EV Tax Breaks to Impact Car Market?

The new tax regulation on the import of electric vehicles (EVs) in September made them much more attractive to consumers and perhaps traders also. Value-added tax, excise tax, and surtax were completely removed while customs duties were dramatically reduced even to the point of zero duty for completely disassembled vehicles. The tax reform’s goal is to implement a transportation system that protects public health and the environment, properly uses renewable energy sources, reduces forex outlays for fuel, and makes electric vehicles available to the general public at affordable prices. For Ethiopians and industry observers who have been shocked by the continued surge of prices in the car market, the new proclamation may serve beyond its stated goals. In this article, EBR’s Eden Teshome, looks into the impact of the new proclamation in terms of stabilizing the overall car market.

Yafet Sisay, a 31-year-old Mechanical Engineer who resides in the Yeka District of Addis Ababa, has his own business called SBF Stone Art Works. Through the years, he has done stone cladding on several residences and buildings across Addis. Yafet now owns a Suzuki minivan but was considering purchasing a 2010 model Mitsubishi pickup since it would fit his lifestyle and work habits. However, the price surge of his dream car put off his purchase.

“The car was ETB800,000 almost a year ago but is now ETB2.3 million,” Yafet told EBR.

He intends to wait it out to see if the automotive market conditions improve as a result of the revised tax regulation concerning electric vehicles. “The new taxation system has led me to consider purchasing an electric vehicle and I’m presently conducting market research on that.”

Yafet, though with his specific reason, is not alone in preferring EVs over fuel-powered cars. Yezihalem Tesfa, a 50-year-old Medical Doctor working for a local professional association is also highly encouraged by the new regulation. He is currently driving a 2004 model Toyota Corolla Executive and is considering selling it to buy a new EV.

“I used to drive to my family in Debrezeit every week and visit friends in Adama probably every other week,” Yezialem complains. “The rise in fuel prices has made those trips unthinkable.”

Yezialem is trying to take advantage of both the new regulation and the rise in the price of cars. Due to Toyota’s high popularity in Ethiopia and inflationary prices, he is planning to sell his car higher than what he bought if for and then buy an EV which takes advantage of the new tax and duty breaks.

“I might have to reconsider driving to and from my office, otherwise,” Yezialem told EBR.

Ethiopia’s customs system is frequently criticized for forcing ordinary individuals to pay twice as much for automobiles as Kenyans do, for example. High costs encourage shady transactions and excessive taxes are said to be the primary force behind Ethiopia’s illegal car trade. Car importers in Ethiopia are used to paying five cumulative taxes on top of the customs duty including 15Pct VAT, excise tax depending on engine size, 10Pct surtax, and 3Pct withholding tax. This can sum up to more than 500Pct of the cost and freight of the vehicle.

Ethiopia now heavily restricts the import of vehicles that are more than eight years old with government levying higher taxes the older a vehicle is. This has led certain importers to import automobiles with forged documentation and production dates. Some even work with mechanics to alter the chassis and engine numbers of the vehicles. Additionally, false documents are used to reduce the cubic capacity of automobile engines. This is all to take undue advantage of Ethiopia’s tax code. These actions have a severe negative impact on the health of the population and environment as well as the car market.

Recently however, the Ministry of Finance announced a change in the tax and duty processing of EVs that would support businesses and importers investing in electric car technology while also enhancing society. The tax reform made it that domestically assembled and imported electric public transportation vehicles, as well as personal and cargo vehicles, will be exempt from value added tax, excise tax, and surtax. Those imported in whole will pay 15Pct in duty. Semi-knocked-down vehicles will pay 5Pct duty while fully-knocked-down will not pay any customs duty.

In one of his social media posts, Mushe Semu, former Politician and career Banker, stated that the new regulation is a significant move since it would save the country from having to purchase fuel and oil and will also lower the inflated price of cars. It is no secret that the running costs of EVs are a fraction of fuel-powered automobiles, though their purchasing price is somewhat higher at the moment. However, experts predict that even their buying price will soon also be cheaper.

Upon EBR’s calculations, the expense of powering similar-type vehicles using electricity is 7,984Pct cheaper than benzene in Ethiopia. The cost per kilometer is ETB0.06 and 4.64, respectively. This was done comparing the Hyundai Ioniq 5 SE and Hyundai Tucson SUV where electricity is priced at ETB0.35 per kilowatt hour and current prevailing benzene price is ETB57.05 per liter.

“Another factor to think about is windfall gain,” Mushe wrote. “The majority of auto dealers do not provide legitimate invoices and do not disclose their profit. Sellers will make a profit of around 1.1 million for a Suzuki Dzire car; the car’s current market value is 2.1 million ETB.”

Such cars have seen a recent drastic rise in their selling prices due to the National Bank of Ethiopia’s recent freeze on the issuance of Letters of Credit (LC) for the import of 38 products as of October 17. This restriction includes petroleum-powered vehicles. However, EVs were not on the restriction list. Rather, they are a rarity in that their customs duty and taxes were recently reduced by the government.

Since the government’s decision to gradually remove fuel subsidies, the take-on of electric cars in Addis Ababa has taken off. These recent governmental moves—of restriction gasoline-powered cars and promoting EVs—has added fuel to the take-on by Addis Ababa’s consumers of personal mobility tools.

Biniyam Alemayehu, 38, Marketing Manager at Ethio Link, says that the new tax structure encouraged their business to import EVs from Dubai. Their firm believes in supporting environmental conservation; thus, they want to construct an assembly facility soon. As this will enable the business to support that cause.

“The future is electric! Ethiopia is a country with abundant resources and affordable electric utility tariffs, therefore we need to take advantage of it and join the movement towards electric cars,” said Biniyam. “Why not buy an EV instead of enduring the ongoing increases in fuel and maintenance costs?”

“Recently, there has been a dramatic rise in the cost of automobiles and fixed assets as a result of unexpected and abrupt demand brought on by certain speculations that the purchasing power of money is declining,” Mushe remarks. “By eliminating all taxes, it is a significant step towards reducing price escalations, particularly for electric vehicles. If the decision to stabilize the price of automobiles is continued in other sectors with caution, I think it will be a significant step forward for our economy while preserving that other issues that need to be resolved.” EBR

11th Year • Oct 2022 • No. 111