible. Families with toddlers can get the latest technology in safety instead of settling for a used car or even motorcycles. Though with the caveat of high fuel prices, they would have to plan their journeys carefully.

High fuel prices incentivise alternatives

This would actually apply to almost every car user because when fuel prices become astronomical, consumers are expected to be more calculative.

In this tax-free situation, hybrid cars will be more expensive than the combustion-engine-only counterparts. But if the price premium can be offset by savings in terms of fuel cost, consumers might take the hybrid option.

A boost for the EV market

As mentioned earlier, sky-high fuel prices will incentivise consumers to invest in alternatives and fuel-efficient tech such as hybrids or better yet - electric vehicles (EV). Imposing fuel tax is perhaps the quickest way to accelerate the adoption of EVs in Malaysia as consumers will naturally be drawn to it.

If there’s demand, there would naturally be supply as manufacturers invest in EV technology. The government may even grant rebates, perhaps in the form of sales tax exemption, on EVs.

Concerns about infrastructure support would be slowly addressed if manufacturers have the government's support, and soon we’ll be on our way to the electric future.

Also read: Will we run out of petroleum? If so, what’s next?

Higher fuel prices, cleaner environment

It seems, then, that abolishing car taxes in favour of fuel tax actually preserves the environment as it pushes for EVs. Yes, electricity in Malaysia is primarily generated from fossil fuels but as we’ve dived into this topic before, it’s easier to regulate the emissions since the pollution happens during production stage.

As we move forwards, we can transition to less carbon-intensive power sources to minimize pollution.

Alas, the likeliness of this hypothetical situation happening here is close to none. Nevertheless, the idea of having cheaper cars in Malaysia has been an entertaining notion.

Also read:

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

Are electric vehicles (EV) truly cleaner than combustion-engine cars?

Will we run out of petroleum? If so, what’s next?