Mr Speaker, Sir

3.1 Before I outline the economic restructuring package, let me now turn to the proposals for tax and fee changes. I will start with motor vehicle taxes.

Motor Vehicle Taxes

3.2 Fiscal disincentives have been a very effective means of controlling car ownership and usage. They have kept our roads smooth-flowing and congestion free. However, our current vehicle taxes are excessively skewed towards ownership costs rather than usage charges. Moreover, the ownership levies are a complicated mix of taxes and fees that are not fully rationalised. With the Certificate of Entitlement (COE) system in place, the Additional Registration Fee (ARF) and excise duty (ED) on cars are higher than they need to be. The road tax is also heavily biased against cars with large-capacity engines.

3.3 The Government agrees with the ERC Sub-Committee that high ownership cost is a blunt tool for controlling traffic congestion. Moreover, it creates significant economic distortions. Car taxes are currently the heaviest taxes paid by upper-middle income households. High ownership costs have also distorted usage patterns by encouraging car owners to drive frequently, since the car has already been paid for.

3.4 The Government aims to strike a better balance between the ownership and usage costs of a car, and to rationalise the various fees and charges. This will be done in stages, so as not to destabilise the market. In the long term, we envisage that the ARF, ED and road tax will still be progressive, but less so than now.

Reducing ARF and ED for Cars

3.5 The Government has decided to reduce the ARF for cars from 140% of the Open Market Value (OMV) to 130% of the OMV. The ED on cars will be cut from 31% of the OMV to 20%. We think that 20% is the appropriate long-term rate for ED, and do not expect to lower it further. However, the ARF can be gradually reduced further as the market adjusts to the changes.

Pegging PARF to ARF

3.6 The Preferential Additional Registration Fee (PARF) rebate is currently pegged to a car's OMV, instead of its ARF. This was fine so long as the ARF rate did not change. But as we have progressively lowered the ARF, the PARF rebate has become too large relative to the ARF paid. We have therefore decided to peg the PARF rebate to the ARF actually paid on each car, instead of the OMV. This way, the PARF will be automatically and proportionately reduced whenever the ARF is lowered.

Rationalising Taxes on Cars and Taxis

3.7 Taxis, being higher end public transport, are similar to cars, and should be treated like cars in terms of ARF, PARF and ED. The new ARF and PARF rates for cars will thus also apply to taxis. However, the ED for taxis is currently lower than for cars. We will increase the ED for taxis from 7% to 10% of OMV. Nevertheless, the combined effect is to lower the ownership charges on taxis.

3.8 Our eventual aim is to raise the ED on taxis to 20%, so as to equalise it with the ED on cars. However we will do this in step with future reductions in the ARF, so that, overall, the ownership taxes on taxis should come down.

Reducing Road Tax

3.9 The road tax is part of the cost of owning a car, since it is payable regardless whether or not the car is actually used. The road tax for cars will be lowered, typically by 20%.

3.10 Taxis already enjoy a significant concession on road tax, since their road tax is equivalent to the road tax for a 1,766 cc private car under the new, reduced rates, whereas all taxis have at least 1,900 cc engines. There will therefore be no change to the road tax for taxis.

3.11 The tables at Annex 1 shows these tax changes for taxis and cars.

Issuing More Certificates of Entitlement

3.12 These changes to motor vehicle taxes will reduce the cost of owning a car. However, unless we issue more COEs, the savings will feed through into higher demand for cars, and higher COE prices, thereby negating the fall in ownership cost.

3.13 The Government announced in 1997 that 15,000 to 20,000 additional COEs could be released if the Electronic Road Pricing (ERP) system proved effective in managing congestion. We have decided to release another 5,000 COEs in Quota Year 2002/2003 from this reserve. 5,500 COEs from this reserve have already been released previously.

3.14 The changes in ARF and PARF will apply to COEs obtained from the May 2002 bidding exercise onwards. The new ED rates will be effective tomorrow. The reduced road tax rates will take effect from Sep 2002. The Land Transport Authority will announce the details regarding the motor vehicle tax changes and the extra 5,000 COEs for QY 2002/2003.

Revising Car Park Charges

3.15 Part of the cost of owning and using a car is the cost of providing a place to park it. At present, car park space in land-scarce Singapore is not properly costed. Our parking charges within the city are much lower than cities elsewhere. Where HDB residential parking is concerned, the existing charges do not cover the cost of building the car parks, leaving HDB with a large deficit.

3.16 It is not logical to levy charges on other aspects of owning and driving a car, while effectively subsidising car parking costs for motorists. We therefore need to rationalise car parking charges progressively. The HDB and the URA will announce the details later.

Expanding Electronic Road Pricing

3.17 As more Singaporeans own cars, the cost of using a car will have to go up, where required, to prevent congestion from worsening unacceptably. The ERP system will also be expanded to keep our roads free flowing. Nevertheless, because the ERP is an efficient and precise instrument in controlling congestion, if we rely more on ERP and less on ownership levies, overall the total cost of owning and operating a car should come down.

3.18 However, Singaporeans must bear in mind that the number of additional cars that can eventually be put on our roads will be primarily constrained by our lack of space. Unlike cities such as New York or London, Singapore does not have a large hinterland where city dwellers can use their cars outside the city. We will reduce ownership charges and enable more Singaporeans to afford cars. But cars in Singapore can never be as cheap, and ownership of cars can never be as widespread, as in these other cities.