PRICE INFLATION, HIGH EXCHANGE AND INTEREST RATES AFFECTING AUTO INDUSTRY
Apr 21 - 27, 2008
Pakistan's auto industry has so far absorbed the shocks of mounting price inflation, increasing Yen-Rupee party and rising interest rates posing problems including drop in demand of cars. Currently auto industry producing more than market demand. The state of surplus production however seems to be a temporary phase and things would improve in the face of strong fundamentals and huge market size in Pakistan.
This was stated by Parvez Ghias, CEO Indus Motors at a Press Briefing. Despite an onslaught of price inflation, we have tried to maintain price stability and so far a little has been passed on to the customers to run the industry smoothly, however some corrective measures are highly desirable in view of the mounting inflationary pressures. Saad Shah and Raza Ansari the top brass of the IMC were also present on the occasion.
The domestic automobile industry demand for Passenger Cars (PC) and Light Commercial vehicles (LCY) which fell for two successive quarters for the first time in the current fiscal year since 2002, recovered slightly during January - March 2008 quarter but was still down 8% to 47,638 units compared 51,740 units sold during the same period last year. Timely intervention by the government to suspend application of 2.5% Withholding Tax for two months until April 21, 2008 helped prevent further drop. On nine months year to date basis, the sales volume was down 5% to 136,587 units compared to 144,072 units sold for the same period last year. Uncertainty in the market place created by the political and economic pressures mainly contributed to the volume decline.
Prior to the Press Conference, the Board of Directors of Indus Motor Company Ltd. also met here today to review the company's financial and operating performance for the quarter ended March 31, 2008.
COMPANY OPERATING PERFORMANCE
Despite the prevailing adverse market environment, the Company's sales of Toyota and Daihatsu brands CKD and CBU for the quarter recorded an increase of 4% to 13,307 units compared to 12,799 units sold for the same period last year. On year to date basis, the sales volume of PC and LCY at 36,445 units declined 1% from 36,704 units, while production at 34,925 units was slightly up from 34,819 produced for the same period in 2007. During the period, Indus was able to improve its market share by 2% to 23%.
The sales revenue for the nine months ended March 31, 2008 increased by 4% to Rs 29.3 billion 9 months to March 2007: Rs 28.3 billion), while profit after tax at Rs 1.9 billion was almost the: same as earn ea in the previous period last year. Increases in cost of production on account of rising! Yen and Dollar, coupled with higher cost of steel, consumables and other inputs caused erosion in margins, even though the Company was able to partially offset some of this burden by way of increases} in retail selling prices of its products.
NEAR TERM BUSINESS OUTLOOK
Parvez Ghias, CEO IMC during a press briefing mentioned that the last quarter, April/June, is traditionally the strongest for the automobile industry owing to the agricultural income cycle and farmer liquidity that contributes by way of strong demand for our products in rural areas.
He stated that the company's sales are expected to remain robust during the quarter but earnings will decline as the Company absorbs cost up pressures owing to the inflationary trends and the effect of exchange rate that has significantly weakened the rupee.
Parvez Ghias hoped that the new government will take proactive steps to encourage growth of the automobile sector which provides robust revenue stream to the government, creates thousands of job opportunities throughout the industry, enables technology transfer for localization, and above all provides affordable mobility for the economic prosperity of the country.
Despite recent slowdown in the market, the Company expects the sales to rebound in the new fiscal year with political, stability returning amidst continuity of economic policies for sustainable development.
Mr Ghias thanked the government for taking the interim step to temporarily suspend application of the withholding tax and would favor this to be dropped altogether. He urged the new government to take note of the recommendations made by the Pakistan Automobile Manufacturers Association to accelerate growth of the local industry, particularly with reference to curtailing the imports of used vehicles.
AUTO INDUSTRY BUDGET PROPOSALS 2008-09
WITHDRAWAL OF 2.5 WITHHOLDING TAX AND 1% FEDERAL EXCISE DUTY
By the end of year 2006, the Government had a great deal of engagement with the industry as a result of which a policy package AIDP (Auto Industry Development Program) was approved, which, interalia, included a pre-announced tariff for a period of five years.
However, an entirely new levy which figured nowhere in the AIDP in the shape of 2.5% Withholding Tax along with 1% Federal Excise duty were imposed.
Withdrawal of 2.5% Withholding Tax and produced vehicles, as this is a deviation consistency in the policies be ensure.
1% Federal Excise duty on purchase of locally from the agreed position under the AIOP and
RESTRICTION OF IMPORT OF USED CARS
The Auto industry, during he last 05 years, has been consistently increasing the capacity and the current capacity higher than demand and as such there is no need of used cars import. Accordingly, it is recommended that Import of Used Vehicles should be further restricted by application of non-tariff barriers as in India and Thailand reduction on depreciation from 2% per month to 1% pm subject to a maximum of 25%. registeration of vehicles in name of returning Pakistani for at least one year reduce used vehicle life from 3 years to 2 years Complete abolition of Gift Scheme.
Proper mechanism for mandatory consulting the industry before finalization of FTAs / RTAs be Implemented.
SPARE PARTS FOR AFTER-SALES MARKET AND DOCUMENTATION
After-Sates Market - In addition to manufacturing / assembly of vehicle, we also trade in spare parts for after-sales services. These parts are also imported by spare parts dealers which are grossly under-invoiced and mis-declared, which adversely affect our business volume and market share of spare parts business. Consequent to this, Government revenues are also affected.
Sales Tax at Retail Stage steps be taken in consultation with the industry by the Government to control this. We would also suggest to impose Sales Tax at Retail stage on spare part for automotive vehicles across the board.,
.Documentation - All claims paid by the Insurance Company in relation to Vehicle Repair should be allowed to the Insurance Company as an allowable expense only if the expense is supported by a Sales Tax Invoice for Spare Parts purchase.
This will automatically channel the Vehicle Repairs and parts purchases through a Registered Workshop / Spare Parts Retailer. This will bring about documentation to some extent in this area:
.Used Auto-Parts/ Scrap: Smuggling and import of used auto parts pose a major problem to local auto-industry. It is therefore proposed that both smuggling and import of used auto parts as scrap or otherwise should be stopped.
CUSTOM DUTY ON ROYALTY PAYMENTS
The auto industry is carrying out progressive assembly / manufacturing of vehicles under Technical Assistance Agreements (TAAs). Under the TAAs, Royalty is paid on progressive localization. The Customs is asking the Auto industry to make payment of Custom duty on Royalty and Technical Fee paid under the Technical Assistance Agreements. Under the Custom's Law the Custom duty on Royalty is payable only, if the payment of royalty is related to goods being valued (imported goods) and is paid as a condition of sale of the goods being valued. Consequently, any demand by Custom Authorities for paying Custom duty on royalty paid / payable on localization is unjustified and we would therefore request for a clarification by CBR on this issue.
DEPRECIATION RATE ON VEHICLES UNDER THE INCOME TAX ORDINANCE
The Depreciation rate for Corporate sector on Vehicles under the Income Tax Ordinance is @15% on reducing balance method, which is very low. In order to encourage the local industry it is proposed that rate of depreciation be increased to 25% per annum and an initial depreciation @ 50% be allowed in the year of purchase of new car.
COMPONENTS CHARGEABLE TO LOWER RATE OF DUTY
The imported CKD for assembly/manufacture of automotive vehicles also contain components which are otherwise chargeable to Custom Duty under the first schedule to the Custom Act 1969, at lower than CKD rates. However, on import, they are charged at the rate of CKD, specified under SRO 656(J) 12006. It is therefore, proposed that such components which attract lower statutory rate than CKD, should allowed to be imported at lower rates, if imported as part of the kit A proviso to SRO 656(1)12006 may be added as follows:
"Provided that for the parts attracting lower rate of statutory duty, the manufacturers/assemblers shall be allowed to get those parts cleared at such lower statutory rate".
PROVISION OF CONTRACT MANUFACTURING IN SRO 655(1)/2006
The local automakers are restricted to self-use only when they import under SRO 655(i)2006'. This restriction is relaxed by allowing the local automakers to have contract manufacturing. 'The provision of contract manufacturing is present under clause (i) of SRO 656(1) 2006 and similar provisions existed under SRO 4531)/2004. It is therefore, proposed that provision of 'contract manufacturing may be restored to an OEM/vendor on' the same lines as it previously existed under SRO 453(1)/2004. '
WITHDRAWAL OF EXCISE DUTY
Finance Act 2006 has levied excise duty by the insertion of the entry II, namely; "Franchise Services" in the Table II of Schedule I of the Excise Act, 2005. The local auto-industry was also' called upon to pay the said duty. A number of representations were made in this behalf that automakers can not be treated at par with franchise food chain operators etc. because the payment in their case is nature of Technical Assistance. The position under these agreements is provision of technical information / technical transfer, which is different from position of a Franchiser under a franchise agreement. This was explained to the government in a number of meetings but question of interpretation still needs to be resolved. PAMA understands that it would adversely affect technology transfer I localization in the country if the franchise services in question were taken to include technical collaboration/ joint venture agreements. We therefore, propose that technical agreements be kept outside the scope of said "Franchise Services" and the necessary amendment in the law be specified.
RE-EXPORT OF FAILED OR DEFECTIVE PARTS
Re-export of failed or defective parts during warranty period: Such parts during the warranty period are replaced cost free. On arrival taxes are charged, which are paid. However, the defective or failed part is required to be sent back to the principal for his examination. At this stage the export is not hassle-free because customs ask indemnity bond for remittance of foreign exchange in respect of part being exported whereas there is, in effect, no sale or purchase and as such no foreign exchange is involved. Under para 11 of export policy (SRO 775/06) a provision exists for Pakistani exporters to re-import exported goods for removing defects during warranty period. A similar provision may therefore be added to cater to the above situation that OEMs may re-export defective/failed part without involvement of foreign exchange.
AUTO INDUSTRY DEVELOPMENT PROGRAM (AIDP)
The recent years have witnessed phenomenal 50 percent compounded growth in the local Auto industry with solid indication of further growth. Keeping this trend in view the government has positively responded and has recently approved AIDP with the aim at doubling the contribution of auto industry to GDP and its turn over to Rs. 600 billion in the next five years and reaching to an export level of USD 350 million for components mostly to the international after market and to the OEMs. It is therefore proposed:
The government pronouncement of auto-related tariff for the next five .years ,in respect of Cars/Lcvs may be made part of Finance Act 2008 so that both government and industry pursue their respective commitments for the projected growth of auto-industry as envisaged under AIDP.
A clear cut Action Plan for implementation of various components of AIDP other than Tariff. Long term consistent policies, which should be strictly implemented
Automobile Industry - Invoicing Under Wholesale and Retail Concept - Proposal_For Revisions
IN INCOME TAX LAWS
The vehicles are invoiced by OEMs (Cars manufacturers) in the name of end customer and dealer(s) are paid commission thereon. OEMs withhold tax @ 10% on the amount of commission paid to the dealers, which is treated as full and final discharge of tax liability of the dealership.
Proposal: In order to implement the wholesale and Retail mechanism of' invoicing whereby vehicles will be invoiced by OEMs to the dealers and dealers would subsequently invoice to the end customers.
Difficulties in implementing Wholesale and Retail mechanism - As per current Income Tax, law if OEMs implement the Wholesale Ii Retail Concept, i.e. OEMs invoice to the dealers and the dealers in turn invoice to end customers, the payment by end customers, if he is required to withhold tax, shall require withholding tax @ 3.5% while making the payment to the dealers. This withholding tax is not adjustable against final tax liability of the dealer and hence would cause extra tax burden to the dealer. Further, this withholding tax @ 3.5% of value of the car is much higher to the earnings / margin of the dealers on the sales.
Recommendation to FBR in order to make Wholesale and Retail concept workable
Sale of vehicles by authorized dealers of local car manufacturers to customers (whether individual or corporate) should not require withholding of tax by customers at the time of payment.
Income tax to be paid by authorized dealer on his income should be the maximum of the tax they are paying at present or 0.10% of net turnover.