No 10% drop in car prices despite 10% Sales Tax exemption, here’s why

As you already know, the government has announced that all new locally-assembled (CKD) passenger cars will be exempted from paying the 10 percent sales tax starting 15-June until 31-December. Imported new cars will be given a 50 percent discount on sales tax, meaning that sales tax is still applicable, but at a lower 5 percent rate.

However, this doesn’t mean that the prices of new CKD cars will drop by 10 percent.

Most cars only saw a reduction of between 3 to 6 percent. Why is that so?

The simple explanation is that the 10 percent sales tax is not calculated based on the selling price of a car, but is instead done on, in simple terms – the cost (wholesale) price of the car, plus excise/import (where applicable) tax.

The selling price of a car is the cost price plus all applicable taxes, handling and transportation charges, registration cost, dealer’s profit, and distributor’s profit.

Also, Sales Tax Act 2018 allows for adjustments in sales tax paid based on excise tax rebates given under the Ministry of Finance’s Industrial Linkage Programme (ILP).

Without going into too much details, ILP allows CKD cars to claim rebates in excise tax payable, based on the value of content used in the manufacturing of the car.

This is why cars with very high local content – popular Perodua and Honda models for example – saw very little reduction in prices, because the actual sales tax payable had already been adjusted in line with ILP.

In fact, actual reduction in prices would have been a lot less if not for additional sales promotions thrown in. Toyota’s revised prices for example, is inclusive of sales promotions. So even though a commercial vehicle like a CKD Toyota Hilux is not eligible for sales tax exemptions (only CKD passenger cars qualify), prices have been lowered anyway.