Luxury tax adjustment to pave way for low-cost cars Low-cost cars with low cylinder capacity are expected to flow to Vietnam thanks to an advantageous luxury tax.  The Ministry of Finance (MOF) has projected lower luxury tax rates for low-cylinder capacity cars in the latest version of the draft on amending tax laws. Analysts commented that the luxury tax cuts would help make popular car models cheaper, thus paving the way for the consumption of small-size and fuel saving models. Sharp decreases in the luxury tax would be applied to the car models with cylinder capacity of less than 2.0L, which is encouraged in Vietnam. 1.0L cars, which now have a 45 percent luxury tax, would enjoy a 25 percent luxury tax rate. Meanwhile, the cars with cylinder capacity of over 2.0L would see tax increasing by 10 percent to 60 percent. Particularly, the tax rate on cars with the cylinder capacity of over 3.0L, including motorhomes, would be 75 percent instead of 60 percent. Thaco Group, a 100 percent Vietnamese-owned automobile enterprise, supports the MOF’s new taxation plan. “Small-size environmentally friendly cars should be encouraged by low tax,” a group’s representative said. “The majority of Vietnamese prefer small-size cars because they are cheaper and they mostly run cars in the cities,” he said. Ford Vietnam’s marketing director Truong Kim Phong agrees that it would be better to impose lower taxes on small cars. Phong said Ford’s small cars (less than 2.0 L) just account for 20 percent of its total products, which means that 80 percent of Ford’s products would bear higher tax. Ford still advocates a new taxation mechanism. “It is necessary to impose a high tax on expensive and fuel consuming cars in order to restrict the consumption of luxury cars, improve the state budget’s revenue and help reduce the trade deficit,” he said. Even the companies specializing in importing and distributing luxury cars – which would suffer most from the new taxation mechanism – said they were not worried about this. Vu Truong Giang from Infinity Vietnam said higher luxury taxes would affect the prices of products that have cylinder capacity of 3.5-4.6L. However, he does not think the higher tax would keep customers away, because big cars target high income earners who will still buy cars despite price increases. However, policymakers have been warned that if the luxury tax falls sharply, low-cost small cars would flow to Vietnam to compete with domestically assembled products. Minh, a car dealer, estimates that with tentative tax cuts, the imports from ASEAN would be $2,500-4,000 cheaper, while imports from India would be $1,500-2,500 cheaper. PL TPHCM