AUTO INDUSTRY CONTINUES TO GROW

The government finally fell prey to the negative propaganda of roadside dealers, unauthorized importers of second hand cars and investors

By AMANULLAH BASHAR
July 18 - 24, 2005

The current financial year 2005-06 was in fact a paradigm of situation prevailing in the auto sector, though it continues to grow yet it seems to have more leanings towards imports.

Actually, it was the federal budget, which in a way was a big surprise for the auto industry. After giving consistent policies for four years, the government finally fell prey to the negative propaganda of roadside dealers, unauthorized importers of second hand cars and investors. The consistent policies of the government in the past four years had led to a boom in the auto industry and this important sector attracted a lot of local and foreign investment.

Further, the growth in the local industry had passed on many benefits to society in the form of increased employment, revenue to the GoP, and savings of foreign exchange. In the new budget instead of furthering growth of the auto sector the government has surprisingly come up with policies that will have a very negative impact on the industry. Some industry analysts even fear that the industry could even experience a total collapse owing to these new policies announced in the budget.

Below are some of the anomalies in the Federal Budget 2005-06 that can seriously damage the local automobile manufacturing industry.

(1) Increase in depreciation rate on import of used cars from 1% per month to 2% per month

On the evening of 6th June 2005 the Central Board of Revenue, Ministry of Finance, issued SRO No. 577(1)/2005 following the 2005-06 Federal Budget announcement. The SRO stated an increase in the rate of depreciation from 1% per month to 2 % per month on used cars below 1800 cc imported into Pakistan. Surprisingly, the Minister of State in his budget speech did not announce this change.

As a consequence to this increase in the rate of depreciation, the import of used cars will now be subject to only a nominal rate of duty of 25% for cars up to 1500cc and as little as 37.5% on other cars. This will make the imported used cars cheaper than the locally manufactured cars. Local manufacturers of cars are required to pay CKD (Completely Knocked Down) duty at 35%, are required to achieve a substantial local content, and also include in their selling prices all costs including mark-up and 15% sales tax thereon. All these transactions are part of the documented economy.

According to estimates, with the increase in depreciation rate, a two year old 800 cc car imported at approximately Rs. 115,000 (Yen 180,000) will attract a duty of Rs 125,000 ( $4000 x .52 = $ 2080), thus costing Rs 240,000 which is considerably less than a locally manufactured car of similar capacity.

Similarly, a two-year old 1000 cc car imported at approximately Rs. 140,000 (Yen 250,000) will attract a duty of Rs 156,000 ($5000 x .52 = $ 2600), thus costing Rs 296,000 which is again considerably less than a locally manufactured car of similar capacity.

Again, a two-year old 1300 cc car imported at approximately Rs. 225,000 (Yen 400,000) will attract a duty of Rs 312,000 ($10000 x .52 = $ 5200), thus costing Rs 537,000 which is again considerably less than a locally manufactured car of similar capacity.

(2) Reduction in Customs duties on Import of CBU (new) cars

The duties on import of new cars have been further reduced in the budget for financial year 2005-06. These duties had already been substantially reduced in the last 2004-05 budget. The following table illustrates the change in CBU (Completely Built Up imported vehicles) duties over the last 5 years.

NEW PASSENGER CAR

CUSTOM DUTY

 

2001-02

2002-03

2003-04

2004-05

2005-06

1801 cc ~

250%

200%

150%

100%

75%

1601~1800 cc

150%

125%

125%

80%

65%

1501~1600 cc

150%

100%

100%

70%

 

1301~1500 cc

150%

100%

100%

 

50%

1001~1300 cc

120%

100%

100%

50%

 

~1000 cc

100%

75%

75%

50%

 

From the above table it is very clear that during the last five years; duties on import of new cars have been reduced by almost three times and by more than half in the last two years only. This reduction in duty is bound to have a negative impact on local automobile manufacturing and does not augur well for increasing foreign investment in this sector in the country.

This increase in depreciation coupled with reduction in CBU duties will cause massive inflow of used cars into Pakistan. Through this step, the exporting countries will be benefited with increased exports while the country will lose billions in taxes, import substitution and foreign exchange savings.

The above budget proposals will only turn the proverbial clock back. As such, the automobile industry is very concerned about the substantial investments already made in capacity enhancement. Both auto manufacturers as well as vendors are now apprehensive also about their future plans for capacity building.

If we compare our used car policy with that of our neighboring country, India, we will very soon realize why Indian automobile industry is now one of the largest in Asia.

Indian policy on import of used cars - an example

Indian car manufacturers are protected through tariff as well as non- tariff barriers

*Imported vehicles need to get tested by testing agencies set up in India to ensure that poor quality; fuel inefficient old vehicles do not enter the country.

*Registration charges for imported vehicles are higher compared to locally manufactured vehicles

*Only right hand drive vehicles with speedometer in Km/hr reading and signaling system for Keep Left traffic system are permitted in India

*Other Non Tariff barriers include conditions such as, cars shall not be more than three years old from the date of manufacture, importer has to submit a pre-shipment certificate to the effect that vehicle conforms to regulations specified in the Motor Vehicles Act 1988 of India

*The importer also has to submit a pre-shipment certificate to the effect that the vehicle conforms to the Original Homologation certificate issued at the time of registration.

A comparison of duty structure of CBU and CKD between Pakistan, India reveals that Pakistani auto industry enjoys the least duty protection in the region.

COMPARISON OF DUTIES & TAXES IN AUTOMOBILE SECTOR

CKD DUTY

INDIA

PAKISTAN

Customs Duty

*20%

35 %

Sales Tax/VAT

*16%

15%

Total

36%

50%

PARTS- FOR MANUFACTURERS

Customs Duty

20%

35%

Additional Customs Duty

16%

-

Sales Tax

-

15%

Income Tax

-

6%

Total

36%

46%

CBU

Customs Duty

105%

20% - 75%

Additional Customs Duty

24%

 

Sales Tax

 

15%

Income Tax

 

6%

Calamity contingent duty

1%

1%

Cess

.125%

 

Capital value tax

 

Up to 7.5%

Total

145.125%

 

USED CARS

Customs Duty & other duties

180%

2% per month depreciation allowed

*As per Indian localization policy where car manufacturers are required to localize any one of the following 7 assemblies i.e. i) Engine Assembly ii) Body/Cab iii) Chassis iv) Gear Box v) Transmission System vi) Axle Front & Rear vii) Suspension.

Industry experts fear that the recent budgetary measures could result in a situation similar to the one created by the Taxi Scheme of the early nineties that allowed zero rated import of taxis resulting in massive decline in sales of locally manufactured vehicles and complete cessation of investment. Before the announcement of the Taxi Scheme, the industry had reached production figures of 65,000 units/year. After the taxi scheme, production reduced to 45,000 units/year and remained at around that level for more than 7 years. That was only due to consistent policies of last 4 years that the local car industry had recovered to achieve growth which has crossed 150,000 units/year in 04-05.

The Budget 2005-06 has once again put the auto industry in a difficult situation, as the GoP is again playing with duties. These budgetary measures will stop the investment by OEMs and vendors. There is no long-term auto policy for the auto sector. Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) highlighted this point at a recent press conference. The association represented the whole auto industry and expressed great deal of concern over the change in policy.

The increase in depreciation rate and reduction in CBU import duties will have a drastic negative affect on employment, revenue to GoP and transfer of technology. Almost all auto manufacturers in Pakistan have joint venture projects with foreign affiliates. Not only do the foreign partners provide foreign exchange equity, but are also responsible for transfer of technology. Many of them are responsible for Technical Assistance Agreements (TAA) with foreign component manufacturers. All of the above has been jeopardized by recent measures in the budget 05-06. These measures render Pakistan a less lucrative investment opportunity compared to other countries in the region that have stable long term, investment friendly policies for the auto sector.

Contrary to the government's expectations of a positive impact through duty reduction on import of reconditioned cars, Pakistan has already begun to face the aftermath of the government's inconsistent policies. The government should immediately reverse its decision of increasing depreciation rate on used cars and should adhere to its strategy of long-term policymaking and not pay any heed to the second hand car lobby, which is always looking to make a quick buck at the cost of national interests.

As one industry expert said, it is for the government to choose if they want Pakistan to develop a strong industrial base and make cars locally, or convert the Pakistani market into an international dumping ground for used and reconditioned vehicles. In the long term, actually even in the short term, the latter is not in the interest of either the consumer or the country.