Infographics claiming to reveal the breakdown of how taxes contribute to high car prices in Malaysia are once again making their rounds on social media, this time in an op-ed by Free Malaysia Today (FMT).

Back in 2013, Rafizi Ramli – now Economics Affairs Minister – pledged to lower car prices if Pakatan Harapan wins the 2013 General Election.

He presented a ‘formula’ of sorts, explaining how car prices are determined three popular models as examples - Perodua Myvi, Honda Civic, and Toyota Camry.

Rafizi had assumed that excise duty rates published by the Malaysia Automotive Association’s (MAA) is applied lock stock, stock, and barrel to every car, which is wrong.

The PKR man claimed that without tax, a Perodua Myvi would cost just RM 24,860, a Honda Civic just RM 63,150, and RM 71,000 for a Toyota Camry.

The truth is that few locally assembled (CKD) cars pay the full excise tax amount, as manufacturers get tax rebates based on the value of local parts used.

Perodua cars for example, with their 95 percent local content, pay barely a few thousand Ringgits per car in excise tax.

One cannot simply calculate a car’s tax-free price by applying the 60 – 105 percent excise duty rate (depending on engine capacity) and working backwards from the retail price.

Unfortunately, this is exactly what FMT has done. They applied Rafizi’s flawed formula on current models (Rafizi’s pledge was made in 2013, car prices have changed a lot since). So now according to their infographic, a tax-free Honda Civic is now RM 68,4000, and a Toyota Camry is RM 102,300.

Why few manufacturers pay the full excise duty rate?

MITI offers various incentives to promote local manufacturing, with the goal of growing the local vendor base, raising their technical competency so they can export to other countries.

The high excise tax is the stick. The tax rebates for purchasing local parts the carrot.

Generally speaking, there are two main programmes for car manufacturers to claim excise tax rebates - Multi Sourcing Parts Progamme (MSP) and Industrial Linkage Programme (ILP).

Somewhere in between these two is the very vague, closed doors negotiations-only Energy Efficient Vehicles (EEV) championed by MARii.

To qualify for excise tax rebates, manufacturers must submit their application along with the necessary justifications, to the Automotive Business Development Committee (ABDC) chaired by MITI, but the final approval will come from the Ministry of Finance.

This also implies that prices of CKD cars will need to be approved by the government.

Does the government control new car prices?

The general public often assume that the government controls prices of foreign brand cars to protect Proton and Perodua but this is not true, at least not anymore.

Prices of CKD cars only require approval by the government if it involve tax rebates. Obviously the government can't have a situation where the savings gained from the excise tax reduction are pocketed by the car company and not passed to the consumer.

If a manufacturer/distributor is not applying for any tax rebates, they are free to set whatever price they want.

If they want to lose money on every car sold to undercut Proton and Perodua, that’s their choice and neither MITI or MoF could care less (so long as it doesn’t infringe anti-dumping rules, which applies in all countries).

So how much is a tax-free Perodua Myvi?

A tax-free Perodua Myvi in Langkawi starts from RM 45,060 for the cheapest 1.3G variant without PSDA feature. That’s only RM 1,440 cheaper than Peninsular Malaysia prices, far lower than the RM 21k claimed by Rafizi’s 'formula.’

Yes, not every single sen in difference between Peninsular Malaysia and Langkawi prices are attributed to taxes, but it’s the bulk of it. The rest is just very minor differences in logistics cost and dealer margins.

For CKD cars, all the cost incurred in the manufacturing including import duties on imported parts, as well as distribution, marketing and dealer incentive is added before tax, summing into what the industry terms as Open Market Value (OMV).

Excise tax is calculated based on this OMV value, and sales tax on this OMV+Excise tax sum. So yes, sales tax is a form of double taxation.

Why is there so little difference in tax-free prices?

As explained earlier, Perodua sources 95 percent of the parts that goes into a car locally. Also, Rawang is the regional R&D centre for the Toyota-Daihatsu jointly-owned Emerging Market Compact Car company. All Perodua models are developed here, with input from Daihatsu in Osaka.

Perodua’s (and Proton’s) local R&D development cost can be presented as contribution to the local economy, and therefore the company is justified to enjoy even more tax rebates. This is why the excise tax paid by Perodua cars is almost negligible.

To say that a RM 46,000 plus Perodua Myvi pays RM 21,140 in taxes and will cost just RM 24,860 without it is just utter nonsense.

So why are car prices still so high in Malaysia then? Explaining that requires a separate topic, which we will keep it for another day.