11 Jan Tax and It’s Effect on the Yachting Industry
Tax and it’s effect on yachts
Tax can make or break an industry, and the boating is no different. It is easy to spot that those places in Asia where taxes are low on boats are also the places with the largest boating industries. For example, Hong Kong currently has one of the biggest boating industries in Asia, and the city has zero tax on boats. Other aspects, such as the ease of getting licenses and transferring ownership, are also important. The economic situation of a country also plays a role of course, but currently we are seeing taxes as being one of the major problems that prevents the boating industry from reaching its potential in many parts of Asia.
One of the biggest lessons that the boating industry has so far learnt from luxury taxation, was in 1990 in the USA, when the Bush government imposed a tax on luxury yachts, private planes, jewelry and other luxury items. An additional tax of 10% was charged on yachts over USD 100,000. This seemed to be an excellent idea at the time. After all, why not charge the rich for their luxury goods? Right? The general public applauded the idea, delighted that someone was at last taxing the rich for their expensive toys.
At first the government enjoyed the situation, which painted them in as a modern Robin Hood on the political scene. They estimated that the newly imposed tax revenue would earn them billions of dollars over the next 5 years. It seemed to be a win-win situation that would solve all their problems. Surely the rich could afford to pay 10% more for their luxuries. At worst, the government predicted that sales might slightly drop temporarily and would then recover.
What the government failed to understand, was that although many of yacht buyers and owners were fairly rich, there was also a large number of middle class boaters who were not able to pay the extra tax. Those affected by the tax were mainly ordinary people who worked and ran the industry. Boat builders, distributors and agents, maintenance workers, engineers, mechanics, surveyors, crew members and suppliers of every imaginable kind of boating equipment. Everything combined, it was a huge industry.
Potential boat buyers, unwilling to pay the extra tax, could make the simple decision to not buy a boat. They had other alternatives, they could go on more holidays, buy a country home, or just cross the border and buy a luxury yacht in another country.
But the workers who form the backbone of the boating industry had no other alternative. When the buyers suddenly stopped buying boats, the industry’s income stopped with it. Suddenly distributors, supplier factories, maintenance shipyards and every other boating related company were forced to lay off their staff, and the industry suffered massive unemployment.
As for the government, instead of earning more tax revenue, earned almost one tenth of what it used to earn when tax rates were lower. Furthermore, government had to cover the extensive costs of welfare for those unemployed in the ensuing financial crisis. Suddenly, the once flourishing boating industry saw massive losses in revenue and bankruptcies became commonplace.
The government quickly took the lesson to heart. After a few years, before the whole boating industry and the luxury yachting culture could come to an end, the new tax was cancelled. The government restored taxes to previous levels and encouraged consumers to purchase luxury products within the country to help the industry grow and prosper once again.
This experience served as an important lesson learned in luxury tax, particularly in the boating industry. It became clear that the amount of labor, work, and expertise that is needed to make a luxury product like a boat creates employment across many other industries. It doesn’t stop there either. The maintenance and repair of the boat is an ongoing fountain head for job creation that aids the economy of a country in no small way. In this way, a yacht creates more employment than other luxury products such as expensive paintings or jewelry. Even a car does not require as much professionalism and a full-time crew to maintain it as is the case with a yacht.
Many countries in Asia are yet to understand this concept. In many cases the political situation in a country bars the politicians from deducting luxury tax because it makes them look like they are favoring the rich. India is one country that has simply been refusing to realize its potential to start a boating industry. The government has yet to take any concrete steps towards creating a proper boating industry.
India imposes a total tax of 47.8% on luxury boats, which is a huge barrier to mass consumption. Let’s say you have made it in the business world and worked hard. You travel all over the world and think that you should also buy a small private yacht to enjoy the great ocean at home. So you decide to buy a boat worth USD 150,000. This is much cheaper than many cars that are currently on Indian roads. You are a good patriotic citizen, and would like to pay the full tax. So you pay the government 47.8%, which comes to USD 71,700, and you get your boat registered. But when you think about it, you start to wonder what the tax is for. What does the government actually do for the boating industry to justify the tax? They don’t provide berth for your yacht, and they don’t support any yacht clubs in India. They do not provide sheltered waters, security or any kind of infrastructure or facility to aid the industry. In short, the 47.8% is not used to aid the industry in any way, you have just paid tax for nothing. If you pay the luxury tax in China, at least you get clean waters shipyards and marina club facilities because the government helped to build a boating infrastructure together with private firms. In India, the government provides no help, despite the heavy tax. Compare this to a place like Hong Kong, where you pay no tax but you get every facility that a boater possibly needs: secure waters, access to a 5-star marina club berthing facility if you’re willing to pay for it, or alternatively much cheaper government mooring, where you would get water and electricity, special fuel stations for private boats, markets to buy yachting related products, mechanics, shipyards, professional boat crews and anything else you might need.
In some cases, high import tax actually makes sense. If a government wants to protect its country’s farmers from cheaper food imports that would compete with local business, of course some kind of regulation is necessary to protect the interests of the local economy. Or, in the case of the manufacturing sector, it would make sense to impose a high tax on imports of garments to protect the local designers and brands. But economists still argue that high import taxes on any product is a bad idea as it will not create a need for the country’s local manufacturers to innovate or become more efficient in their industries. Sometimes however, an import tax is necessary to protect the country’s own manufacturing industry especially if some countries use unscrupulous ways of manufacturing to reduce cost, such as violating human rights, underpaying workers or using child labor.
By this same token, it does not make any sense for a government to charge a high import tax on a product of which there is no local manufacturing industry in the country. For example, yachts in India. The pleasure boating industry in India is almost non-existent. The government has nothing to lose by lowering their taxes, and everything to gain. This creates the impression that the government is not willing to make an effort to create new industries, employment and infrastructure. It seems they are just interested in looking good on the surface by being seen to tax the rich.
Some politicians in Asia argue that there is more important work to be taken care of than the boating industry. When there is so much poverty in a country, it might be more prudent and human to rather solve that problem than providing infrastructure for rich man’s hobbies like yachting. This argument does not make sense, however. Creating employment and promoting industry is the absolute best way to eradicate poverty and empower the poor. Although it is true that the government may have limited budget to provide a specialized infrastructure such as what is required for boating, there are solutions. A good way to start would be to simply provide a space for the private sector to build the boating infrastructure, and create a consumer-friendly taxation system that would drive the industry.
By imposing unnecessary import duties, the governments in Asia are also hurting their own export industry. Countries often react to one another’s tax regulations and get embroiled in ‘tax wars’. This halts growth for everybody, and the consumer is the biggest loser at the end of the day. Perhaps lowering taxes on luxury yachts could also be used by the governments to develop their foreign trade relationships.
Many experts in the field of yachting believe that yachts should not be categorized as luxury products to begin with. This would solve many of the industry’s current taxation issues and could potentially create a healthy amount of employment.
Like mentioned before, many politicians in Asia argue that they have more urgent and important things to take care of, rather than focusing on creating a boating industry. To them I have to say, when you prepare a feast, you boil the pasta, fry the meat, and bake the dessert all at the same time. If you do it one by one, it would take you forever to finish.
I hope you found this article interesting.