In my conversations with ODD Chairman İbrahim Aybar, who is also general manager of Renault Mais, as well as with other experts on the industry last week, I must admit I found their arguments pretty convincing. Aybar says ODD's recommendations are simple and offer a win-win situation to both the industry and the government. A nine-month-long study conducted by a team of experts on behalf of ODD unveiled a number of projections that showed government tax revenue would increase if tax breaks on car purchase transactions were made permanent.For years, the government has been reluctant to allow tax breaks on car purchases, fearing that it would lead to a decrease in revenue for the Treasury. The test runs in 2004 and in 2009 during which the government slashed taxes temporarily, however, prove that premise false. These periods of lower auto taxes fattened the Treasury's chest as more cars were sold when consumers rushed to take advantage of falling prices.
During a three-month period between March 15 and June 15 of this year, the number of cars sold increased almost 35 percent over the same period last year. The ODD singles out the government's reduction of the private consumption tax (ÖTV) as the main reason for this spike, despite the market contraction in vehicle sales witnessed throughout the world.
The question remains, however, of how long this might go on and when the market in Turkey will be saturated. According to Turkish Statistics Institute (TurkStat) data, almost 100 cars are registered per 1,000 people in the country. The number is far below the European Union average of over 500 cars per 1,000 people. In light of this unsatisfied demand, industry observers predict the Turkish market will continue to grow for the foreseeable future. Because of this huge unexploited potential market, they also point out that foreign auto manufacturers are increasingly choosing Turkey for investment.
The comprehensive study posits a number of projections based on a reduction of taxes and an expected income rise in Turkish households, with fuel prices and exchange rates remaining constant. In one scenario, the government's tax revenue from car sales increases 87 percent by 2015 when the government keeps the ÖTV at 18 percent. The projection expects 1.2 million cars to be sold in 2015 with reduced taxes, as opposed to 400,000 cars if the tax rate is kept at 37 percent.
If the ÖTV is reduced to 27 percent, the number of cars expected to be sold in 2015 drops to 900,000 but Treasury revenue increases 95 percent because of the higher tax rate levied on car sales. In another scenario, the ODD survey anticipates a 115 percent revenue increase for the Treasury if the government offers a TL 3,500 new vehicle discount incentive for owners of cars over 16 years old. In this case, 880,000 cars will be sold in 2015, in contrast with 400,000 cars if no incentive is offered.
In addition to drops in the ÖTV, the survey also plays around with a reduced value-added tax (KDV) and makes projections based on a KDV of 8 percent rather than the regular 18 percent applied to car sales. It estimates 920,000 new cars would be purchased in 2015 with an 8 percent sales tax while the government's tax revenue would jump 95 percent.
The last scenario examines the combined effect of a reduced KDV, cash incentives for old car trade-ins and a reduced ÖTV. The government's tax revenue would reach an apex in this case, increasing more than 119 percent with 1.04 million cars expected to be sold in 2015. The recommended incentive for older cars is set at TL 3,500 in this projection.
In all these projections, the ODD is trying to show that tax breaks and incentives are a win-win situation for the government. Aybar said he presented the case to the Economic Coordination Board (EKK), the highest body consisting of trade, industry, finance and economy ministers, in a pitch to convince the board to continue offering tax breaks and possibly make them permanent. It remains to be seen what the EKK will decide when the current stimulus package ends on Sept. 30, a date when all temporary tax breaks and incentives will be terminated.
I think it is time for the government to come to grips with the fact that the country needs, and frankly deserves, a much better and more fair taxation system. Generating revenue through indirect taxation, which amounts to 70 percent of all taxes collected in Turkey, should be reduced to a reasonable level. While we are trying to stimulate the economy amid increasing signs of recovery, we might as well change and modernize our taxation system.
