July 6, 2021

Excise tax pushed used cars prices up

City: Addis AbabaMarketEconomy

Severe shortage of foreign exchange coupled with the heavy excise tax imposed on imported used cars significantly disrupted the used car market.

Avatar: Haymanot Girmay
By Haymanot Girmay

Excise tax pushed used cars prices up

Beza Ayalew, a resident of Addis Ababa, wanted to buy a 5L Hyundai minibus. When he planned to buy the minibus, its price was 555,000 birr. As he did not have that value, he decided to save the remaining 150,000 birr and go back to the car seller. 

After two months, he went to the car seller with the required money, apparently, he found the price of the minibus spiked by another 100,000 birr.

“Every time I visit a car shop,” said Beza, “I find the price of a car increased. Then I decided to wait for some time assuming the market could stabilize, however it keeps soaring.”

Beza says scaling up the number and capacity of domestic car assemblers could solve car market price inflation, which is directly influenced by the forex crunch to import cars. 

Another buyer, who was looking to buy a Toyota Yaris, told Addis Maleda he was asked 1.1 million birr for the car, a double price from what it was 6 months ago. 

“I was shocked”, he said. “ The same model was sold for 650,000 birr six months before.”

A severe shortage of foreign exchange coupled with the  heavy excise tax imposed on imported used cars significantly disrupted the used car market, a car retailer told Addis Zeybe.

The Ethiopian parliament has approved a new Excise Tax Proclamation No.1186/2020(new proclamation) on 13 February 2020. Used cars for not above two years with less than 1300 cc (cubic centimeters) will have the excise tax of 55% and up to 500% for used cars over 7 years that are 1800 cubic centimeters.

The foreign exchange crunch has an impact on the car market, and this is the major reason for the rising price, according to the owner of Biruk car retail business around Meskel  Flower area. He added that his stock offers just brand new cars since the excise tax made the price of used cars expensive. Currently, the price of used cars is very close to the prices of brand new cars.  

One of the salespersons at Yami Car Dealership around Meskel flower also agrees with Biruk’s idea and sees the tax system as a hindrance for the car importing business, “Nowadays many car importers who used to import used cars stopped importing and shifted to new car sales,” he says.

 Toyota ‘Vitz’ is sold at 800,020 and Toyota Corolla 2003 model is tagged as 1.2 million birr. The price of these cars has increased by 100,000 birr to 200,000 birr within 9 months.  9 months. 

Even if the vehicles that were imported before the excise tax was enacted had increased. The traders explain that they increased the prices knowing that they will not import used cars in the same volume as before or they will not import at all. 

Sewale  Abate (Ph.D.), an assistant professor in finance and investment, at Addis Ababa University, sees the impact of the excise tax from a positive perspective.  He explains that it will discourage the import of used automobiles, which has a negative impact on the environment.  

Because of high fuel consumption and maintenance-related costs, used cars are not economically advantageous therefore, avoiding these cars benefits the nation’s economy, according to Sewale. 

“Simultaneously, it also opens an opportunity for the domestic car assembly companies,” Sewale explains.

“The way to overcome these problems is having many car manufacturing companies locally’’, the expert recommends.