The heavy taxation measures of the budget will have a significant impact on consumers

Jul 13 - 19, 1996

The automobile industry in the country has not been developed according to the country's demand for road vehicles. Several industrial units were set up but vanished after some time due to unplanned development and manipulations of the foreign principals on whom the locals were very much dependent.

There has been some encouraging development in the recent years. According to some reports, more than 80 billion rupees have been invested in the industry, particularly its mechanical equipment sector where more than 175,000 workers are employed. The output of the industry has been fluctuating from year to year, though it has been on the increase during the last few years.

The Players

National Motors, a public limited company which is said to be the pioneer in the industry, came into existence in the 50s. Established by General Motors of USA in 1953, National Motors assembled passenger cars as well as commercial vehicles carrying General Motors brands such as Bedford, Vauxhall, Chevrolet and Holden before being bought over by Pakistani entrepreneurs. It was subsequently nationalised and was once again bought over by Ghandhara Industries Limited, the initial owners.

After that, others like Hinopak Motors, Naya Daur Motors, Pak Suzuki Motors, Sindh Engineering Limited, an arm of Pakistan Automobile Corporation and assemblers of Mazda Pickups, Indus Motors, assemblers of Toyota cars and still others like Honda Atlas have come to enter the local market. A regular car industry started in the country in 1983 with the introduction of Suzuki car with the commitment of providing an affordable car for the middle income group which constituted the larger segment of the society.

Like other industries, the development of automobile industry, too, depended on persistent government policies. Any sudden changes in the official priorities certainly affects the long-term planning of an industrial sector.

This is particularly true of the automobile industry where production units require heavy amount of capital investment and long-term commitment.

Different policies were introduced by different governments at different times but the latest one — imposition of ban on import of used cars — was introduced in February 1994 on the insistence of local assemblers that such imports were killing the local industry. on their part, they assured the authorities that there would be no increase in prices.

Things have never been the same again as the assemblers increased their prices more than six times since then on the pretext of rupee devaluation, inflation, etc. (Since then, the prices (of automobiles) have been increased six times with a total average of about 75 per cent over the prices — PAGE issue No. 16, April 20-26, 1996)

Ever since the announcement of this year's budget, increase in the prices of passenger cars and other vehicles is the most favourite topic of discussion in many circles including the industry itself. The local manufacturers keep blaming the policy-makers for imposing heavy taxes and duties; the government keeps shrugging its shoulders which means they cannot help it, while the overall result is a vastly shrunken market compared to last year which, in turn, means much lesser development in the industry as a whole.

The automobile industry which has been in operation for more than a quarter of a century now, is still unable to solve its own problems due to what the players in the industry called 'inconsistency' of the government policies.

The government's taxation policy, too, has been in question from time to time since it appears that whatever government comes to power uses the taxation policy as a tool to subjugate the industrialists.

In 1995, the formulas for taxes on import of completely knocked down (CKD) and completely built-up (CBU) units of vehicles were simplified. All the previous import taxes and duties were rolled into one import duty of 30% on CKD kits as well as assembled vehicles. A sales tax of 15% is charged on the total of the cost, insurance and freight value and import duty. The import duty charged on CBUs starts at 100% and increases with the engine size for passenger cars while in the case of commercial vehicles it is fixed at 60%. For taxation purposes, the CBU passenger cars have been categorised into four groups. Those below 1000cc are in one group, those in the 1000cc and 1300cc bracket constitute another group while those in 1300cc to 1800cc are grouped together separately and those above 1801cc are placed in yet another category.

The whole industry is now facing uncertainty as a result of introduction of the new taxes in the budget which have been levied according to the new policy. The sales tax on CBU has been increased to 18% while the 10% regulatory duty stays. In addition to that, a Capital Value Tax (CVT) of 4% for those who have already acquired a National Tax Number (NTN) and 10% for those without NTN has been imposed, according to market sources.

The CVT rates recently introduced to the automobiles sector were also categorised on the basis of tax-payers and non-tax-payers and according to the capacity of the vehicle. A non-tax-payer planning to buy a car of upto 800cc will have to pay 2.5% while tax-payers or those in possession of NTN are exempted in this category. Vehicles of upto 1000cc are subjected to 7.5% CVT for non-tax-payer while tax-payers are still exempted from this tax. Vehicles falling between 1000cc and 1300cc are subjected to 10% Capital Value Tax in case of non-tax-payers and two per cent for tax-payers. A 12.5% CVT is to be paid in case of non-tax-payers and four per cent in case of tax-payers in the 1300cc-1600cc cars category whereas for vehicles above 1600cc, the CVT is fixed at 15% for non-tax-payers and 6% for tax-payers.

The result of this increase in prices and the introduction of new CVT will be that the consumers will have to pay for it again in terms of another increase in prices, since the latest price increase was just before the budget when the prices were increased in the name of rupee devaluation.

Sources at one of the manufacturers were quoted as saying that the increase was imminent.

But according to Yousuf Shirazi, the chairman of Honda Atlas Cars, assemblers of Honda cars in Pakistan, "The budgetary measures are expected to push inflation upward and consequently push the cost of production which would in turn increase the prices of different models."

Though the City's car assemblers, like Toyota, KIA and Honda are yet to announce officially the increase in their prices, prices in the car market have already been pushed up by three to five percent. Sources from the Indus Motor Company, assemblers of Toyota cars and pick-ups in the country are quoted as saying that the company has already increased the prices of its vehicles (Toyota range) by nine percent.

Analysts in the market are of the opinion that the increase in prices would not hurt the assemblers as such because as usual it will simply be passed on to the consumers and they (the consumers) cannot back out at this stage because at least some of these assemblers, if not all have got cars booked for the next six to eight months and, therefore, production would go ahead in any case.

The only new entrant which may have to suffer due to these taxes is going to be Ghandhara Nissan Limited, assemblers of Nissan range of trucks in the country who are now coming in with Nissan Sunny cars. Though all efforts to get a word from the company proved futile, sources in the market indicated that the company is set to launch the first range of Nissan Sunny cars in the city in October this year. The Nissan 1.4 Diesel engine which is expected to roll out of the production line then, may not find a happy market to settle in. Though the company's plan, sources in the car market said, is to follow the 1.4cc with another 2.8cc diesel engine that will compete directly with Toyota's 2.0cc diesel engine that is already in the market, it may now look like more of a dream than reality.