GST reimplementation could reduce Malaysian car prices, says analyst – but is that really the case?

Here’s an interesting take on a possible return of the goods and services tax (GST) – a recent report by Berita Harian suggests that it could reduce car prices by between one and six per cent if it replaces the sales and service tax (SST), currently charged at a rate of ten per cent.

The publication quoted RHB Investment Bank analyst Eddy Do Wei Qing, who wrote in an RHB Research article that during the previous changeover to the six-per-cent GST in 2015, the prices of cars went down by between one and three per cent. “When the 6% GST came into effect in April 2015 to replace the 10% SST, overall vehicle prices declined.

“This was due to the method of calculations of GST and SST. The GST is a value-added tax in which tax is paid in every stage of the business transaction versus SST’s one-time tax paid by the manufacturer/importer. Despite that, the total amount of tax paid is actually lower due to the input tax claim mechanism under the GST regime. In essence, the final GST quantum is borne by the consumer vs the SST, which is paid by the importer/manufacturer in the SST regime,” he wrote.

Wei Qing also mentioned the slump in the total industry volume (TIV) after the tax’s introduction, as consumers bought cars in droves the previous month due to pricing uncertainty – something he reckoned probably won’t happen again.

“The high March 2015 TIV of 67,314 units was mainly due to consumers making vehicle purchases ahead of the implementation of the GST, due to the uncertainty of post-GST vehicle pricing. However, it is unlikely that the pre-GST purchase frenzy will re-occur – if we assume that there will be no aggressive pre-GST sales campaigns and promotions held.” he wrote.

Proton Edar CEO Roslan Abdullah was more cautious in his outlook, telling the publication that any increase or decrease in car prices would depend on the rate of GST that would be charged compared to the current SST rate. He added that there are many aspects that need to be considered, including the list of items or components that are not taxed as well as incentives for companies that conduct research and development (R&D) and manufacturing activities for the domestic market.

Roslan also said that prices of Proton models fell by between 0.89% and 3.25% when GST was implemented. He stressed that the company will support whichever tax system that brings benefits and advantages and will be supported by Malaysians. “If switching the tax system to GST can ensure the motoring industry is more competitive and give an advantage to buyers, Proton will approve of its implementation,” he said.

More bullish was Malaysian Automotive Association president Datuk Aishah Ahmad, who said that the 2015 implementation of GST was proven to reduce car prices by as much as six per cent. “It is up to the government whether to reimplement GST or vice versa,” she said.

It was reported in March that the finance ministry was evaluating the reintroduction of GST as part of major fiscal reforms to strengthen the country’s revenue capacity in times of crisis, such as the ongoing COVID-19 pandemic. According to Bernama, deputy secretary-general Zakiah Jaafar said that while the ministry is studying new tax reforms, the government is also mindful of their impact and timing and will wait until the economy has fully stabilised before making any big changes.

The aforementioned RHB Research article, as quoted by New Straits Times, said that there was some market talk about a possible reintroduction. “While comments by finance minister Tengku Datuk Seri Zafrul Abdul Aziz indicate that GST may not be reintroduced in the upcoming 2022 national budget, we cannot rule out the possibility of its return going forward,” Wei Qing wrote.

Will car prices actually go down?

The reality is, the topic of car price adjustments in relation to new tax regimes is far more nuanced than what some observers will lead you to believe. Yes, prices by and large did decrease somewhat when GST superseded SST in 2015, but there were also some increases. And let’s not forget, there were also large-scale price drops when SST was reimplemented in 2018, so it’s not an apples-to-apples comparison.

As mentioned by RHB Research, the differing methods in calculating GST and SST complicates matters a little. We actually have a deep dive into the differences between the two tax regimes, which was even referenced by the RHB Research article – it will give you a better understanding on how GST affects car prices.

Let’s take Perodua as an example. When GST was introduced in 2015, prices of all models fell by between 0.15% and 1.57%, resulting in decreases ranging from RM95 to RM650. Prices fell again with SST in 2018 by a margin of between 0.32% and 4.07%, with cars seeing discounts of between RM199 and RM1,710, although there was an increase for a couple of Alza variants.

Again, it’s not possible to make a completely fair comparison, as most models were refreshed in the intervening three years – the then-new Myvi being the most obvious example. Proton, on the other hand, absorbed SST during the changeover, making it impossible to actually make a comparison in the first place.

This is, of course, only a small sample of the wider market – price adjustments varied greatly across brands during the introduction of both GST and SST, the latter generally leading to increases in fully-imported (CBU) models. Remember that SST is also absorbed for CKD vehicle components, which helps keep prices of locally-assembled vehicles lower.

Car companies may also tweak how they calculate prices of their models to maximise those price drops, in order to please customers and the government of the day. All this is to say that it’s way too early to say how much car prices will drop (if at all) if and when GST is reimplemented – we’ll just have to wait and see.

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