Saturday, September 18

Tax-free period will likely boost car sales


KUCHING: With the upcoming goods and services tax (GST) and sales and service tax (SST) tax-free window, analysts are expecting to see a temporary boost for auto sales during the period.

After GST is zero-rated effective June 1, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) expects that SST to only be re-introduced within a two to three months period.

“The implication is that consumers will likely take advantage of the GST-SST-free window which will artificially drive up total industry volume (TIV),” MIDF Research said.

Beyond this, given that purchases would have been brought forward coupled with a re-introduction of SST, the research arm anticipated some weakness before demand normalises.

MIDF Research highlighted that in order to avoid a vacuum in demand between now till implementation of zero-rated GST, key auto players have decided to provide some form of GST rebate for the period leading up to June 1.

“Others meanwhile, have already announced price reductions of between five per cent to six per cent, as a result of the zero-rated GST decision.”

It further highlighted that the decision to absorb GST for the period of about 13 days to June 1 is likely to have some impact on the sector’s second quarter of 2018 (2Q18) earnings, albeit temporary.

Affin Hwang Investment Bank Bhd’s (AffinHwang Capital) channel checks also indicated that with the newly-revised zero-rated GST and the absence of SST (until further notice), auto players are adopting a variety of pricing strategies although predominantly pointing towards lower prices, which in its view may bring forward the replacement cycle.

“Thus far, Nissan (Tan Chong Motor Holdings Bhd), Subaru, and Proton (DRB-Hicom Bhd) have responded by offering ‘price protection scheme’, offering refunds or service vouchers to cover the car price fluctuation, ahead of the impending SST.

“Others, like MINI, Honda, Toyota (UMW Holdings Bhd) and Volvo are cutting prices, excluding the additional six per cent GST charge,” the research firm said.

“The new development alongside with the ongoing Hari Raya promotions from automakers, is likely to excite buyers to flock into showrooms again, leading to a temporary TIV boost.”

However, MIDF Research’s channel checks suggested that input GST that have been charged on existing inventory can still be reclaimed, which means there is no reason for dealerships to provide excessive discounts to clear off existing inventory or to freeze purchases from distributors.

It noted that this had been the case when GST was implemented, whereby during the transition to GST, dealers were double-taxed as they were only allowed to reclaim 20 per cent of the SST paid on stocks in hand, on top of being charged the six per cent GST introduced from April 2015.

On top of this, given that most key distributors have already announced GST rebates even prior to the zero-rated GST implementation in order to avoid a vacuum in demand, the research arm anticipated little impact to the flow of purchases by dealers from distributors for the period leading up to June 1.

MIDF Research opined that if SST is reinstated at the previous 10 per cent rate, car prices are likely to rise.
The research arm said that on simple logic, car prices are expected to increase marginally (versus prices under the current six per cent GST rate), which is the opposite of what happened under GST in 2015 when car prices reduced by one per cent to three per cent.

“Given the GST-SST-free period however, the magnitude of increase from that base could be quite meaningful.
“Nonetheless, detail of the SST re-introduction is still scant and it would be too preliminary to conclude at this stage.”

While the level of price increase remains uncertain with the reintroduction of SST, Affin Hwang believed the impact will be minimal, as a sharp hike in prices will hurt auto sales, hurting profits and market share.

“Moreover, the ringgit has been favourable to the automakers while the removal of GST will also see a stronger middle-class segment that can afford big-ticket purchases, we opine.”