The day of reckoning under Afta


MANUFACTURED goods of Asean origin are already enjoying preferential rates of not more than 5% under the Asean Free Trade Area (Afta), except for cars. The Government had asked for a two-year extension (up to Jan 1, 2005) to include cars in the Afta scheme, but what exactly will happen to tariffs under Afta? 

What we do know is that under Afta, import duty on cars of Asean origin will be reduced so that by 2005, the import duty will be at 20% compared with the present tariffs ranging from 140% to 300%. However, the preferential rates will only apply to cars of Asean origin (i.e. at least 40% Asean content). 

Khoo Chin Guan

The interesting question is: will the Government impose a local tax (e.g. excise duty) to compensate for the reduction in tariffs? What remains to be seen is whether the Government will phase in a gradual reduction to 20% or would we see a sharp drop in import duty rates. 

Earlier this year, the Government amended the customs laws to set the legal framework to allow for the imposition of excise duty on imported goods. Traditionally, excise duty has been a tax imposed on local manufacturers of excisable goods such as cigarettes and liquor. However, with the legal framework set, it will not be surprising if the Government announces a reduction in import duty well before the Jan 1, 2005 deadline. 

I believe that the Government will announce a gradual phase-in of the preferential rates under Afta for cars of Asean origin in the coming 2004 budget proposals. In addition, the Ministry of International Trade and Industry (Miti) has indicated that excise duty will be imposed on all cars in order to give equal treatment to both local and imported cars. This is also seen as a move by the Government to compensate for the loss in revenue arising from the reduction in the import duty rates. 

To some extent also, the local car industry will continue to be protected from stiff Asean competition. Another reason for the Government to maintain the high tariffs could be that it wishes to limit the number of cars on the road. 

What has the local car industry done to face the challenges under Afta? Cost reduction seems to be the key to survival. Perusahaan Otomobil Nasional Bhd (Proton) has reportedly invested in excess of RM4bil over the last five years in factories, technology acquisitions and new product development to turn itself into a global player ahead of a liberalised regional automotive market come 2005. 

Its chief executive officer Tan Sri Dr Mahaleel Tengku Ariff has outlined a four-pronged strategy of price competitiveness, improvement in quality, larger distribution network and penetration into new market to ensure the sustainability of Proton’s profits post-Afta. 

After having introduced various initiatives, is there something more that the Government can do, say introduce a new tax incentive? But any new tax incentive must be carefully planned so as to withstand scrutiny under Afta (and from the World Trade Organisation) on grounds of unfair advantage. 

The local car manufacturers are already entitled to tax incentives such as reinvestment allowance (on the basis that they expand, modernise or automate their existing manufacturing activities) and various double deduction claims on approved research and development expenditure. 

As for local parts manufacturers, many major players have already prepared or are preparing to face the implications of Afta. Some of the larger manufacturers have ventured into Thailand and China to expand their market. They are capitalising on lower costs of production overseas and also an expanded Asean market for their products. 

Miti has also initiated programmes to help the small and medium-scale enterprises such as the industrial linkages programme and global supplier programme, and providing technical/financial assistance. 

There is no doubt that our local automotive industry is seriously making efforts to meet the challenges under Afta and would therefore have to be ready by 2005 in order to withstand these challenges.  


·Khoo Chin Guan is KPMG Malaysia partner in charge of tax 

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