EV tax scheme fallout feared
Electric vehicle (EV) owners may unsuspectingly fall victim to imminent EV excise tax cuts, potentially reducing the value of their vehicles in the secondary market.
The recently-announced preferential tax rates on EV vehicles covered by the Board of Investment’s promotions will reduce excise taxes on hybrid electric vehicles (HEVs) and plug-in hybrid electric vehicles (PHEVs) from 5% to 25%, depending on their emission levels. Battery electric vehicles (BEVs) will be taxed at a flat rate of 2%, down from 10%. Pickup trucks that release less than 175 grammes of C02 per kilometre will receive a 2% excise tax reduction.
As in 2011, reductions in EV ownership costs and perceived increases in EV supply may drop the price of these vehicles in the secondary market, said Kanis Saengchote, a finance lecturer at Chulalongkorn University and former economist at the Fiscal Policy Research Institute.
The 2011 first car tax rebate had an analogous effect, which was documented by Mr Kanis in his 2017 study: “The Impact of Tax Rebate on Used Car Market: Evidence from Thailand.”
The 2011 tax rebate on first-time car owners reduced the price of small vehicles with motors no larger than 1500cc and pickup trucks by up to 100,000 baht. In order to be eligible, these vehicles had to be priced below 1 million baht and purchased between Sept 16, 2011 and Dec 31, 2012. Since one of the goals of the policy was to incentivise ownership, people who took advantage of the tax had to maintain possession of their vehicles for at least five years.
Due to the policy, buyers saw the value of their vehicles drop by up to 10% in the secondary market once the policy was implemented, said Mr Saengchote.
These victims include used car dealers who had purchased a large number of these cars at higher prices, and who saw the value of their inventories reduce and their profit margins tighten. “Many used car dealers went out of business,” he said.
While used car sales reached 2.06 million in 2013, and 1.86 million in 2014, prices fell 25% across the board from 2012 to 2015. Profit margins also fell to 5% from 25% before the implementation of the scheme.
Natthawut Ph aisanwip hat pong, general manager of 19 Sripakorn Used Car centre, said this policy began affecting the prices of second-hand cars at the end of 2012, ensuring a crisis for the industry in 2013. “Prices were shockingly reduced a few months after the first car policy was implemented,” he said.
Massive amounts of cars entered the second-hand market at the same time, and dealers were not able to accommodate that volume. Prices decreased and demand increased.
The market impact of the EV excise tax reduction will probably be limited compared with that of the 2011 rebate, since the market for EVs is much smaller than for small vehicles covered by the income tax. For example, the policy would have a minor effect on the value of used car dealers’ inventories, since they currently have few EV vehicles in stock.
But the impact for the individual owner of an EV could be very similar to that under the 2011 tax policy. The announced tax reductions have the capacity to inject a significant number of EVs relative to the ones already on the road. The scheme could soon result in a high percentage increase in the number of these vehicles, and a proportional reduction in their price.
As Dr Saengchote’s research suggests, these reductions in price are not only driven by changes in supply, but by customers’ forward looking perspectives. As shown by his paper, prices for both vehicle types covered by the scheme started falling immediately after the policy came into place — before people who wanted to take advantage of the rebate were allowed to sell.
“Some people sold their cars almost immediately after buying them and thereby forfeited their right to the rebate, because they thought prices would keep dropping,” said Dr Saengchote.
Surprisingly, Mr Phaisanwip hat pong said these con d-handcar market rebounded during 2015-17, after people who made use of the policy became eligible to sell their vehicles.
A drop in EV prices is likely to have a small impact compared with the drop in small vehicle prices during the past five years. But the policy will still have important effects on the equity of people who already own EVs.
Dr Saengchote said: “Policymakers should include the interests of this unsuspecting victims in their calculations.”