Auto Industry Perplexed Over Govt Decisions

Hardly 6 months ago the government relaxed various duties & taxes on the auto sector which resulted in a decrease in prices of locally assembled vehicles. However the benefit to the end-user lasted for a few months only as in November automakers started to give a massive push to prices citing increasing freight charges & depreciating currency value as the main reasons.

But just like public, the auto sector isn’t too happy with the government for making constant shift in policies. The latest comes in form of supplementary financial bill (aka mini budget) in which government has increased the federal excise duty (FED) on local assembled vehicles of 1,000-2,000cc from 2.5% to 5%, and from existing 5% to 10% on vehicles with engine displacement exceeding 2,000cc. FED on local assembled double cabin vehicles witnessed a raise from 7.5% to 10%. General sales tax (GST) on automobiles with engine capacity between 850cc and 1,000cc had been increase from 12.5% to 17%.

Related: Car Prices to Increase Again Amid Supplementary Finance Bill

All this will translate into a price jump of Rs 62,000 to up to Rs 195,000 in locally assembled vehicles. Besides, Advance Tax on cars up to 1,000cc had been jacked up from Rs 50,000 to Rs 100,000 followed by an increase of Rs 200,000 from Rs 100,000 on 1,000cc-2,000cc and Rs 400,000 from Rs 200,000 on 2,000cc above engine capacities. Furthermore, FED on imported vehicles of 1,000-1,799cc has been increased from 25% to 30% followed by a jump to 40% from 30% in vehicles with more than 3,000cc engine displacement.

financing bump

While the auto industry executives were analyzing the possible fall in sales given State Bank’s decision to curb auto financing coupled with rising interest rates, the mini-budget proposals to raise duties and taxes on locally assembled vehicles have posed a new challenge for them. According to the CEO of Lucky Motor Corporation (LMC), Asif Rizvi while speaking to Dawn said that the government has changed taxes and duties 7 times in the last 3 years. He lambasted that the dream of a long term auto policy with the assurance of it remaining unchanged has yet to become a practical reality. Asif Rizvi said:

“How can an important local industry operate efficiently with such instability in the duty and tax structure that shakes the confidence of investors as well as customers. Our auto industry policy is vision-less which does not promote confidence towards making future investment plans — always fearing an unexpected change from the government.”

Related: Pakistan Auto Industry – What Is Going On…?

According to Asif Rizi, when the prices came down after cuts in taxes and duties in Budget 2021-22, consumers expedited their buying resulting in creating a demand and supply gap in delivery and vehicle manufacturing due to low stocks of parts in the assembly units. With already soaring demand in hand, the government has now increased taxes and duties to cause an upward price spiral in vehicles to compress demand amid the presence of higher auto parts stocks. He added:

“I fail to understand the logic of regulating vehicles’ demand through raising or lowering tariffs. The government should focus on generating its taxes through larger volumes, thereby also increasing employment, localization and utilization, and providing growth to the economy, rather than putting higher taxes on lower suppressed volume.”

Asif Rizvi- CEO Lucky Motors

Asif Riazi was also surprised over the government’s inability to foresee an impact on the country’s current account deficit when auto industry taxes were reduced only 6 months ago to create demand. This inability to foresee even 6 months out yet again puts the industry in a tailspin. The government has recently unveiled a new Auto Industry Development and Export Policy (AIDEP) 2021-2026 to boost localization and enhance vehicles’ exports, but the policy lacks any thought behind how to increase localization without a volume critical mass and locally produced raw materials. Sadly, there is no vision towards making cars that are truly localized and “Make in Pakistan”, he added.

Related: The Costly Auto Industry of Pakistan- Destination Unknown (Part 1)

The CEO of Indus Motor Company (IMC) Ali Asghar Jamali was also surprised over the government’s approach to control current account deficit by squeezing demand in the auto sector. He said recent measures will slow down the sale of vehicles and the second quarter of 2022 will give a true picture of their impact.

Ali Asghar Jamali- CEO Indus Motor Company

About 40% of vehicles sales in Pakistan are through auto financing. If State Bank’s move to restrict auto financing coupled with rising interest rates and mini budget measures manages to slow down auto financing by 20% then it will help bring down auto sector related imports by $300-400 million per year. “This little saving is peanuts in the overall import bill whose main driving forces are food items, petroleum imports and vaccines for Covid-19,” Jamali said. Furthermore, he added that tightening demand of the auto sector may put jobs of workers at stake besides closing doors for new job avenues in the auto sector under AIDEP 2021-2026.

Related: The Costly Auto Industry of Pakistan- Destination Unknown (Part 2)

Director Mehran Commercial Enterprises, Mashood Ali Khan said the massive fall in rupee against the dollar has made the cost of imported parts soar while the measures taken in the mini-budget will badly affect the prices of vehicles. “Volume of car sales through auto financing will drop due to rising interest rates,” he anticipated. This environment is creating uncertainty which is really bad for domestic and foreign investors. Although the government has assured that all incremental measures taken in the mini-budget will be reversed in June 2022, the industry is very skeptical, he said.

Full Story: Dawn

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