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Pakistan has huge automobile potential and set to see strong auto demand

PAMA proposes removal of anomalies in SRO 499 to encourage documented sector sales of HEV

Pakistan is one of the last remaining large populations to go through rapid growth in motorization despite projected GDP ranking of 24th in the world. Currently, Pakistan has 16 vehicles per 1000 people and per capita income is $1400, which is leaving it behind against India (18 vehicles), Philippines (30 vehicles), Indonesia (69 vehicles), Thailand (206 vehicles), and Malaysia (361 vehicles).

“Pakistan’s economy is shaping up and recent testimonials on the country’s economy by renowned world institutes confirm that Pakistan is the 3rd fastest growing economy,” said Aamir Allawala, former chairman PAAPAM (Pakistan Association of Automotive Parts & Accessories Manufacturers).

Moreover, he added, upcoming investment of $54 billion in the shape of China Pakistan Economic Corridor (CPEC) will have infrastructure development and stimulation of economic growth, while it would increased consumer buying power, which in turn would result in growth in auto demand.

According to Aamir, the industry has potential but it has long way to go due to lower per capita, which is significantly lower than other regional countries. This is in spite of the fact that three out of top 15 automakers in the world are present in Pakistan and many latest vehicles are expected to come to Pakistan by 2019. He said that the local auto industry has the investment of Rs 140 billion with 2.22% contribution to GDP and the contribution of Rs 120 billion to national exchequer.

“Pakistan can learn from Indonesia since both the countries have similar factors but Pakistan is way behind in motorization,” he said. He added that Indonesian automobile industry achieved growth from 379,000 vehicles in 2000 to 1,298,000 vehicles in 2014 and this growth was triggered by economic stability and young population. “Pakistani auto industry has recovered from the 2010 crisis so it can achieve the same growth in next few years,” he added.

According to Japanese International Cooperation Agency’s estimation of Pakistan auto market potential, approximately 480,000 new vehicles per year could be sold in a country of the scale of Pakistan economy (GDP and population). “But currently not even half of the estimated vehicles are sold every year in the country,” he added.

He said that local market size growth could reach to 500,000 vehicles by 2020 as economies of scale will enable long term investments. “The industry (OEMs and Vendors) are investing in capacity enhancement though it requires long term, predictable policy framework,” he said.

Aamir said that more auto production leads to more localization of parts, more foreign and local investment, employment generation, and more government revenues. “The government’s support through stable policies would help the local auto sector increase its production and increase motorization in the country,” he added. He said, ‘Auto policy is bearing fruits, new players are eager to enter the market which will not only result in growth of industry but more choices for customers. However, Government needs to be very cautious and ensure continuation of policies to provide predictable environment as we are still paying for deviation from policies in past such as opening used cars import,’ he concluded.

Moreover, in its budget proposal Pakistan Automotive Manufacturers Association (PAMA) has urged the government to remove the anomalies in SRO 499 which puts documented taxpaying industry on disadvantage. The proposal suggests that SRO 499 should be restricted to new Hybrid Electric Vehicles (HEVs) only and incentive should be extended to OEMs at retail stage by changing the provisions of SRO499 to encourage documented OEMs.

The government extended duty and tax concessions on the import of Hybrid Electric Vehicles (HEV) in June 2013 when the global oil prices was at all times high at US$ 100 per bbl. At that time, Pakistan’s trade deficit stood at US$ 15.3 billion and the contribution of oil imports within the overall import bill was 35%. The total average HEV imports were at less than 2,000 units per year at that time.

Last year only, close to 11,000 hybrid vehicles were imported costing approximately US$ 160 million which was sent out through illegal channels which State Bank has also acknowledged as the official import data doesn’t reflect the amount sent through official banking channels. Realizing the damaging impact on economy, SBP has now proposed certain measures to curb the illegal used car imports under Transfer of Residence/Personal Baggage/Gift schemes including certificate from Pakistan Embassy in the country of vehicle export certifying that the overseas Pakistani is indeed relocating back to Pakistan and has sufficient financial resources earned legally to buy the vehicle being exported under any scheme. This is in addition to a moratorium on the transfer of such used imported vehicles within 2 years of imports so as to curb their illegal trade.

Industry experts highlighted that SRO 499 never served its purpose as oil prices went down drastically from $ 100 per barrel in 2013 to $50 per barrel to date. Compared In 2013 the oil import bill was $14bn, in 2016 it was $8.3bn and YTD 2017 its $ 6.8bn. Instead, it only helped used car importers to dent local economy and national exchequer.

The extent of damage to economy is huge as during last 4 years, close to 40,000 HEV have been imported into Pakistan mostly under various used car schemes costing the economy approximately. US$ 500 million.

It is pertinent to note here that the market share of 2major OEMs in the HEV CBU sales is negligible so majority of these vehicles plying on our roads are up to 3 year/ 90,000 KM used vehicles without any warranty or after sales support which further put into question the efficiency of these vehicles to deliver fuel savings.

On the other hand OEMs share in HEV sales is almost nonexistent, mainly because the law, under which concessions are allowed, doesn’t give level playing field to documented OEMs who provide full warranty and after sales support for new HEV. The provisions of SRO 499 only extend duty/tax relief at import stage and not on subsequent retail stage. This anomaly in SRO 499 results in OEMs paying full 17% GST at retail stage in addition to income tax compared to very low fixed duty/taxes being paid by used car importers with absolutely no income tax as their sales is not documented. In addition to significant lower duty/taxes fixed in SRO 577, HEV gets 50% reduction on applicable duty for upto 1800 cc and up to 36% depreciation (1% per month) due to age – taking the total concession up to whopping 68%. There is no way that documented OEM can compete with such discrimination on the applicable duty/taxes.

Industry has submitted proposal to FBR who has assured industry to consider the proposal and remove anomalies.

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