The government and the ruling parties are considering freezing a new tax on vehicles to mitigate the economic impact of a planned consumption tax increase in October next year, sources close to the matter said Saturday.
By exempting the new tax to be imposed on purchases of vehicles depending on their fuel efficiency, the government aims to prevent a cutback on buying after the consumption tax hike.
Tax breaks for eco-friendly vehicles scheduled to end next spring are also likely to be extended for around two years, targeting a limited number of models, the sources said.
The new tax is supposed to replace an existing tax imposed on purchases of cars when the consumption tax rate is raised to 10 percent from 8 percent.
Depending on fuel efficiency, cars other than minivehicles will be subject to the four-stage tax from 0 to 3 percent. In 2015 when the new tax system was designed, the government expected about ¥89 billion in new tax revenues.
Most vehicles are likely to be exempted from the new tax for at least a year from October next year, according to the sources.
If a tax equivalent of 2 percent of the purchase price, excluding vehicle accessories, is imposed on cars under the new system, the exemption is likely to wipe out a 2 percent consumption tax increase.
Budgetary measures are expected to be taken to assist local governments which stand to collect lower revenues following the exemption.
But the tax freeze could prove problematic as it will give a greater advantage for cars with poor fuel efficiency since electric vehicles and other eco-friendly cars will be tax-free regardless of the exemption.
In addition to the time of a new-vehicle purchase, the auto industry is demanding a more drastic tax cut for keeping cars. It is asking the government to slash the minimum yearly automobile tax from the current ¥29,500 to ¥10,800 — equivalent to the duty currently imposed on minivehicles.
But the Internal Affairs and Communications Ministry as well as the Finance Ministry are reluctant to introduce a long-term tax cut because automobile-related taxes constitute an important financial source for local governments.