Is taxing private electric vehicles really regressive?

In his third annual budget presentation that the Finance Minister (FM) Yubaraj Khatiwada announced a 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 much lesser than for fossil fuel vehicles, it wasn’t enough to quell critics. They argue 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 fixated on tax regime.

More traffic problems

Full tax cuts on EVs will only make it too affordable, which is tantamount to boosting EV sales and perpetuating the existing reliance on private vehicles such as bikes and cars. Rapid increase in the use 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 start bringing in more 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 majority of the middle-class will also somehow manage one that best suits their pocket size. Meanwhile, young commuters and poor classes will, most likely, go for the two-wheelers.

But once auto-sales rise, it will overcrowd roads and streets with more private 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 the cities in the Kathmandu Valley.

The problem of traffic congestion has in fact worsened across many large cities of the world.

In his 2012 bestseller ‘Breakout Nations: In Pursuit of the Next Economic 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 the worst traffic jams for any capital city in the world with its growing auto-sales but crumbling road conditions. In São Paulo, CEOs used helicopters to hopscotch from one corporate headquarter to another. In Jakarta, commuters in rush and with deep pockets used services from teams that arranged fake mothers and children to obtain police bike escort service and cut through the traffic. That escort came at the 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.

For Sharma, who serves as chief global strategist for Morgan Stanley Investment Management and heads its emerging markets frontier, these matters are an important marker of the economic potential of those cities.  

In Nepal too, there is a strong probability that Nepal can see a good jump in private vehicles once small and medium EVs start gaining momentum based on available data and trends in Nepal and deteriorate the traffic woes further.

According to the Department of Transport Management (DoTM) data, the number of vehicles registered in Nepal doubled in the five years-time between fiscal year 2012/13 and 2017/18. Between 1990 and 2014, personal car registration grew yearly by 11% and two-wheelers by 12%, says the 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 reaching 45,000, according to Electric Vehicle Association of Nepal (EVAN).

Once demand and supply constraints are taken care of, a further and a rapid surge in private vehicles is, thus, a good possibility.

In other parts of the world, fed up with traffic congestion, noise and pollution, many crowded cities have already started 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 encourage and accommodate more pedestrians. European cities like Madrid, Oslo, Prague, Turku, Vienna and Venice have also embraced vehicle or car-free initiatives. By doing so, their cities and market places look much more vibrant.

In Nepal’s case, there is rather a vociferous call to encourage private vehicles, with many concerns left unanswered, 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 is there any timeline? iii) what are the complementary plans to ensure that two and four wheelers don’t dominate the road? 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 central questions is if EVs are really the future of mobility, fossil fuel vehicles will soon turn obsolete and considering India and China’s aggressive EV plans, how rational are tax break incentives for the revenue-strapped economy? Aren’t consumers wise enough to stay away from something that is set to lose appeal and value?

Public or private alternative: what should the government pursue?

The ongoing discourse on EV is solely centred on tax breaks 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. If broader context is analysed, electric-run public transportation for both commutes and freight,  wider and walkable sidewalks and separate lanes and sense of security for cycles should actually take precedence in policy discussions.

Untaxing private EVs should instead come out as a phase-wise component of a broader and integrated transport framework. Effective traffic management plans with economic efficiency should lie at the heart of the framework.

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

In absence of an 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 choices in favour of private vehicles. It is nothing short of tacit enforcement of private vehicles and an unfair proposition for households/consumers.

In reality, average consumers will be better-off using public transportation as it doesn’t necessitate lump sum and regular flows of money from households' pockets in the forms of down payments, EMI burdens, yearly insurance and maintenance costs, road, registration and vehicle taxes and parking costs.

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 larger social and economic returns compared to the use of private solutions that will make only individuals better off.

Private solutions are good for individuals, bad for economy

Till date, private 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 opt for private solutions.

But once this feedback loop normalises, it creates a whole new vicious inefficient system, posing even larger problems.

Kathmandu’s urbanisation is one of the best examples. In absence of a good urban plan, land, and physical structures of all shapes, sizes and designs have engulfed the valley destroying its aesthetics and environmental quality.

Trends such as fencing houses with king-sized walls, building parking structures and spending in yards and gardens have become a norm as there is dearth of public parks, open spaces and a sense of security.

With persistent water crisis in Kathmandu and lack of an efficient centralised water-supply system, private water suppliers and boring water have today become the ultimate remedy. 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 systems 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 private solutions to problems that are public, clearly, do more harm to society’s net welfare although they make individuals seemingly better-off.

How valid are business concerns?

For businesses, their concerns about policy stability are 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. Once the consumption pattern shifts, the big push will be for EVs just like fuel-run vehicles in the past.

Meanwhile, another section of the private sector is milking the 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 the private sector is solely fixated with making a fast buck, 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 a few years ago is one of the rare hopes for public transport enthusiasts. The transport agency envisions becoming a leading service provider in its line of business throughout Nepal and currently operates 71 large buses across the valley and few outbound routes.

But, for a transport agency that aims to run electric trains and tramways in the future, Sajha appears to be complacent, lacking business aggression and axing its own foot. 

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

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

In the same year Sajha failed to operate five electric buses it had borrowed from Lumbini Development Trust that were actually intended for Gautam Buddha International Airport. Prime Minister KP Oli amid a special fanfare inaugurated the Sajha’s initiative. 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.

Sajha’s overall management doesn’t look promising either. Its 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 are staunchly advocating for tax breaks on private EVs.

The big questions here are - 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 focus on adding their own e-buses or press for a tax regime that promotes private solutions?

These are important issues for the public, public transport operators and Sajha itself because public transport, mainly buses, may lose passengers once private vehicles dominate the road.

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

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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 must be the immediate step, with a plan to upgrade into Bus Rapid Transit (BRT). There’s a good chance 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 adding more and more private vehicles in the street. 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 the 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 tax-free and there is going to be surplus electricity.

What is stopping us from making big investments in developing a robust public transport system that works for all classes of people, starting from Sajha?

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*This work is edited on 16 Jan, 2022.