Driving costs

Driving your car in Lebanon has never been so expensive. Neither has the government swallowed a more substantive share of the transportation budget from private households. Since the introduction of value-added tax in February 2002, the government’s revenue participation has reached and exceeded 50% on the amount a consumer spends on the purchase of a new car, even in the middle market segment of cars that cost $20,000 to $30,000 ex factory. Data from Lebanon’s ministry of finance (MoF) reveal that on the level of fiscal income, government revenue derived from the car sector has increased from 4.9% to 16% of total government revenues. These revenue streams are a combination of registration fees on cars, excise taxes on imported cars collected at customs, and excise taxes collected on fuel.

The most pronounced increase has impacted fuel costs, where the fiscal burden on Lebanon’s driving population ballooned from little over $50 million in 1998 to almost $465 million in 2002, or 12.02 % of the government’s total revenue of $3.95 billion. Often summarily called customs duties in conversations by tax-weary citizens, excise taxes on new and used cars imported to Lebanon also brought a massive boost to government revenue, reaching $100 million in 2002. From a fiscal perspective, the only dent in recent revenue optimization from the car sector was that excise tax collection from car imports, which last year registered a 21% decrease over 2001, from roughly $126 million to $100 million. This decline in car imports (from $619 million in 2001 to $558 million in 2002) is widely accepted to be a result of the implementation of VAT. However, if last year saw no decrease in the government’s revenue from car imports, it was because of VAT. Of over $500 million, which the government collected from VAT on imported goods in 2002, $127.5 million (25%) were levies on mineral products, fuel mostly, and $58.5 million (12%) on transport equipment, mostly cars. Adding these amounts to the $620 million which the government-generated from excises and registration fees on cars and fuel, the fiscal revenue linked to automotive sales and car usage reached a cool $806 million, 20% of the MoF’s total revenue generation for 2002. Not forgetting of course the vehicle maintenance fees, or MECHANIQUE, which added nearly $86 million to the purse. Driving license fees netted the government over $8.5 million.

The government rationale behind increasing the taxation of fuel consumption and car purchases was, quite evidently, revenue optimization, Chadi Abou Chakra, a tax analyst at the ministry of finance, confirmed to EXECUTIVE. It did not include obvious components aiming at controlling the number of vehicles on the road or reduce fuel consumption out of environmental concerns. “The perspective of the government is to generate revenue,” he said, “by taxing people who make more money than others.” Some of the fees charged car owners in Lebanon, such as the MECHANIQUE fee, are quite low in comparison to other countries, Abou Chakra added, but he could not say if the car sector was generally overtaxed because the MoF has not yet undertaken a study of the automotive sector and related economic activities. For consumers, the most inescapable tax dues in the entire transportation scenario were evidently the petrol taxes. Here, taxation rates differ by fuel type. According to Abou Chakra, the rates also fluctuate frequently because the ministry of energy adjusts them in response to the ups and downs of the oil price to maintain the stability of the respective mandated gasoline prices at the pumps. As a combination of excise tax on fuel and VAT, however, the share of government revenue from each liter of gasoline sold at the service station pump is roundabout 75%, or LL15,000 out of a LL20,000 gas tank filling, the MoF analyst said.

Driving being perceived as daily need by at least two thirds of Lebanese households, the fairly consistent levels of government revenue from petrol taxes suggest that citizens, however grudgingly, paid the increasing charges on gasoline consumption without radically changing their driving patterns. They did not, however, renew their vehicles at the rate of earlier years, as evidenced in the 2002 contraction of the value of total car imports by almost 10 %, after VAT introduction altered the whole equation of buying.

The reason is simple enough to compute. The combination of customs duty, value-added tax and registration fees racked up the cost counter radically. Car dealers say they have to calculate 20 % in customs charges for the first LL 20 million of new car value. On the remaining value of the vehicle above LL20 million, the duty is 50%. Above a base charge of LL5 million in customs duty and excise taxes on used vehicles valued up to LL20 million, the duties on a used car are also 50% on the amount of its value that exceeds LL20 million. Although handsome, the fiscal revenue participation does not stop here. After the dealer has added his margin, the customer has to pay 10% VAT on the car’s value, which now includes both customs duties and dealer margin. As icing on the automotive revenue cake, the buyer faces an additional fee of 6% to 7% for registration – calculated not based on the car’s factory price but the transaction value between dealer and consumer that already includes two hefty tax components.

Based on a dealer markup of 5% – which local dealers say is barely enough to sustain their business – the price for a new sedan that left an American or European factory with a $20,000 dealer invoice thus will have jumped to more than a $32,000 acquisition cost to the Lebanese customer. If the car’s base price was $30,000, the driver here will have shelled out more than $50,000 by the time he turns the ignition. For a car that left the Ferrari workshop in Modena or the Mercedes factory in Sindelfingen with a sticker price of $150,000, one can liberally add 80% as surcharge of that original cost to see the fancy wheels spin in Beirut or Beckfaya. The regime of overlapping taxes has wiped the smiles of the faces of many a car dealer in Lebanon. From over 22,000 new cars that were sold in Lebanon in 1998, the sales dropped to some 14,000 units in 2002, according to figures published by the Automobile Importers Association (AIA). Dealers say an annual sales level of 12,000 to 12,500 units is today realistic in the new car market, and some describe the business as reaching the point where it starts to look unfeasible. It is beyond question that the high taxation of car imports has a strong negative effect on the automotive sector in Lebanon, even as it cannot be assessed with exactitude how much this field contributes to the Lebanese economy. According to Samir Homsi, president of the car dealers’ association, the country’s 35 car agents with official distributor contracts from international manufacturers employ about 2,500 persons directly. Adding to that the importers of spare parts and automotive supplies, plus a vast number of independent small car repair and service workshops would bring the number of people living in one form or another from the sale and servicing of motor vehicles to easily more than 10,000 employees or self-employed individuals and their families.

Other than in car manufacturing countries, the automotive sector in Lebanon is organized only to a very small degree, and even fundamental data on car usage are often broad estimates.

The Lebanese government’s policies of automotive taxes and taxation of fuel consumption, based on the country’s dire need for fiscal revenue, cannot be expected to change fundamentally. But evidence from the fiscal revenue evolution supports the claim of AIA president Homsi that the reduction of the government revenue share in the cost of newly bought cars would not harm the fiscal revenue stream. In an interview with EXECUTIVE, Homsi named the tax and fee burden as one of the main reasons why sales figures of AIA members have contracted. “I believe that if the taxes went down, the volume could go up. Then the government will be happy and the consumer would be happier, because he would be able to renew his old vehicle, which is now polluting the country and creating hazardous transportation conditions through the use of very old vehicles.”

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.