While the auto industry executives were analysing 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.
The government has increased the federal excise duty (FED) on locally-made vehicles of 1,000-2,000cc to five per cent from 2.5pc, followed by a hike to 10pc from 5pc on vehicles that are more than 2,000cc. FED on locally-made double cabins vehicles had been raised from 7.5pc to 10pc. General sales tax (GST) on automobiles with engine capacity between 850cc and 1,000cc had been enhanced to 17pc from 12.5pc. This will translate into a price jump of Rs62,000-195,000 in future in the locally assembled vehicles.
Besides, advance Tax on up to 1,000cc had been jacked up to Rs100,000 from Rs50,000 followed by Rs200,000 from Rs100,000 on 1,000cc-2,000cc and Rs400,000 from Rs200,000 on 2,000cc above engine power.
FED on imported vehicles of 1,000-1,799cc has been increased to 30pc from 25pc followed by a jump to 40pc from 30pc in vehicles that are more than 3,000cc.
If rising interest rates and mini budget measures manage to slow down financing by 20pc then it will help bring down auto sector imports by $300-400m — peanuts in an import bill of around $60bn
In the last week of September 2021, the State of Pakistan (SBP) had slashed the maximum tenure of auto financing from seven years to five years besides raising down payment for auto financing to 30pc from 15pc and reducing maximum tenure for a personal loan from five years to four years.
The maximum debt-burden ratio allowed to a borrower had been decreased from 50pc to 40pc while the overall auto financing limits availed by one person from all banks/development finance institutions, in aggregate, can not exceed Rs3 million, at any point in time. SBP’s prudential regulation for consumer financing is not applicable on locally-manufactured cars below 1,000cc and locally-manufactured electric vehicles.
The CEO of Lucky Motor Corporation Limited (LMCL), Asif Rizvi said the government has changed taxes and duties “seven times” in the last three years. “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,” he said, adding that the dream of a long term auto policy with the assurance of it remaining unchanged has yet to become a practical reality.
“Our auto industry policy is visionless which does not promote confidence towards making future investment plans — always fearing an unexpected change from the government,” he said.
When the prices came down by Rs62,000-400,000 after cuts in taxes and duties in Budget 2021-2022, 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, Mr Rizvi said.
“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, localisation and utilisation, and providing growth to the economy, rather than putting higher taxes on lower suppressed volume,” he said.
He expressed surprise over the government’s inability to foresee an impact on the country’s current account deficit (CAD) when auto industry taxes were reduced only six months ago to create demand. This inability to foresee even six months out yet again puts the industry in a tailspin.
The price cut in vehicles by the government in Budget 2021-22 barely lasted four months before all the assemblers had increased prices in November by five to 10pc, citing rising freight rates, logistics issues and rupee devaluation against the dollar. A second phase of price increase is imminent as the rupee has devalued further since November and freight has further gone up effective January 2022, he feared.
Mr Rizvi said under the previous successful Auto Policy 2016-2021, some 12 assemblers from Korea and China mainly had landed in Pakistan with an investment of over one billion dollars but many of them are operating on very low volume as no policy or regulation was devised to balance the entry of new entrants with the country’s demand and supply situation.
The government has recently unveiled a new Auto Industry Development and Export Policy (AIDEP) 2021-2026 to boost localisation and enhance vehicles’ exports, but the policy lacks any thought behind how to increase localisation without a volume critical mass and locally produced raw materials. Sadly, there is no vision towards making cars that are truly localised and “Make in Pakistan.”
The CEO of Indus Motor Company (IMC) Ali Asghar Jamali said recent measures will slow down the sale of vehicles and the second quarter of 2022 will give a true picture of their impact. He expressed surprise over the government’s approach to control CAD by squeezing demand in the auto sector. In the country’s overall import bill of around $60bn per annum, the share of the auto sector is just $2.5bn on account of imports of new vehicles and completely knocked down kits.
About 40pc of vehicles sales in Pakistan are through auto financing. If SBP’s move to restrict auto financing coupled with rising interest rates and mini budget measures manages to slow down auto financing by 20pc 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,” Mr Jamali said.
However, 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. The previous auto policy has created over 100,000 jobs in the new and existing auto assembling units, vending units, distribution networks, transportation side etc, says the IMC CEO.
Director Mehran Commercial Enterprises, Mashood Ali Khan said this year will be exceptional for the auto engineering sector as 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.
Director Prince DSFK, Sohail Usman, said the government had earlier hinted at a complete ban on the import of new vehicles to give a free hand to new entrants to sell their products and control the import bill, but the government had come out with the imposition of FED on imported as well as locally made vehicles.
Published in Dawn, The Business and Finance Weekly, January 10th, 2022