GST – Impact on Automotive Industry

POSTED BY Dinesh Appavu ON 12 February 2015

If you’re buying a car, don’t worry about the GST. Essentially, it won’t make your car more or less expensive.

Instead, you should be more concerned of the Malaysian Ringgit. If the Ringgit keeps dropping versus the US dollar, this will wipe out the 9.7 per cent theoretical savings ushered in by the Goods and Service Tax (GST) come April 1.

The US dollar exchange rate versus the Ringgit is important to the Malaysian automotive industry because most of the car importers such as UMW Toyota or Volkswagen Malaysia denominate their foreign trade using US dollars.

Except for the one-time occurrence of double taxation on existing stocks of vehicles which will take about six months to wash out, the GST will generally be of a quantum that’s less than the incentives given to dealers.

In fact, Edaran Tan Chong Motor Sdn Bhd gives the best clue to the situation when its executive director, Datuk Dr. Ang Bon Beng said; “ETCM will not raise its prices for at least a few months after the implementation of the GST.” He was speaking last week at the “Great Nissan Buy 1 Win 1” prize presentation.

For a RM100,000 car, the GST might come up to about RM500 versus a dealer’s margin of about RM3,000 per car, said an industry participant with more than 20 years of experience, more than half of it in local assembly. The fluctuation of foreign exchange may even have a greater effect than GST.”

“What we’ve seen so far is that there’s confusion only in the mechanism of how to claw back the GST from the government,” he said, declining to be identified because of company privacy policies.

“I think almost everyone understands the concept that this is a tax on value added. My own accountant, for instance, was more worried about how to claim that back from the government, the GST charged to us by our vendor,” he said.

GST is a hot topic because the Customs Department has not been able to feed the hunger for more details from tax-payers. Obviously, the Customs Department is itself a victim of a rushed policy by the government to buy time and keep international ratings agencies happy enough not to downgrade Malaysia’s credit ratings, say non-executive directors of two or three public listed companies met at a recent old boys gathering of St. Johns Institution KL.

To be implemented by 1 April 2015, the GST will replace Malaysia’s Sales tax (10%) and Service tax (6%). Under GST, most of the goods and services (except basic necessities and those good under exemption list) will be charged a tax rate of six per cent at every level of the supply chain. Public concern about the GST is whether it will increase the cost of goods and eventually the cost of living.

One industry that contributes in billions to the government’s coffer is the automotive industry. The National Automotive Policy encourages local assembly but is conflicted by policies to protect the national car companies. One result is that almost all the car companies have channelled their major investments elsewhere, making Thailand their export hub, and to Indonesia to tap the 240 million population domestic market.

Any negative impact on the industry due to the implementation of GST will greatly affect the whole supply chain, and will reduce the collection of duty, corporate tax, and even personal income tax. In 2004, 666,464 passenger cars and commercial vehicles were registered in Malaysia with the former contributing 88 per cent of the total volume. Malaysia Automotive Association (MAA) expects the industry to grow to 680,000 this year.

Not much has been written on the impact of GST to the price of automotive products – car, SUV, 4WDs, MPV and even motorcycle. To understand the impact of GST on price of automotive vehicle, one must understand the basic structure of the taxation for automotive products. The government imposes three types of duties for all automotive products: Import duty, excise duty and sales tax. The sales tax rate currently is at 10 per cent while GST is at six per cent. At one glance, there should be a saving of four per cent on the duty that will translate into a four per cent cost reduction.

However, it is not as simple as that.

All over the world, the automotive product can be categorised into 2 categories: CBU (completely built-up) unit for those vehicles imported fully assembled and CKD (completely knocked-down) for those vehicle imported in parts and locally assembled in Malaysia with some local components added.

In brief, the import duty and excise duty rates are higher for CBU vehicle as compared to import duty and excise duty rate for CKD vehicles. Rates of import duty and excise duty also depend on the engine capacity – the higher the engine capacity, the higher the duty rates. The duty rate also differs from one type of vehicle to another type of vehicle. Passenger car pays higher duty as compared to MPV and 4WD. Sales tax, however, remains at 10 per cent. As such, GST does not have any impact on the import duty and excise duty amount to be paid by the importer or manufacturer.

For our market, the CBU vehicle can be further categorised into two categories – the ASEAN CBU and non-ASEAN CBU. ASEAN CBU are those vehicle assembled in one of the ASEAN countries and comply under the policies of ASEAN Trade and Good Agreement (ATIGA). These vehicles draw zero import duty. Currently, most of these vehicles are assembled in Thailand. The non-ASEAN CBU are those vehicles that either do not meet the policies under ASEAN or vehicle imported from non-ASEAN countries. Other term used for non-ASEAN country under the customs code is Most Favoured Nation (MFN)


Completely-Built-Up (CBU) automotive vehicle

The principal difference between GST and Sales tax for CBU (fully assembled) imported vehicle are as follow:-

  1. The 10 per cent sales tax is a one-time charge, on the government valuation, at the importation level (input level) whereas the six per cent GST is charged at every level of the supply chain – importer/distributor, wholesaler and retailer (input and output level).
  2. The six per cent GST can be claimed (rebate) from the government at every level except the retail level. Thus, the final GST amount to be collected by the customs is equal to the retail GST amount. Sales tax is a one-time charge.
  3. With sales tax, whatever value been added to the vehicle no longer attracts tax. These values include profit, accessories, admin charges, etc., whereas GST will be imposed for whatever value-added components to the final price of the vehicle.


The calculation of import duty, excise duty and sales tax for CBU vehicle at importation level (impact comparison between sales tax and GST treatment)


Note : The import duty and excise duty rates above are actual rate for passenger car above 1,800cc but below 2,000cc. The CIF of RM10,000 is a matter of choice for easier reference and calculation.

CIF is the vehicle cost plus freight and insurance. This is normally the reference used by the customs to determine the value for the calculation of duty amount.

Total duty/tax paid is RM15,740 which is inclusive of 10% sales tax at RM2,340. Although the tax structure is 30%:80%:10% (total 120%), the effective tax rate is actually at 157.74% due to the compounding-based calculation (Import duty is added to the CIF before the calculation of excise duty and import duty and excise duty are added to the CIF before the calculation of sales tax ). With GST the effective tax is at 148.04% at the importation or input level.

Based on the above calculation, there is a saving of RM936.00 at the importation level  with GST in place. However this saving is only at import level. As mentioned earlier, GST is imposed at every level of  the supply chain. Therefore any value been added to the price structure will attract the six per cent GTS. So let’s assume the distributor added RM10,000 as gross profit to the product.


Table 1

Present calculation for sales tax to arrive at the final selling price

Table 1


Table 2

Calculation for duty under GST (assumption of the importer is also the retailer – 2 stage)

Importation stage (input GST)                      Retail stage (Output GST)

Table 2


Note : The GST of 6% collected at the importer level is not considered as cost to the retailer since the importer can claim for rebate. This method also avoids the calculation of compounded GST. ID stands for import duty and ED stands for excise duty

Based on Table 1 and Table 2, at a Gross Profit of RM10,000 or approximately 40 per cent over the import value plus duty, there should be a small cost reduction from the six per cent GST implementation. (However, please take note, that the 40 per cent margin used does not reflect the standard margin added by the importer, distributor or retailer. Margin can be even negative for many reasons or at single digit.)


Table 3

Calculation for duty under GST (Importer to dealer to end customer – 3 stages). Assuming importer gives RM2,000 margin to dealer.

  Importer level                                   Wholesale level                            Retail level

Table 3

The above table shows the GST calculated at three stages –import, wholesale and retail. The government will collect at every level but net of the collection from the preceding stage.

Total collection of GST:

Table 3a

Table 3 shows that, as long as the value been added through the whole chain remains the same, i.e. at RM10,000 Gross Profit (RM8,000 at wholesale level and RM2,000 at retail level), the GST to be paid remains the same. However if at retail level, the retailer decides to add additional profit or accessories, then the GST amount to be paid will increase.

Therefore, the most important cost factor with GST calculation is the value that has been added at every stage before the final price to the customers. The higher the value that is added to the vehicle, the higher the chances that cost will increase although the rate of GST is only six per cent.


Completely-Knocked-Down (CKD – local assembled) automotive vehicle

For the locally assembled vehicle, the tax rate and the tax calculation is different compared to the CBU vehicle. The import duty is calculated based on the import value of the components and to be paid immediately upon the clearance from the port. However the excise duty and the sales tax are calculated after all the value are added to the imported components to make a complete vehicle or in other words the excise duty and sales tax are calculated at the output level or at finished product level whereas the import duty is calculated at the input level. The government will determine the total value of the assembled vehicle based on the submission by the manufacturer. The excise duty and sales tax will then be calculated.

Since the excise duty and sales tax calculation has taken into account the value added components to the total cost, there is possibility of a small saving on the duty amount. However if the distributor decides to add accessories which increases the selling price, the GST will be imposed on higher selling price.

Will GST implementation reduce or increase the price of the vehicle?

The biggest components of tax are the import duty and excise duty. The GST is a small component of the duty at six per cent as compared to the excise duty of a minimum 75 per cent for passenger cars below 1,800cc. Chances are that most of the current prices will remain the same. If there is saving due to GST, it will be very minimal and the distributor will keep the margin to cover the investment in IT, consultation fee, and other extra cost to prepare for GST implementation, or to keep it for future promotional activity. Cost increasesdue to the GST will also be minimal, and possibly the importer or distributor will absorb the increase.

Why do the car companies say that they don’t know about the GST? They don’t want to show how much margin they provide for themselves.