Carbon tax on vehicles and the possible aftermath

It has been proposed in the latest budget for the fiscal year 2023–24 that taxpayers who own more than one car will have to pay an additional tax ranging from BDT 25,000 to 3.5 lacs - depending on the engine size - during the registration and renewal of the extra cars. Additionally, every second car with 2,001cc to 2,500cc engine capacity will have to pay an additional BDT 75,000 for "environmental protection". Called carbon tax, this form of compulsory financial charge is imposed to motivate people to emit less carbon from the different equipment and machines they use.

While there are obvious environmental merits to this proposed carbon tax, there are some notable side effects as well. Let's take a look at what this carbon tax is and how it might affect local users.

What is a carbon tax?

The types and implications of carbon taxes vary from country to country. In Bangladesh, the government has proposed to impose a carbon tax on taxpayers who own multiple cars like sedans, hatchbacks, station wagons, and SUVs such as crossovers, compact SUVs and MPVs. 

While local car owners are already paying high taxes for vehicle ownership, this new 'carbon tax' will exert a heavier toll on taxpayers who own more than one car. The carbon tax also seemingly discourages the increasing demand for private vehicles, instead promoting public transportation systems, despite them not being organised or maintained enough to fulfil the general expectations of the citizens.

Another motive behind this proposal is to decrease pollution, though diesel-powered buses and trucks, which create more pollution, remain unaffected by the carbon tax rule. Though the carbon tax is a new concept in Bangladesh, the implementation of this system is not unique to the world, especially in developed nations.

What is the public opinion?

The topic has become a debatable issue since the law is being proposed to be implemented on such a short notice. One of the rationales behind keeping more than one vehicle is that members of a family may need to go to different destinations at the same time on a regular basis. Therefore, for better connectivity and to save time, multiple cars may be required for one family.

Md. Farooq, the owner of Japan's Car, a reconditioned car importer, has multiple cars in his ownership, and he opposes the carbon tax initiative. According to him, many buses and vehicles do not have fitness and use hydraulic horns, which are not eco-friendly. Because of the lack of advancement and proper management in the existing traffic system, traffic congestion is often created. Therefore, vehicles pollute the environment while sitting idle in traffic jams while keeping the engine running. "Imported modern cars have catalytic converters installed in them, which contribute to less pollution," says Farooq while comparing imported modern cars to unfit vehicles plying the streets regularly.

However, Tirtha Dey, a student of Accounting & Information Systems at University of Dhaka, whose family uses one car, welcomed the new proposal. He thinks that the law is environmentally friendly and will make people more aware before purchasing extra vehicles. "But the government should increase the minimum amount of the tax since the people who own two or more cars are considerably wealthy," he states.

Will car sales go down?

Cars are generally not considered luxury items any more by the upper-middle class and upper-class citizens, especially cars that are not too expensive. Therefore, to fulfil their necessities, they will need to buy more than one car if needed.

Shabab Mosharraf, a student of Computer Science and Engineering at BUET, whose family uses one car, thinks that the implications of the carbon tax will not decrease car sales. "Different tax amounts and rates related to cars have been quite high in the past and remain the same today. But the number of cars plying the streets never dropped. The imposition of a carbon tax will not make any big difference," he adds.

According to Farooq, who is an importer of Japanese reconditioned car brands like Toyota, Honda, Nissan etc., the number of car sales will not go down. "People will transfer car ownership to their family members. Consequently, an extra carbon tax will not be required to be paid," states Farooq.

A sales manager of an official brand, who chose to remain anonymous, also believes that the carbon tax, ultimately, will not affect sales that much, as people might opt to change ownership.

Whether people resort to downsizing the quantity of their vehicle ultimately depends on many factors, such as their financial ability and the need for extra cars. However, in most families, not everyone is a taxpayer.

Therefore, if ownership is transferred to any family member who is not a taxpayer, the Advance Income Tax, or AIT, cannot be adjusted, and a tax rebate cannot be gained. The same thing can happen if anyone in the family is a taxpayer but does not pay that amount of tax, which will be equivalent to the figure of AIT.

What other solutions are there?

According to LightCastle, a local market research firm, in 2021, there were 2.5 vehicles for every 1,000 people in Bangladesh. On the other hand, according to the international statistics source ASEANstats, in 2020, there were 138.8 vehicles in Myanmar, 608.7 in Thailand, 42.8 in Vietnam, and 993.7 in Malaysia for every 1,000 people. Although there are fewer cars for every 1,000 people in Bangladesh compared to these Asian countries, the traffic condition here is of relatively worse quality. 

As such, certain steps could be taken to achieve a more sustainable solution to the existing problem of carbon emission. Eco-friendly cars, which do not emit carbon, such as electric cars and hydrogen-driven cars can be promoted. Unfit vehicles, especially buses and trucks, which emit huge amounts of carbon and harm the environment, could also be regulated strictly to ensure they aren't damaging the environment to a large degree.

According to a 2023 case study titled 'Traffic Problems in Dhaka City: Causes, Effects, and Solutions', improving public transportation and road infrastructure while promoting alternative modes of transport can help reduce severe traffic conditions. The study also suggests improving traffic management and introducing congestion charges to better the livelihoods of the citizens.

While it can be said that the sales growth of cars may not decrease because of the new system, it can affect the upper-middle class if they own more than one car. Nonetheless, the consensus remains that a carbon tax system should have been introduced after a more thorough discussion with local car owners and relevant stakeholders. The exact aftermath, however, remains to be seen.