IMPORT OF CARS

Government bereaved due to under invoicing

BY SABEEN IBRAHIM
Apr 10 - 16, 2006

Encouraged by reduction in duties of import of cars in Pakistan as compared to other regional countries, local manufacturers are now importing cars with no value addition or l assembly from local resources.

This is an indication of a CKD manufacturer opting for CBU business over local manufacturing. If other manufacturers follow, there will be a considerable loss of jobs, loss of revenue for the government and the local auto parts industry will be affected.

What eventually forms the basis of such business decisions is the consistency in government policies. If policy changes render mammoth projects such as those of the auto manufacturing economically non-viable, the reason for sustaining investment, expansion, employment, technology transfer, human resource training and production are annulled.

Looking at markets that possess similarities with Pakistan, we find that Indian car manufacturers are protected through tariff as well as non- tariff barriers. Imported vehicles are evaluated by testing agencies in India to ensure that poor quality and fuel inefficient old vehicles do not enter. Furthermore, registration charges for imported vehicles are higher compared to locally manufactured vehicles. Other non-tariff barriers include conditions such as rejection of cars that are more than three years old from the date of manufacture and submission of pre-shipment certificates by the importer.

The table below shows a comparison of duties and taxes in Pakistan, India and Thailand. It is evident that the gap between CKD and CBU duties in Pakistan is the lowest when compared with the other countries although both India and Thailand have substantially more mature, developed and larger auto and engineering industries and the volumes of their markets are many times larger than Pakistan.

IMPORT OF CARS FAILS TO REDUCE PRICES OR DELIVERY TIMES:

With the sharp rise in demand for automobiles, car manufacturers have undertaken colossal expansion plans. It has to be understood that increase in production capacity requires heavy investment, transfer of technology, hiring and training of additional manpower, product development and trials etc. The previous, current and future production capacities of the four major car manufactures, according to sources direct from the industry (and also quoted by PAMA at various forums) are;

#

MANUFACTURER

CAPACITY

.

01-02

04-05

05-06

1.

Honda Atlas

15,000

30,000

38,000

2.

Indus Motor

26,000

42,000

52,000

3.

Pak Suzuki

50,000

80,000

90,000

4.

Dewan Motors

8,000

15,000

18,000

5.

Ghandara Nissan

6,000

6,000

10,000

The above data clearly proves that all manufactures are aggressively increasing capacities to meet demand. After capacity expansion, the demand supply gap is shrinking and will be filled within the next year.

A significant impact on the auto industry is caused by reduction in import duties of new and used cars. Rising imports reflects the increasing profit margins in automobile import business. This indicates a growing trend among CKD manufacturers to opt for CBU business over local manufacturing. If the trend continues there will be a substantial loss of jobs, revenues to the government, technology transfer, GDP contribution and will result in a shift from manufacturing to trading.

The situation is aggravated by the fact that local manufacturing of cars is becoming less and less profitable with the reduction in duties of new and used car imports as the gap between duties of imported cars and CKD import has now come down to only 15 % which is the lowest in the region when compared with India, and Thailand. These countries also give protection to local manufacturing against used car imports by applying prohibitive high duties.

Also a host of other regulations regarding vehicle fitness are applied that make it virtually impossible to import used vehicles and very few foreign residents can send cars home to their families in their countries, which is not the case in Pakistan, where such imports are easily done with very low duties and depreciation rates. Rising value of Yen and US dollar, appreciating steel prices, high cost of utilities and other inputs have also added to the cost of local car manufacturing. Even then, cars manufactured in Pakistan are cheaper than India, according to a report of Engineering Development Board.

There are a host of disadvantages of the import of automobiles that can adversely affect the industry in specific and the economy of the country in general. For instance, when local manufacture of cars is decreased in number due to non feasibility of production as compared to imports, the manufacturing units would require less man power, thus decreasing the level of employment in a country where unemployment is a major economic burden.

Furthermore, the rate of technology transfer would also decrease, making our country a mere supplier of automobiles rather than having the capacity and superior technological capability in the field of manufacturing. Availability of spare parts will decrease and ones that will be available will be charged at a higher price as the range would be diverse, yet the stock would be limited. This is so because it is expected that there would be a larger range of models of automobiles available rather than a larger stock of the same model. This will have a negative impact on the service and spare parts industry and maintenance of vehicles will become an expensive and inconvenient effort for the buyer.

Such factors would lead to a higher level of tax evasion in the country as the imported cars would be of a higher price and therefore be more costly to the end buyer. Such high costs will also lead to higher profit margins for the importers and the practice of under invoicing will become common. Under the current economic scenario, it is the under invoicing of auto parts that is continuing to adversely affect the local auto industry, with the practice being common, the auto vendor industry will suffer.

Henceforth, it is not through the import of cars that delivery periods will shorten for improved facilitation of customers, it is infect the capacity expansion policies of the auto manufacturers, along with consistent and favorable government policies that can work to the benefit of the automobile buyers.

CKD

 

INDIA

PAKISTAN

THAILAND

Customs Duty

20%

35 %

20%

Sales Tax/VAT

16% of DPV

15% of DPV

Commodity Tax

33%

CBU

Customs Duty

105%

75%- 150%

20%

Additional Customs Duty

24%

-

Sales Tax

16%

15%

7%

Commodity Tax

35%

Income Tax

-

6%

Government Tax

10%

CVT - other than commercial vehicles

0-7.5%

Total impact

     

Used cars

Customs Duty

105%

80%

Additional Duty

24%

Up to 50% reduction in

Excise Duty

custom duties for used

Up to 48 %

Calamity Contingency Tax

1.0 %

cars

Cess

0.125%

Sales Tax

15%

Income Tax

6%

CVT

0-7.5 %

Total impact

     

DUTIES & TAXES COMPARISON IN SELECTED ASIAN COUNTRIES

While there is no equity or investment of the government at stake in case of local auto manufacturing establishments, the revenue through duties and taxes paid by auto manufacturers' amounts to almost 30 percent of the vehicle price in Pakistan. Of this, 15 percent is just sales tax, which amounts to more than 100,000 rupees for a 1300 cc vehicle. While taking straight benefits from the industry, the Government of Pakistan should devise a policy framework that supports auto sector and safeguards their interests.

The recent policy decision impedes future investment and expansion plans of the auto manufacturers. On one hand auto manufacturers have been asked to increase production and maintain quality, while on the other hand, no incentives have been offered to facilitate expansion and quality assurance. There is a lot of pressure on local auto parts vendors to increase production and maintain quality.

Pakistan has already begun to face the aftermath of the government's inconsistent policies, and it is for the government to choose if they want Pakistan to develop a strong industrial base and make local cars, or convert the Pakistani market into an international dumping ground. In the long term, neither option is in the interest of either consumer or country.