Economic Analysis | Public Transportation | Economic Independence

Is taxing private electric vehicles really regressive?

Critics are arguing that taxing private EVs is a regressive step. But what is more regressive - lacking a proper public transport system that works for all class of people or promoting private vehicles at any cost in an economy beset by trade deficits?

- By Sabin Jung Pande |

Buses, trams and wide sidewalks, Edinburgh, Scotland | Photo by: Sabin Jung Pande
Buses, trams and wide sidewalks, Edinburgh, Scotland | Photo by: Sabin Jung Pande

In his third annual budget presentation that Finance Minister (FM) Yubaraj Khatiwada announced few weeks back, the government raised tax brackets for private electric vehicles (EVs) raising effective rates up to around 140 percent, inviting immense criticisms for himself.

Although FM Khatiwada gave continuity to tax breaks for public EVs and the new tax rates for private EVs are still relatively lesser than for fossil fuel vehicles, it wasn’t enough to quell critics who are critical of the hike on grounds that the new tax regime will discourage mass adoption of the EV technology, bring more harm to the already ailing environment and waste Nepal’s surplus electricity that it is set to generate this fiscal year onwards for the first time in decades.

Nevertheless, the discourse on private EVs should be broader, rather than one-dimensional fixed on simply tax regime.

More traffic problems

For average Nepalis, full tax cuts on EVs will make it too affordable, which is tantamount to boosting EV sales and increasing reliance on bikes and cars. Rapid increase is likely to occur once tax concessions are enforced, marketing campaigns are in full swing, charging stations and power supply are ensured, people are convinced about the EV technology, and importers bring in cheaper vehicles, all the while public transportation remaining ignored and poorer.

Obviously, the rich will easily afford the best of EVs. As has been the case so far, the entire echelons of middle-class will also somehow manage one that best suit their means. Meanwhile, young commuters and poor classes will, most likely, hinge on to two-wheelers.

But once auto-sales rise, it will overcrowd roads and streets in Nepal with more personal vehicles. Cities will have to manage more spaces for parking facilities. All this will leave cities with additional stress on their underdeveloped traffic management, particularly Kathmandu Valley.

Photo by: OlegD / Shutterstock.com

Similar to Nepal’s present state, there are cities which are experiencing great troubles with increased traffic congestion.

In his 2012 bestseller ‘Breakout Nations: In Pursuit of the Next Economics Miracles’, Ruchikar Sharma observed that big cities like Sao Paolo, Moscow and Jakarta faced a common adversary – terrible traffic problems.

Sharma noted that Moscow faced worst traffic jams for any capital city in the world with its growing auto-sales but crumbling road condition. In Sao Paolo, CEOs used helicopters to hopscotch from one corporate headquarter to another. In Jakarta, people in rush and with money used services from teams that arranged fake mother and children to obtain police bike escort service and cut through the traffic. That escort came at a price of a 100-dollar bill.

Situation in Jakarta, which is flooded with two and four wheelers, is so terrible that it prompted an Indonesian novelist Seno Gumira Ajidarma to remark that  an average Jakartan spends 10 years of their life in traffic.

These matters were one of the markers of economic potential for Sharma, who serves as chief global strategist for Morgan Stanley Investment Management and heads its emerging markets frontier.  

Based on available data, there is strong probability that Nepal can see a good jump in private vehicles once small and medium EVs start gaining momentum. According to Department of Transport Management (DoTM) data, number of vehicles registered in Nepal doubled in 5 years-time between fiscal year 2012/13 and 2017/18. Between 1990-2014, personal car registration grew yearly by 11% and two-wheelers by 12%, says DoTM. Similarly, there were altogether 21,000 EVs including private two-wheelers and four wheelers and public EVs in Nepal which more than doubled in 2018 crossing 45,000, according to Electric Vehicle Association of Nepal (EVAN).

Source: DoTM *(FY 2017/18 data is as of May)

These data may not provide a realistic basis for growth projections, but once demand and supply constraints are taken care of, a rapid surge in personal vehicles is a good possibility.

On the other hand, crowded cities are experimenting with the idea of vehicle-free zones by either using taxing mechanisms or simply getting rid of them from the urban landscape. Central London charges congestion fees to avoid car congestion and accommodate more pedestrians. By doing so, it also makes it market look vibrant. European cities like Madrid, Oslo, Prague, Turku, Vienna and Venice have also embraced vehicle or car-free initiatives.

In Nepal’s case, concerns about cities getting overcrowded with vehicles also stem from unanswered questions such as i) will the private EVs displace the existing vehicles or are they just new additions? ii) what are the long-term plans with fossil-fuel vehicles and their timeline? iii) what are the complementary plans to ensure that roads aren’t flooded with two and four wheelers? iv) Are there plans to convert the existing fossil fuel vehicles into hybrid technology or electric, and if yes, who will bear the costs?

One of the main questions is if EVs are really the future of mobility, fossil fuel vehicles will turn obsolete soon and considering India and China’s aggressive EV plans, how rational is tax break incentives for the revenue-strapped economy? Aren’t consumers wise enough to discard something that is set to lose appeal?

Public or private alternative: what should government pursue?

The ongoing discourse on EV is solely centred around tax break which takes a reductive view of Nepal’s traffic, environmental and economic problems. Arguments are made in isolation – how taxing penalises potential EV users – but do not take stock of ground realities and a broader context where electric-run public transportation and freight transport and wide sidewalks and cycle lanes should actually precede in priority and discourse.

Taxing or untaxing private EVs should rather come out as a phase-wise component of a broader and integrated framework. It must prioritise robust electric public transport, improved road infrastructures including wider sidewalks and space for cycle lanes and effective traffic management plans with economic efficiency at the heart of the framework.

All this should lead to developing proper public transportation system as a meaningful alternative to private vehicles and as a better response to tackle traffic, environmental and economic problems.

In absence of as important alternative as public transportation, tax break i.e., currently being advocated, combined with the forces of private players, will only incentivise consumers to make their choice in favour of private vehicles. It is nothing short of tacit enforcement of private vehicles and an unfair proposition for households/consumers.

Kathmandu’s underdeveloped traffic infrastructure | Photo by: Sabin Jung Pande

In reality, average consumers will be better-off using public transportation as it doesn’t necessitate big fat spending, EMI burdens, yearly insurance and maintenance costs, road, registration and vehicle taxes and parking costs.

If an alternative in the form of a relatively reliable public transportation that works for all class of people is made available, consumers can make other important investment decisions with those saved outlays.  

It is simple economics. With reasonable alternatives around, consumers will land a better deal for themselves and society will benefit from much better social and economic returns compared to the use of private solutions.

Private solutions are good for individuals, bad for economy

Till date, individual solutions have unseated emphasis on public goods and public utilities. Another way of looking at it is that – lack of emphasis and investment on public goods and utilities have forced individuals to take matters on their own hands.

It may appear as a chicken-egg situation but once this cycle normalises, it creates a whole new vicious inefficient system.

Kathmandu’s urbanisation is one of the best examples. In absence of right urbanisation planning, houses and structures of all shapes, sizes and designs have covered the valley destroying its aesthetics and environmental quality.

Trends such as fencing houses with king-sized walls, building big concrete parking spaces, spending in yards and gardens have become hipper for some and urgent need for others as there is dearth of public parks, open spaces and sense of security.

With persistent water crisis in Kathmandu, private water suppliers have become the ultimate solution over an efficient centralised water-supply system. Meantime, houses are built with water tanks atop them, reserve tanks beneath them and water pumps installed in between to move the water from its storage.

Similarly, when load shedding persisted for years, Nepalis were forced to manage their lives and businesses by buying diesel-run generators, inverter system and batteries, all of which raised Nepal’s import bills and made households and businesses worse-off.

In the same vein, many Nepalis have now developed a strong preference to own personal vehicles due to dysfunctional public transportation and more incentives to buy personal vehicles.

All these individual or private solutions to problems that are public, clearly, do more harm to society’s net welfare despite making individuals seemingly better-off.

How valid are business concerns?

For businesses, their concerns about policy stability may seem valid but two exceptions have to be made here.

First, private vehicles don’t make consumers better-off, public transportation does. Besides, Nepal is basically a net importer of vehicles, fuels and batteries, their accessories and spare parts.

A tax policy departure is, thus, justifiable because there are clear economic implications. By nature, import businesses are subjected to policy changes throughout the world because policy makers make decisions based on net economic and social benefits.

Second, despite enormous taxes levied by governments and the hassle involved, all leading business conglomerates represent prominent global vehicle brands as one of their business verticals. So far, it’s proved to be easy cash cows for them. So once consumption pattern shifts, the big push will be for EVs just like fuel-run vehicles in the past.

Meanwhile, another section of private sector is milking public by running a transport syndicate at the expense of public welfare. They openly flout regulations, care little for passengers’ security, safety and convenience and lack price uniformity and time reliability.

Public grievances abound that private sector is solely fixated with fast cash, are non-transparent, lack innovation drive and have little concerns for sustainability and public welfare. These grievances neither take centre stage at business and private sector conferences nor addressed by their business models.

The ‘Sajha’ Problem

Sajha Yatayat, a cooperative public transport agency that revived to life after biting dust years ago is one of the rare hopes for public transport users. The agency envisions to become a leading service provider in its line of business throughout Nepal and currently operates 71 large buses across Kathmandu Valley and few outbound routes.

But, for an agency that aims to run electric trains and tramways in long run, it is complacent and lacks business aggression.

Last mid-year, the government had dispensed NRs three billion to Sajha to purchase and operate 300 electric buses in Kathmandu Valley. Sajha officials had already visited vendor country to negotiate a deal but the government pulled out its money after Sajha allegedly changed bus specifications unilaterally.

Buses make city look pretty and commuting easy | Photo by: Sabin Jung Pande

In July 2019, Bagmati province government and Lalitpur Metropolitan had handed over NRs 325 million to Sajha while Kathmandu Metropolitan announced to chip in NRs 100 million. That agreement too flopped due to issues concerning shareholding.

In another case, Sajha failed to operate five electric buses the same year that it had borrowed from Lumbini Development Trust intended for Gautam Buddha International Airport and were inaugurated by Prime Minister KP Oli amid a special fanfare. The electric buses are currently languishing at Sajha premises due to lack of charging stations. Sajha is still short of delivering its promise of operating e-buses that it made in early 2018.

On the other hand, Sajha’s gloomy website gives a sense of archaic ways of doing things and provides little information about its business plan.

Meanwhile, veteran journalist Kanak Mani Dixit and environmentalist Bhusan Tuladhar who serve as the chairman and executive director at Sajha have been staunch advocates of tax breaks on private EVs.

The big questions remain: when will Sajha operate a large fleet of its own e-buses? What business plans does it have to inspire and reform Nepal’s public transport with scale and speed? Should Sajha’s directors push harder to add e-buses or promote private solutions?

These are important for Sajha, other public transport operators and for public as well because public transportation, mainly buses, may lose commuters once private vehicles dominate the road.

There are sufficient examples to understand such phenomenon from the likes of Nepal Airlines and Sajha’s own past, where private operators gained upper hand once their ships started leaking or Kathmandu’s hideous urbanisation that thrived on private solutions and can’t be undone now.

Read Also:

‘GDP and Development’ Lessons for Nepal

The Failures of GDP

How Kathmandu’s lethal pollution is its worst economic adversary?

Chitwan’s Chained Elephants

If Sajha could present a better alternative to the public or give hopes about better days for public transportation, many consumers may shelve their vehicle plans. To begin with, operating a large fleet of e-buses should be the immediate step, with a view to transform them into Rapid Bus Transit (RBT) later. There’s a good chance that it can do well with a strong business plan.

For that, collaborations need to happen, Sajha should get grants and subsidies from the government and flexibility in route permissions and their operations. It should be able to attract business capital that is squandered on importing and using more and more private vehicles. If there is business viability, banks will finance too.

Similarly, people are fed-up with private operators of public transport. The ascent of Tootle and Pathao not only signal demand, but also public’s deep-rooted desire for reasonable and better transport services. Prepaid bus cards can be a good business model in the present state.

On top of that, public EVs are almost tax-free and there is going to be surplus electricity.

What is it then stopping us from making big investment in developing a robust public transport system, starting from Sajha?

 

Sabin Jung Pande :)

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