A SELF-DEFEATING NOTION FOR THE AUTO SECTOR

Currently as many as around one million people earn their livelihood from the domestic auto industry

By T.B. HISAAM
July 12 - 18, 2004

The revision of duties in relation to automobiles, announced in the Federal Budget 2004-05 by Shaukat Aziz, Federal Minister for Finance and Economic Affairs has come as a blow to the local auto industry. The budget has declared a downward revision of Customs Duty on imported CBUs along with increasing import duties on sub-assemblies, components and parts used in manufacturing and assembly of vehicles.

These measures come as a major threat to the auto sector as they would increase the cost of the locally produced vehicles and at the same time allow imported vehicles to enter the market at lower costs. The drastic effects of this inconsistency in government policies is expected to erode the protection to domestic industry to ineffective levels.

Investment in the auto industry is estimated at Pak Rs. 52 billion, of which Indus Motors' share is Rs. 2.4 billion; Pak Suzuki's share is Rs. 3 billion; Honda Atlas' share Rs. 1.053 billion; and Dewan Faruque Motors' share Rs. 1.8 billion. Other than the share of these major car manufacturers, investment in vendor industry stands at Rs. 35 billion; in tractor manufacturing at Rs. 3.5 billion; motorcycle manufacturing at Rs. 3 billion and other commercial vehicle manufacturing at Rs. 2 billion. Had the environment remained conducive, investment in the industry was expected to reach approximately Rs. 93 billion by 2006.

However, the inconsistency in policies is evidently penalizing towards the factors that have contributed to Pakistan's economic revival. The policy is expected to lead to roll back in localization programs as it carries no incentive for OEMs and vendors.

During the second half of the 90's, similar inconsistencies and frequent policy changes affected the market negatively and production figures remained stagnant at under 50,000 units annually. It was a result of consistent government auto policies during the last three years that spurred market growth. Indus Motors, with an installed capacity of 26,000 units, had a production that increased from 13,200 in 2000-01 to approximately 20,500 in 2002-03 and was projected to reach 32,000 units by end of 2004. Pak Suzuki, with an installed capacity of 50,000 units, went from a little over 19,000 in 2000-01 to over 38,650 in 2002-03 and was projected to reach 50,000 units by end of 2004. Honda Atlas, with an installed capacity of 6000 units, increased from 5800 in 2000-01 to approximately 8400 in 2002-03 and was projected at 12,000 units by end of 2004. Dewan Faruque Motors was also expected to reach its full capacity of 20,000 units in the current fiscal year.

Needless to say, these measures carry a self-defeating notion for the auto sector. The proposals made will put all investment and expansion proposals and plans on hold and will grossly un-nerve investors.

It is estimated that currently as many as around one million people earn their livelihood, either directly or indirectly, from the domestic auto industry and all its allied industries. It was estimated that the industry would create a further 350,000 job opportunities, a big boon to a country where unemployment figures are presently at 7.8 per cent. Under the current scenario, these would be shelved as planned expansion by local OEMs comes to a standstill.

The duties on some of the categories being locally manufactured have been lowered by 50%. The proposed tariffs on import of new cars will give Pakistan the distinction of being a country with the lowest tariffs on cars in the entire South East Asia. To consider as a case in point, duties & taxes on CBUs alone in India stand at 146.13%.

DUTIES & TAXES ON CBUS IN INDIA

Customs Duty

105%

Additional Customs Duty

24%

Sales Tax

16%

Commodity Tax

Calamity Contingency Tax

1%

Cess

0.13%

Income Tax

-

Govt Tax

CVT - other than commercial vehicles

Total

146.13%

Though the budget clearly strikes at the root of the Auto Industry's thrive, it has not spelt out any rules to govern import of used cars. Under current rules there is a maximum of 50% depreciation allowance given on two-year-old vehicles. Application of this rule in conjunction with the newly proposed tariff will render the protection level to the local industry to a negative one. To consider as an example, duty on vehicles up to 1300 cc has been reduced to 50% whereas duty on CKD of 1300 cc is 35%. On application of 50% depreciation allowance duty on finished product that comes under transfer of residence and personal baggage, this becomes 25% while input materials remain at 35%.

The restriction on local manufactures (OEMs) of selling vehicles only to customers possessing National Tax Numbers (NTN) and the requirement of submitting details of all such transactions and customers to CBR is an unworkable one. While no such requirement has been proposed for imported vehicles, this clearly proves the bias of the budget against the local industry. This proposal coupled with the increase in cost of inputs due to the proposed upwards revision of customs duty on sub-assemblies, components and parts will put an immediate hold on sales of local vehicles.

The measures taken so far reveal that the government has taken its decisions keeping in view the consumers' interest, instead of the national one. It is proven that the local auto sector has not been taken on board, in the least for consultation even before finalizing the policies that govern the root of their very existence.

Protection to the local industry has been rendered ineffective and if the rules governing import of used cars remain vague the domestic industry will have no choice but to shut down assembly and localization operations.

GoP should immediately announce measures to discourage imports of used cars as in the case of India and Thailand where there are compound tariffs of 140 and 128 per cent respectively on used cars, a comprehensive policy may be formulated in conjunction with the industry.