KARACHI: Yielding to pressure from luxury automakers, the government has withdrawn the proposal to impose a 25 per cent sales tax on hybrid electric vehicles (HEVs) and restored the existing 8.5pc in the Finance Bill 2024, resulting in a loss of a whopping Rs30 billion to the national exchequer on an annualised basis.

While wrapping up discussions on the budget 2024-25 in the National Assembly on Tuesday, Finance Minister Muhammad Aurangzeb surprised everyone by announcing that the current reduced sales tax rate would continue to apply to HEVs mentioned in Schedule 8 and Serial No 73.

Market experts believe this GST concession will grow to Rs50bn next year as more assemblers gear up to roll out hybrid models.

The Ministry of Industries and Production (MoIP) pleaded the case on behalf of hybrid car makers for reversal of the proposed hike in the GST despite the fact that the auto assemblers have recently taken the MoIP and other relevant ministries to court over the issue of exporting vehicles and parts.

Sticks to taxing essential food, healthcare, equipment in FY25

The Engineering Development Board (EDB) and MoIP seem confused. They had requested the Finance Division and FBR to restore 8.5pc GST on HEV instead of 25pc, citing this as a contradiction to the commitments made in AIDEP 2021-26. In contrast, they failed to make Japanese auto assemblers fulfil export targets under the AIDEP.

The auto industry is in court against MoIP and other relevant ministries, making it more surprising why the government supported the hybrid vehicle makers’ demand for a GST concession — remarkably when they are increasing taxes on essential commodities.

Based on the prices of hybrid vehicles, previously, the government was charging 8.5pc as against 25pc GST, making it equivalent to Rs1.5 million to Rs2.2m tax concession per hybrid vehicle sold, which looks massive considering the country’s financial standing.

On top of the reduced GST, there are customs duty concessions on hybrid parts worth almost Rs1m, making a total concession of nearly Rs3m per car.

Despite huge GST concessions, these hybrid vehicles are expensive in view of price ranging from almost Rs10m to Rs15m. Tax authorities believe that the GST concession must be withdrawn as rich and well-off customers can easily pay the GST. The government should avoid providing any more subsidies to the privileged class.

They believe it will be politically damaging for the government if it retracts its decision to raise GST on HEVs under pressure from automakers, particularly at a time when the IMF is putting extra pressure on even taxing essential commodities like packaged and infant milk, medical care and equipment, etc.

As per AIEDP 2021-2026, the mandatory export target was zero per cent in FY22 which was then raised to 2pc for FY23, 4pc in FY24, 7pc in FY25 and 10pc in FY26.

Earlier, while failing to pursue the export target, the EDB had refused to extend the petitioners’ manufacturing licences and withheld their respective annual import quotas.

Published in Dawn, June 26th, 2024