An Audi A6 2.0T will cost no more than before, but a mid-spec Toyota RAV4 with its 2.2L engine will attract 50% more tax and duty. Read on to understand just how insane the new tax on so-called luxury cars really is.
In Trinidad and Tobago, we pay exorbitant taxes on motor vehicle purchases. We actually pay a lot more for a car than most probably do; sometimes twice as much or more, in fact. This is arguably the very reason why the foreign used market has been able to thrive as it has. When a vehicle lands in this country, it is subjected to Motor Vehicle Tax (MVT) and import duties, both of which scale based on the engine's size measured in cubic capacity (cc) and both of which are applied before sales tax (VAT). Needless to say, that is a lot of tax!
As a form of icing on the taxation cake, as of the April 2016 Budget Review, MVT and duty on vehicles exceeding 1999cc were increased by a whopping fifty percent.
Let's clarify something before going further: A car with a "2.0" engine is rarely actually 2000cc. Since manufacturers like to round up to a nice even figure, a 2.0L engine is usually more like 1998 or 1999cc. The "1.6" engines that are so common on the local market are typically about 1599cc and so on. This is the simple reason for low-end cars dominating the local market: engine sizes exceeding 1999cc attract quite a lot of tax and duty. Keep this in mind if you notice a dealer has significantly hiked the cost of a "2.0L" vehicle citing increased taxes; if it is not actually 2000cc then you may be dealing with a case of profiteering.
Here's how it actually works out. I hope this is correct; the new laws are exceedingly difficult to come by so I ended up running calculations off 2014 documents. You can see my prior blog entry for a rant about the lack of local information. Note that duty is a percentage of the landed value.
|Engine size in cc||MVT per cc||Duty|
|Up to 1599||$5.00||25%|
Just look at the magnitude of that increase at the 2000cc mark. It's more than twice the MVT and almost double the duty. Have you ever been overseas and wondered why the people there drove such nice cars? It's not because they are all rich; they just pay a lot less than we do. As a consumer in a supposedly free market you should now be asking: Is this fair?
Not A Luxury Car Tax
The increases made in April 2016 were purported to be a luxury car tax, but upon consideration, it's really just a penalty on the middle class. In a way, it can be looked at almost as a form of punishment for having earned just enough income for the banks to loan the kind of money needed for a family sedan or SUV...in exchange for a great big bite out of the family's monthly earnings.
Lancers and Almeras are not family cars; they are compacts. The Mazda 6, Nissan Altima and Honda Accord are the types of vehicles actually classified as mid-sized family sedans. They're fairly expensive locally, but even with our high taxes are completely attainable by dual income households or well qualified professionals. These vehicles start out with a 2.0L (~1999cc) engine, but fully loaded can end up with about a 2.5L (~2499cc) engine or larger. Several small to medium SUVs such as the Toyota RAV4 are in a similar situation.
Similarly sized sedans aimed at the more luxury-oriented market such as the Audi A4, BMW 320i and Mercedes-Benz C180 come in at 1999cc and under. This is is due to a trend where European manufacturers are increasingly opting for smaller, high-compression, turbocharged engines. Even the prestigious Audi A6 and Q5 come in under the 1999cc threshold. These luxury cars will not be affected by the new rules. Wrap your head around this one: A Porsche Macan currently attracts the same MVT and the same level of duty as a Hyundai Tucson, and neither one is affected by the 50% increase. That's how arbitrary it is to determine luxury by engine size.
Are we about to see a market where a Benz will be cheaper than a similarly sized Nissan? Are we going to see a market where the people who can probably afford to pay more will not be paying any more, but the family that just makes enough for a larger car will have to settle for less? That can't be fair, and it does not affect only a select few: Just look at how many family sedans and SUVs are on our roads. It does not matter whether those cars were purchased new or foreign used; MVT and duty apply to both.
So yes; if you drive a foreign used vehicle and think this doesn't apply to you, then think again! Why do you think you couldn't buy new in the first place? Even with that foreign used option, how much of the cost do you think went into duty and MVT?
Enter Alternative Fuels
At the very least, I should probably note that duty and MVT on hybrids (1999cc and under, in any case) and electrics have been waived. Now MVT and VAT were already proposed to be waived in the 2014/2015 budget, so this seems to be just the removal of duty. This is nonetheless a fantastic deal and I hope that the dealerships respond in kind to make these vehicles readily available. I do however find it a little bit silly to cap the hybrid exemption at 1999cc; I thought the previous waiver was across the board, and in any case that size seems quite arbitrary in nature. In any case, it is certainly not the exclusive domain of high-end vehicles. Indeed, if I interpret correctly then this arbitrary cap will ensure gas-only models continue to dominate the mid-size segment as it effectively makes options such as the Toyota Camry Hybrid and Ford Fusion Hybrid (both 2.5L on the gas side) uncompetitively expensive next to their gas-only counterparts.
What about CNG, you ask? The government has been shouting CNG at us for years, but the market is just not there. Very few manufacturers produce CNG models, and only one such model (the heavily marketed Honda City) is even locally available. For any other car, an aftermarket conversion kit must be installed that halves the trunk space and very likely voids the manufacturer's powertrain warranty. Who will be keen on honouring a warranty when the fuel system has been tampered with? Some people will do it, and it might be great on the public bus fleet, but CNG will never be mass market because the industry has gone in another direction - hybrid and electric. Spending millions to refit service stations will not change that simple fact.
The Fuel Subsidy
If you are wondering where this topic comes in then try to remember that taxes are paid in exchange for services from the government. They pay for all the big and little things we expect as being part of a society. In other words, we pay taxes to get benefits. It's not a donation.
For many years one could argue that it was only fair to pay such exorbitant taxes on a vehicle purchase, because the cost of fuel was subsidised. The link was not stated in the books, but one could view the subsidy as the unspoken benefit of paying high vehicle taxes. It is in fact quite difficult to identify any other benefit enjoyed by the motoring public, so it has to be fuel.
Now however, the subsidy on fuel is being lifted. Consider the cost of fuel at the pump four years ago and today:
|Fuel Type||Price per litre (2012)||Price per litre (2016)|
In other words, as taxes on vehicle ownership have risen, so too has the cost of fuel. Not only does a rise in fuel cost inflate the cost of just about everything else, but the value for money of those vehicle-related tax dollars has disintegrated.
At the same time, we must recognise that we are in dire economic straits. According to the 2015/2016 budget statement, the state spent $19 billion on the subsidy from 2011-2015. That's an average of almost $5 billion annually. Now if we cannot afford that benefit, and the subsidy is to be removed, then I think the removal should be:
- gradual to avoid spiraling inflation that John Doe cannot afford, and
- done in tandem with a reduction in vehicle taxes out of the simple principle of fair value for money.
The above said, I do think a subsidy should be able to kick in to keep pump prices at a certain level - when oil prices are high and the country has extra income flowing in. I'll probably need to do a whole blog about that concept at some point.
If the intention is for that of a "luxury tax" then I simply propose that the extent of duty charged on any given vehicle be calculated based on the landed value of that vehicle rather than its engine size. If the principle really is for the wealthy to bear more of the burden, then that's how we should do it. Let the wealthy person with hundreds of thousands dollars in cash put out another hundred thousand if that's what we want to do, but don't make the family car more expensive than the bank is willing to lend John Doe at his fairly stagnant income level.
MVT on the engine size can perhaps stay, but at a reasonable, universal level per cc that is not determined by some policymaker's arbitrary idea of what is too big. I think this is only fair if as I outlined above, a subsidy should still kick in at a certain pump price/oil price per barrel threshold. All hybrids and electrics should of course be exempted from both MVT and duty, no fine print involved, as a genuine incentive for cleaner transport.
Will this make cars cheaper? Yes, it will. Will it put more cars on the road? No, probably not. Even if we take advantage of lower new car prices to phase out the foreign used market (slowly and with plenty of notice, so those businesses can adapt their business models), it should not have a major impact. Low income earners already have access to cheap used cars and that will not change. The calibre of car available to buyers will get better, that's all.
This does not mean that the government stands to lose money either. High taxes will still be collected on true luxury cars and a flat rate of MVT per cc will still be in effect. On top of that, there are numerous other valid taxes that can be levied: an environmental tax based on vehicle emissions levels is one option and a road use tax upon vehicle inspection or license renewal is another.
We can be creative about tax collection without punishing the middle class for affording the things they worked hard to get. Did the Minister of Finance consult anybody before making his decisions? It certainly doesn't seem so.