The Government is planning to replace the car registration tax with an environmenally-friendly levy, The Sunday Times has learnt, which may lead to cheaper cars on the local market.

Reforming the tax will form part of the Government's next legislative programme - if elected - Parliamentary Secretary Tonio Fenech said yesterday.

The news comes days after EU finance ministers discussed a European Commission proposal to substitute the car registration tax regime with a system based on congestion and C02 emissions.

Malta imposes one of the highest registration tax regimes on imported cars in Europe, which means cars sold on the island are among the most expensive on the continent.

Vehicles are taxed between 50 and 75 per cent of their value depending on their engine cylinder capacity as well as being subjected to 18 per cent VAT on the amount of registration tax payable.

However, it is the minimum thresholds imposed on second hand vehicles imported from the EU, irrespective or their value, that has concerned the European Commission.

Last March, the Commission sent a formal request to Malta to amend its car registration tax regime, because it said the measure applied to second hand vehicles was discriminatory. It also objected to VAT being levied on the tax.

Mr Fenech said when contacted that the tax - which injects no less than Lm30 million into the Government's coffers - might not be levied at the same level, meaning there could be savings for motorists.

Since the reform requires an adequate consultation period, detailed studies on technical mechanics and the proposed changes may only come into force after the general election.

Mr Fenech said the Government had already made some changes to bring the system closer to the EU position.

"However, when it comes to addressing the issue of second hand cars coming from the EU, it could actually destablise the car importation market, tilting consumer preference towards second hand cars, which in itself runs contrary to the environmental concerns the tax system should seek to address."

The Government is therefore considering a total revamp of the current system to make it an effective environmental instrument based on the polluter-pays principle, rather than simply addressing the issue of second hand cars that emerges from the EU infringement.

The Government's plan is to introduce a CO2 (carbon emissions) element into the tax base, similar to the discussions currently taking place at an EU level which, however, have been inconclusive.

While a European harmonised system may not be close, the Government still believes that the country needs to address the detrimental impact of CO2 emissions on the environment, and it is seeking to tackle these key environmental concerns rather than patch up the existing system, he said.

Will the revision of the tax lead to cheaper car prices for both new cars and second hand ones imported from abroad?

"Clearly, yes," Mr Fenech replied. "However, we first need to see a shift towards fewer polluting cars. To do this, polluting cars have to pay a higher levy. This would encourage car producers to continue developing cars that are more sensitive to the environment. Secondly, and specifically for Malta, we also have high traffic congestion levels on the roads and an increasing need for parking areas."

At 660 vehicles per square kilometre, Malta ranks way above other EU member states in terms of car congestion, and is second in the world only to Singapore.

Mr Fenech is fully aware that the matter is sensitive and any changes will therefore need to be phased in over two to three years. And credits would need to be introduced so that car owners who paid registration tax are not taxed twice.

"We need to ensure that the operators are sufficiently well advised on how the changes will be implemented to ensure that second hand car dealers, in particular, do not end up with a lot of unsold cars once the changes are implemented."

Mr Fenech dismisses claims that such a revision could potentially lead to a reduction in car sales. The objective of the reform is to encourage people to shift to cars that pollute less and therefore cost less to buy and run.